This commentary is a collection of thoughts without an intended theme. I just feel the need to put my ideas into a document and share them. In these times, it’s therapeutic.
As my family and I tried to enjoy our Easter weekend in isolation I found myself reflecting on the state of things. This produced a spectrum of emotions including anger, fear, disgust, sadness (pity), and shame among them. I also found myself bewildered by the incredible number of inconsistencies between our economic prospects (and the capital markets interpretation of them), the Covid-19 pandemic, and political decision making.
Our CINC
Most upsetting to me is that the Executive branch’s decision-making process isn’t improving. It may even be regressing. With each day the president and his appointed leaders seem to float one bad idea after another to see which receives a positive reaction from the voters. No consideration seems to be given to the intermediate or long term. Trump tweets fake news in response to every article that is objectively critical. Finger pointing and picking fights with anyone who raises a question is the daily operating procedure. Meanwhile he has no plan, no vision, and seems devoid of leadership. He needs to evolve and articulate an actual plan.
Sadly, he’s become an incompetent and ineffectual executive. Granted, he’s probably the best alternative we got and that is a sad reality.[1] He has not grown in his position. Pugnacity has a place for sure but it’s not effective in every situation. He keeps reverting to the same dumb tag lines. He simply refuses to elevate his game. People are suffering and will be REALLY suffering in the future under current policy. The fiscal and health policies are grossly misplaced and most probably will not do anything constructive. He’s behaving like a classic politician in an election year. His only go to is the economy – and now it is being destroyed by his own policies. He’s panicking and desperate and seems to not understand what’s going on throughout the country. He has no plan. No vision. Nothing. Ineptitude run amok. He is quickly spiralling into a James Buchanan presidency all due to his own actions. And we all lose as a result.
We need leadership, a well-articulated plan and a vision, with actionable and meaningful metrics. His whack a mole approach destroys our collective psyche. His adolescent like impulsiveness has resulted in a loss of all credibility. Moreover, it is whipsawing our expectations, so we have no idea how to plan our future. Mr. President, we beseech you to grow up for the sake of our country. We need leadership not reality television. It was entertaining for a period but now the stakes are too high for such pubescent behaviour. Rise up and become great. God Bless America.
SBA – Garbage
The Small Business Administration (SBA) loan program suffers from massive inefficiencies. We applied more than two weeks ago to possibly help bridge ourselves for a few months. After receiving an application number, we have tried unsuccessfully to obtain the status of our application. It is impossible. No website, no phone numbers, no ability to access information. I am sure we are not alone. We are still on the fence of whether to take on the loan but wanted to better understand the loan requirements before we made the final decision. It may not ever matter since we will never get access to actual funding!
We have spoken to several small business owners regarding their situations. All are suffering and may not survive much longer under current policy. Literally all are applying futilely for SBA loans. Most are considering taking on as much SBA loans they can and simply defaulting on them. Their attitude is, what’s the SBA going to do about it? The government shut me down and so like everyone else I took the handout. Why shouldn’t they feel this way? I certainly don’t agree with the defaulting decision but don’t blame them one bit for feeling betrayed and embittered. It is this general level of disgust that is permeating the small business environment. Loans will not help and certainly not going to sustain businesses. They are most definitely not stimulative. Many are going to suffer as will the economy. These are not temporary phenomena.
Caprice
Between legislation and Federal Reserve profligacy several trillions (that’s 1012) have been committed to artificially boosting asset valuations. The capital markets have reacted favorably to these short-sighted interventions. Concurrently, Trump continues to rhetorically state that he’s going to “open up our economy” and it’s going to “take off like a rocket.” How’s that? So, all these resources have been committed (presumably to deal with several months of lock down) and now Trump is stating he’s going to remove the policies that are wreaking havoc? What then happens to the trillions of commitments already made by the government? Are they reversed? The inconsistencies would be laughable if they weren’t so damaging. The capital markets clearly embraced a scenario that the economy is going to take off and the profligate commitments are going to stay in place. Why wouldn’t they? The last decade has largely been this scenario! So, the taxpayer will once again subsidize Wall Street at a level never seen before in our history. And after the last decade, that’s quite something.
We’d encourage investors to tap the breaks on this euphoric expectation. Most of the “investment professionals” that buy into this belief are presupposing an awful lot and are from the BTFD crowd. First, they assume that consumer behaviour will immediately return to a pre-pandemic state. This is hard to fathom. For the reasons addressed above and just common sense. We will all be different. It’s unavoidable. Also, almost every post pandemic scenario includes incredibly draconian health constraints. So even if our psyche hasn’t been permanently altered, we literally couldn’t return to the pre-pandemic state of consuming. It’s going to be physically impossible. It is my sincere opinion that this isn’t all bad. A little less consuming and more prioritizing to a more frugally sensible place is long overdue. In the end this might be a very positive change.
