Strike that last part. Make it NoBid 20.
Because, though memory fades after all these crazy weeks, I vaguely recall that there actually were bids in ’19; (as I remember it) lots of them.
At first, I thought that I’d originated the first of the handy phrases I use in my title, but of course, that couldn’t be. In fact, I now find that the term econovirus has entered that pantheon of pithy expressions otherwise known as The Urban Dictionary. The entry is dated March 30th: six days before this document went to press. I thus missed claiming my place in nomenclature immortality by less than a week.
However, amid other worries. I choose not to dwell on this lost opportunity.
On a brighter note, I’m pretty sure that I’m the first to bust out the phrase NoBid 19/20.
Funny thing is, though, there actually have been bids – even in (so far) Terrible 20. Even in March. Even in April (come she will. And has). To wit, from those dismal Middlemarch horrors to the end of what was one of the longest lunar cycles in recent memory, the Gallant 500 ginned up a nearly-double-digit rally. Custer-like Captain Naz and his forces recaptured nearly 15% ere that month was over. And our sea-faring hosts in both Investment Grade and High Yield, attempting, as they are, to navigate to safe port over an enormous, stormy ocean of credit, showed similar happy progress. Markets have since backed off a bit, but not by much, and not, in my judgment, sufficiently to reflect underlying economic conditions.
And even this past week, when the virtually inescapable reality of an unprecedented collapse in the jobs and broader capital economies became a statistical actuality, the 500 managed to retain all but 2% of the valuation it sported coming into the five-day cycle. To put these dynamics into further perspective, on Thursday, after the BLS corroborated that over the past two weeks, approximately 10 million new souls had been forced into the indignities of the unemployment lines (a number that is surely understated because the regional offices were overwhelmed with applicants), equities actually rallied — to the tune of >2%. The next day, when the March Monthly Jobs totals dropped, and the count told of the worst results since the teeth of the (last) crash (and these figures only covering the period through March 12th), investors mostly yawned, selling off (going into a weekend sure to be chockful of negative news) so benignly, that our indices are actually ~70 bp to the good across these two dismal sessions.
From whither these bids have derived, and based upon what investment hypothesis, is something I’ve been trying to puzzle out.
Who knows? Maybe they persist.
But I strongly believe that anyone who digs this sort of thing (bids, that is), should enjoy them while they last, because my hunch is that bids are going to be in rather short supply in the coming weeks.
And, returning to the first half of our titular theme, I myself have come to firmly embrace the viewpoint that the econovirus risks we now confront are greater than those associated with the dreaded Corona.
Now, I wanna be precise in my messaging here. First, I’m not referring to outcomes; only risks. I don’t know what’s gonna happen out there: when, how and to what extent we tame this King Tiger (no, I haven’t watched the show yet; probably won’t). And I can’t get a true handle on how devastating the economic impact we will have suffered in the effort.
Moreover, I point no fingers here at anyone. I am convinced, given the previously unimaginable level of contagion embedded in these little CV buggers, that the steps we have taken are necessary and unavoidable. Moreover, I believe that whoever was running this here show, we’d be doing pretty much the same things. We’d have isolated ourselves, shut down broad swaths of socioeconomic activity. Albeit with only partial effectiveness and a lot of sh!t slinging, we would’ve marshalled all the forces of the public and private sectors in a race to figure out who was sick, how to care for them, how to immunize the population, and the best way to cure the disease.
But as I have stated repeatedly, even if all of those nasty little viral cells were to beat an immediate, unilateral retreat, never to show their spores again, the economic damage will have been unprecedented. There’s simply no roadmap here. Quarantine aside, it’s eerily quiet out there. But we’re starring in the face of 1933-like unemployment, and maybe an even worse set of conditions from a GDP perspective.
So, let’s fess up; we have a raging econovirus on our hands. Like nothing we’ve ever experienced. From this perspective, it is indeed novel, and, it is viral. Maybe on the whole, maybe I’m due that phraseology victory lap after all.
Again, all of this would be so much more manageable if we weren’t so deeply in the pockets of The Man. But we owed him so much green that even before this here catastrophe hit, whether we could pay him back, or, alternatively, were destined to have our legs broke, was very much in question.
