For some time, in our client meetings, you have heard me express my amazement and the ease of which equity markets were basically going straight up, with nary a correction (Down 10% from highs) or bear market (Down 20%). Far too often, I could not reconcile the stratospheric valuations and the momentum stocks were given by World Central Banks, as a direct result of their ‘Easy Money’ policies. It seemed the old school metrics of fundamentals didn’t mean boo. You know, things like earnings. As long as the low interest rate environment continued, unicorns, bleeding voluminous amounts of money soared (Think: We Work, Uber, .etc) ‘Against All Odds” apologies to Phil Collins, because ‘This time it’s different’ and ‘Nothing’s Gonna Stop Us Now’, apologies to Jefferson Starship.
As I posted on LinkedIn in September, 2019, one very small, yet massive event occurred, namely the Federal Reserve Bank of New York, came into the ‘repo’ (Repurchase Agreement) market to provide liquidity to the banking system. It received a mention in the Wall Street Journal, but was pooh-poohed everywhere else. Why did this matter? Simply put, the plumbing of the credit markets, a multi-trillion dollar market, was experiencing abnormalities. Liken this to a clogged toilet, initially cause for concern, but until it doesn’t work, no big deal. Another incident like this occurred late in 2019, again to no great fanfare or news coverage, save for the WSJ, noted above.
Enter our new decade and whereas things were sailing along, the US 10-year Treasury, which started the year, yielding just about 1.90%, was falling in yield, thus prices were going up. The equity markets were still chugging along, yet this barometer of the credit market was gathering money like gangbusters. True, other countries around the world had negative interest raters ($15 trillion or so) so money coming in to earn something was a rational explanation, right? For a while, that seemed plausible and accepted. Trouble is, the Federal Reserve had a front row seat and as the Fed is wont to do, it erred. Not so much in lowering interest rates (the market effectively, did it for them) but for not raising them after the Great Recession of 2008-2009. Multiple times, Ben Bernanke, but more pointedly, Janet Yellen, had the chance to normalize rates, from crisis era lending levels, but always deferred because of some reason, be it a weak EU reading, inflation being subpar (less than 2%) or less than ‘Full Employment’ (whatever the hell that means). EPIC FAIL.
This led consumers to go on a gargantuan debt binge and corporations to goose earnings by facilitating stock buybacks, sometimes by issuing corporate bonds (debt) albeit at low interest rates, to pre-Great Recession levels. Everything from auto loans, student loans, mortgage loans, corporate bonds, you get the picture, leveraged. Hey, as long as you can pay your bills, consumers and corporations alike, what’s the worry? In fact, the world was gearing up for ‘The Year of The Rat’.
One of the most majestic waterfowl creatures is the swan. Most often, they glide effortlessly through the water and are almost all white. The parallel, it’s easy to make money, interest rates are low, stocks keep hitting new highs and suddenly, complacency, or the aura of being bullet-proof existed. Then, in a rare instance, the optic changed. Starting as a speck, then a blot, growing ever larger emerges the ‘once in a generational event’, The Black Swan. Treated as an outlier, the black swan glides just as effortlessly as the other swans, yet represents an ugly infiltration. Kinda like COVID-19.
Individually, any adverse market factor was quickly handled. Even a combined second factor was summarily dismissed. However, add the black swan to the mix and you get a toxic cocktail of cascading and historic proportions. Remember that manageable debt/leverage? If you aren’t working or get laid off as an individual, or if your revenue slows down or dries up as a corporation, that debt just became an anchor and if in deep water, uh-oh.
Fast forward to present day and what we are witnessing is a de-leveraging of the entire financial system, akin to ‘Shoot first and ask questions later’. Individuals and Corporations are selling at unprecedented levels, first the most liquid assets, stocks and bonds, then tangible assets, think Gold, Silver, etc., and if you get a margin call, similar to the Duke Brothers in the movie ‘Trading Places’, panic selling, to raise capital ensues. There is no doubt, individuals and corporations will go broke. Some may get a bailout, others will not. Government will pick Winners and Losers among the corporations with Boeing leading the list. Given their recent corporate culture and hubris, personally, I would give them a poke in the eye with a sharp stick, call it day and tell them to call up their favorite Chapter 11 attorney. But as one of America’s largest exporters and employer of 100,000 people, we all know what will happen.
Next in line are the airlines. Once this historic chapter has passed, life returns to some sense of normalcy and one thinks of a vacation from this nightmare, try asking for a discount on a future ticket. You might be amazed at some of the replies, but we all know what the answer will be.
What about that neighbor that has every toy on Earth, the man cave, a shiny new vehicle, eats out religiously (oops, well not now) is beyond his eyeballs in debt and has already spent the $ 1,000 proposed by the federal government? Tell him 7 will be in his future. Not a lucky seven, but a painful, multi-year event for self-inflicted errors and omissions.
Enough about everyone else. How is this impacting you? Make no mistake, we have taken a pretty good body blow, but not as bad as if it were 2008-2009. Why? Back then, it WAS the banking/financial system under duress. Not to say it isn’t today, but capital ratios and standards are much higher and since we are in full liquidation mode, good investments get thrown out with the bad. High quality, large capitalization stocks, preferred stocks, municipal bonds, the selling is indiscriminate. Therein lies the silver lining since all of our investments and I say our, because I am invested alongside You, my clients, for these investments to be the first to recover. Albeit it will take time, but the homework we performed by probing, discussing and agreeing upon, before any investment ever took place, will pay off in spades. The ‘DIME’ moniker is no gimmick, since the Design and Implementation are just as important as the ongoing Monitoring and Evaluation. Anything that was salable is long gone. As the equity markets try to find their recession-era levels of fair value in the upcoming weeks and shutdowns of every facet of our lives begin to recede, so too will our investments because the basic laws of supply and demand are working in our favor. Income-producing investments and high quality, large capitalization industries/stocks, focused on technology, health care and consumer non-durables, will lead the recovery. You have been there and will be there as 2020 marches forward.
Our domestic economy was slowing before everything hit the fan, so I do not foresee a rapid snapback, as others are presaging. One could hope, but a more realistic expectation is for most of 2020 to be a long slog, with policy-making on the fly, continued volatility, until confidence flips that COVID-19 is under control (not eliminated), life, as altered, is not over and humankind has each other’s back.
In the interim, I continue to look forward meeting on a quarterly basis, be it on the phone, video or whatever means is available and prudent. In every client portfolio, liquidity is not a concern. Together, we planned for monthly withdrawals, Required Minimum Distributions and they will occur without batting an eye. In most portfolios, we have the luxury to allow battered investments the time to recover and ascend. Financial Planning is the glue to the client and has paid off handsomely. Should you have any concerns or questions, please contact me at your convenience.
Four months after I started my firm in 1987, October 19th (Black Monday) occurred, which had me thinking at the time, “Nice time to start a business, Greg’. That was over 32 years and a decent amount of hair ago, but you know what, if you know your client, do right for the client, act in the best interest of your client, all will work out. I am forever grateful of the trust you have placed with me and will continue to assist/guide you to the best of my ability…
All The Best,