A Market Call …

April 23, 2020

As I have said before, offering advice on when to buy and sell securities is a great way to lose friends . . . please take my advice with a grain of salt.   I have a tendency to be wrong.

On March 1, 2020 I wrote a post suggesting that you take some money off the table, particularly if you don’t have a significant emergency reserve.   Somewhere near the bottom on March 23rd, I suggested it isn’t over yet.  I repeated that call in late March  Now we are up about 26% from that bottom.  I would like to offer my insight again for those that may be interested.

There is a good chance that we are reaching the apex of a relief rally.   If you have been following my ‘where are we now’ posts about market psychology, we are still in the denial phase.

The father of this chart, Dr. Rodrigue was quoted yesterday by Marketwatch, but his chart is directly related to markets, and I copy it here from the article.  In this version another commentator (John Hussman) has highlighted the market concepts of a bull trap and re-titled the relief rally as ‘Return to “normal”‘ which is what many are proposing will happen.

In other posts I have highlighted that the government has taken $6 trillion of the public’s money to throw at poorly run businesses in an effort to remove fear from the market (what is normally referred to as ‘moral hazard’).    This means that we still have not reached the fear phase, nor capitulation (except oil; oil was clearly in the capitulation process on Monday.   Fear is rampant in the oil market right now).   In any case, we are nowhere near despair and a valid bottoming process.

I can’t tell you when the fear will set in, but all the funds being provided to support asset prices have been absorbed within 6 weeks.  That’s over $2 trillion in real dollars and about $1.5 trillion added to the federal reserve balance sheet.   That is more money than was provided in four years during the great recession of 2008/9.   I suggested in March that the stimulus won’t be enough.   The first batch wasn’t enough.  It won’t be enough this time either.   When all of the stimulus money runs out and businesses are still seeing 30%, 50% maybe even 80% of business activity, they will have nowhere left to turn.

There is a chance that the market stays up for a while, but if you haven’t taken the advice to provide yourself with ample funds to sustain a long downturn, please consider this approach.  You don’t have to sell everything, because the world will continue to run and strong businesses will survive and, given time, thrive.   But asset values are being supported by stimulus money, not by business fundamentals.   If you feel like investing, make sure it is money you can afford to lose because bankruptcies are just beginning and the complexity of our financial system is so vast today that the fallout will be very, very difficult to estimate.

Experts around the world, both global thinkers, bank analysts and government agencies are coming around to the same conclusion.  The world will not be returning to normal soon and the fallout will likely be the worst since the great depression (1930’s).  To be sure there are others offering hope in a ‘V’ shaped recovery, and they may be right but I suspect they are simply ‘talking their book’, which is a polite way to say they are trying to explain why they are still invested.  Generally, their best argument here is ‘we are thinking long term’.

Investing for the long term is a great idea if you are in your 20’s and have no financial dependents.   Forty years from now, this will be a major historical event that your grandchildren study.   Most of my friends and family are retired or nearing retirement and the next decade could be quite difficult.   The advice is different depending on your asset base, income level and timeline.   Note that this is a market call, not an investment plan!

Be healthy; focus on your passions and keep your assets close.

Some other opinions –

Leon Cooperman – Taxes will have to go up

Bill Gates – … Pain that lies ahead

Mark Cuban on the brutal recovery

IMF Press briefing

Christine Lagarde of the ECB

Jim Rogers – ‘worst bear market in my lifetime’

Merkel – Things will be hard for a very long time

Trump is predicting a rapid recovery

Trudeau’s comments on re-opening the economy

World Economic Forum on China’s slowdown and recovery due to COVID-19