And now, because of deflation, we owe him more. A great deal more. Allow me to explain.
When you owe The Man, and your earnings just took a hit, your ability to cover the nut contracts considerably. You have more debt, without taking in an extra penny. With broken legs, it’s harder to put out, much less, collect upon, your Shy. And this puts the hurt not only on you, but on your Capo as well. Because he owes the vig to the big bosses, who don’t like getting stiffed. So, multipliers abound.
Yes, I’m a connected guy (though not a made one) but let me put this in Chevy Suburban terms. Let’s imagine you are a working stiff (say, a pharmacist with two beautiful daughters and a lovely wife), taking in $90K a year, and with $10K of credit card debt, a $1500 mortgage, etc. Before Covid, you were scraping by. Your boss is a nice woman, but she herself is getting crushed by this whole thing. She doesn’t want to lay you off but needs to put you on half time/half pay if she’s to survive at all.
Well, buster, your debt load, in terms of your ability to honor it, just doubled.
Now let’s extrapolate this to the entire economy. Which just took one baller of a pay cut – right at a point when its indebtedness had been hitting one new unthinkable peak after another:
Now, I’m not sure who this FRED character is, and maybe I don’t want to know. But whatever books he’s keeping show us into him for $75 Tril, and that’s only as of the end of (No) Bid 19. This was unfortunate, arguably unmanageable. But now we just took one whale of a compensation haircut, and, in real terms, we may actually be compelled to fork over something more on the order of >$100T.
But we can’t. Fork it over that is. And it’s not as though the collectors of our debt are just cashing our checks and spending them. They are using our scrips to pay their own debts – most likely to entities who themselves are in hock. Stopping this cycle of payments is akin to arresting the blood flow through the veins of the economy, which thus faces the threat of cardiac arrest. So what we gonna do?
A couple of steps come to mind. First, we gotta print money and hand it out. Yes, to individuals but also to corporate enterprises, in order to minimize the count of folks on their payrolls who otherwise will end up on the street. A few weeks back, I estimated that any effective policy response would be on the order of $10T. At the time, I thought I was being extremist, but now I think that the number may be on the low side. Of course, the combination of a Quantitative Easing that will make the magnitudes of that exercise a decade ago look like Chump Change, combined with what will ultimately be a fiscal stimulus >3x what was just enacted, and credit relief of similar magnitude, will only be a partial solution. It will be messy, sleezy and only of limited mitigation value. But it is needed. And it is coming.
The economic wages of these sins, at least according to the economic textbooks, take the form of hyper- inflation. But I’m here to tell you that hyper-inflation is off the table at the moment; it’s the least of our worries. What we have now is hyper-deflation, and, while there will be a toll to pay somewhere down the road, inflationary policy actions should: a) help reverse the slide; and b) do so at a cost that is astonishingly benign compared to the carnage we can expect if we fail to take these actions.
We’re also, I hope, gonna stop worrying about missing the next rally and reconsider our yearning to load up on some additional risk. Because we have not, cannot have seen the worst of this yet, marketwise.
And most assuredly, we’re going to be forced to defer our fondest hopes and dreams for a spell. Maybe not for long; but at least for a little while. This, to me, is the unkindest cut of all.
I do hold out hope that we will, reasonably soon, have parameterized and started the path towards containment of the novel coronavirus. But the novel econovirus is even more novel, more viral. And our work here has just begun. My fear is that in terms of our most cherished resource – the limited number of heartbeats that each and all of us are allocated – the EV may take a greater toll that the CV.
And my beating heart only beats for yours; you know that, I hope. I do think we can endure; maybe even thrive. Let’s just understand what we’re up against. Alright?
And do me this one favor. Let’s make NoBid 20 something of a reality, shall we? There will come a time when we can safely infer that risk assets are cheap and worth the risk of owning incrementally.
That time is not now.
Instead, let’s protect what’s precious to us, tuck in, and live to fight another day.
And with that, along with my best wishes for the upcoming Passover and Easter festivities, I once again wish everyone a heartfelt…
TIMSHEL