March 16, 2020
Not much to say here, but we are somewhere between denial and fear now.
This downturn is different than anything in modern history. It’s based on the almost complete withdrawal of demand. It has never really been experienced before, at least not this rapidly.
The real risk here remains the debts of the world. When cash flow is constrained, companies and individuals go bankrupt and that frequently cascades into every aspect of the economy. The central banks of the world are providing liquidity, but that doesn’t help you pay your bills. Further it doesn’t encourage demand because we need to stay at home, stop travelling, stop working, stop going out for dinner, etc.
In my original ‘what does it all mean’ post, I commented that it is way too early to tell how all of this plays out. It has been two weeks, and it is still too early, but it is becoming clearer.
The words of government remain in the ‘keep calm’ variety, but their financial maneuvers are anything but calming to experienced investors.
For you and I, again, keep a fair stash of cash around. I think it is way, way too early to start buying anything unless you’re a pro or a trader who really understands finance. On the other side, with markets down about 30% now, it may not make any sense to sell either (unless you don’t have a cash reserve, it always makes sense to have a cash reserve for times like this). That 30% move makes this decline one of the most significant declines in history, and certainly in such a short time frame. That doesn’t mean its over.
If you want to know what a bottom looks like it is when companies start declaring bankruptcy. When your friends start telling you that they are selling out because they can’t take the volatility. That is when a bottom is close at hand. But even then, ‘building’ a bottom often takes months.
The crash of 1987 was one of the things that piqued my interest in investing and I have been studying disasters, financial, social and otherwise since then. Over the past two decades we have experienced five downturns and all of them could be considered ‘V’ bottoms. But in each of those cases, the ‘V’ was supported by massive government spending. The trouble is that they haven’t been working so well recently and the debt levels are rapidly increasing to ‘unsustainable’ levels.
We are just three weeks into this decline and the cause (COVID-19) is only starting to take hold in North America. In my opinion the effects will linger, socially and financially for much longer.
Be patient with your cash, take care of yourself and don’t worry. This is not the Spanish Flu and you and everyone near to you will almost certainly be fine in the end.