Second, many are assuming the creation of a vaccine. This seems extraordinarily farfetched and contradictive to all existing pharmaceutical history.[2] Particularly to a virus that seems capable of mutating. We hope it’s possible but proper expectations may be in order here. Even if one could be developed it would then have to be massively produced and implemented. Additionally, it would have to be closely monitored and evaluated. We can’t even come close to properly testing for the virus on a massive scale. To date, we have tested less than 1% of our population. That’s for a test that exists! Not to be Debbie Downer, but a little common sense is in order here.
Third, the capital markets are acting as though the appropriate starting place to resume valuations are the previous highs. This is a hybrid of technical and behavioural finance. Traders (and the BTFD crowd) can’t escape referencing lows and highs whenever they perform technical analysis. It serves as an anchor in their minds. Similarly, they are motivated by the aversion to losses and so act solely to reverse failures. So until they return to the previous high they seem to ignore reality. That certainly seems to be the case in the current equity markets. We argued that the equity markets were meaningfully overvalued before the pandemic and that the fundamentals came nowhere near supporting valuations or spreads. It was a liquidity driven phenomenon supported by the Fed. Now they seem far more decoupled.
Today, the current valuations are bordering on delusional given the economic realities. We are facing an economic environment that will be far different from anything we have faced in most of our lifetimes. Any economist that forecasts a return to pre-pandemic patterns simply has their head in the sand. Not going to happen. Even the most optimistic post-pandemic policies will severely constrain societal movement and activities. This will suppress economic activity for a long time (if not permanently). The term depression has no widely accepted definition – nor does recession for that matter. We are certain that the economy will be depressed for a very long time. The only way current valuations are sustained is if there is a liquidity insertion by the Fed that is multiples higher than historic levels. Even then, it is hard to imagine them being sustained given the fundamental realities. These valuation changes will take place along with a bear steepening change to the term structure. This result is easy to justify given the economic backdrop and the insane levels of fiscal and monetary policy. In the end this will produce an investment environment that truly rewards asset allocation. Income generation and capital preservation may once again be plausible. Generations of investors will finally be rewarded for proper wealth management. If the Fed is held accountable for their horrific policies and is removed from capital markets, even better! Intermediate and long term, these are positive outcomes.
Investors are finally being introduced to the meaning of risk, and loss. Wild fluctuations in valuations across the capital markets tends to do that. This will meaningfully influence how investors behave for a long time. This too is a good outcome. Eliminating the BTFD idiocy and building well thought out wealth solutions will serve the investment industry for the better. The Fed-BTFD trending equity market can finally die and deliberate and thoughtful fiduciaries can once again offer long term wealth solutions.
Back to the Future and Let it Run
Our first commentary at the outset of the pandemic was for everyone to Calm the **** Down. Ironically, it may end up that the best policy may be to let the virus spread in as a controlled manner as possible. We suggested this at the outset and it still seems to be the best alternative. It seems that all of this “flatten the curve” nonsense is unattainable given it is completely contingent on who and how the test is being performed. It is a completely fictional metric. Stop testing, it goes to zero! Increase testing and it becomes exponential. Whoever controls the testing controls the slope and curvature. It’s just silly. It’s dystopian in that the government can easily control both sides of the decision process. They can circularly justify everything they do for as long as they want to do it. No accountability.
Real flattening will take place after everyone gets the virus and builds an immunity. This seems harsh and perhaps it is. But I’d take that over leaving it to our elected leaders and especially our appointed decision makers to solve the problem. They are all failing miserably. Let it run.
A Plead for Leadership
I have four children ranging in age from 14 to 21. Middle school, high school, and two Virginia Tech engineering majors. Selfishly, I love having all of them home. However, their worlds have unfairly come to a screeching halt as a result of fear and panic based decision making using zero information. It is time for leaders to lead. The youth of our country deserve it. Get kids back to school. To competing in sports. To interacting properly. You have destroyed once in a lifetime experiences for too many young people. Stop being so afraid to lead. Our leaders all seem to want to follow the lowest common denominator. It’s embarrassing. This is true at every level of our society. For the love of God, lead. This includes school administrators, mayors, governors, and presidents. Your display to date is pathetic, short sighted, and selfish. I am tired of self-congratulatory platitudes that celebrate ineptitude. Revisionist and delusional comments that completely misrepresent the facts are getting old and have destroyed your integrity. Our PC culture has infiltrated leadership to a point that it has become destructive to our society. We are all watching as you flail repeatedly. Come on already. History is watching and will rightly judge you harshly. Raise your games. Don’t be petrified by decisions that may offend a small percentage of your constituents. Lead for the majority.
Young people want to be inspired. So, inspire and let’s get going. Make the right decisions based on actionable information. Stop introducing bad ideas that promulgate more bad decisions or that compound already made bad decisions. The very thought of another cancelled sports season for our youth may permanently damage their ability to develop character. As leaders you need exhibit a bit of character as well. For all our sake, start doing so now.
[1] Biden is simply frightening and his revisionist self-promoting policy proposals preposterous and devoid of substance. He seems incapable of retaining a thought for longer than a nanosecond.
[2] At the most basic level, how can a vaccine be properly tested for side effects in such a short period of time? So many other obvious issues arise that it’s simply a ridiculous notion unless quality control is nonexistent.