I walked down to my mailbox this Sunday morning and things seemed perfectly normal. I could actually write my name on my car due to the heavy pollen. It is a passage of spring in Atlanta to have the yellow pollen all over everything outside. It doesn’t do much for your sinuses, but it does mean that spring is coming.
As I walk through the yard, I notice that the crabgrass and chickweed are growing fabulously well this spring. I have learned over the years if you cut the grass short enough, it all still looks green. As I walked back from the house with the morning newspaper, I noted that virtually no one was on the streets and the city was calm.
Josh (17) and Ava (2) taking a stroll to the beach
After driving to work, I can see that the world is not normal. Almost no one was moving around and clearly America has changed over the last 30 days. I could never have imagined, nor could anyone have expected, that the extraordinarily robust economy of America at the middle of February would have crashed to a halt by the end of March. The turnaround was exceptional by any definition, wherein the government insisted that private businesses close and suffer the economic consequences. Never in the history of America has this ever occurred. With all the major negative events such as World Wars, 9/11 and the financial meltdown has the government ever gone to private businesses and insisted they forfeit their financial futures?
I will be the first to admit I know very little about the science of the virus. I cannot give you any recommendations or predictions on the spread of the virus or how to prevent or avoid it. However, I read the numbers every night and actually keep on my desk a scorecard of new cases. What I do know, without any involvement from the medical world, that we must put Americans back to work in order to save our society. Which is more important?
I intend to discuss all of these very interesting items, but I must report on the very negative financial news from the first quarter and the month of March. The Standard & Poor’s Index of 500 Stocks fell 12.4% during the month of March and is down 19.6% for the first quarter of 2020. Even with those dismal numbers, that index is up 10.5% for the 10-year period. The NASDAQ Composite fell 10% for the month of March and is down 14% for the first quarter of 2020. For the 10-year period this averaged 13.7% per year. The Dow Jones Industrial Average fell 13.6% during the month of March and is down 22.7% for the first quarter of 2020 yet remains up 10% a year for the last 10 years. The Barclay’s Aggregate Bond Index fell 0.2% during the month of March and is up 3.7% for the three-month period and for the 10-year period has averaged 3.9%. As you would expect, bonds did better than stocks.
The first rose of the season at the Rollins’ house
During the quarter it was clear that investors were jumping out of the market and getting whatever cash they could reserve. It was an interesting period of time where virtually everything lost money. Even bonds went down before the magnificent efforts of the Federal Reserve came in to prop up the bond market. While many people characterized this as a bear market because of the standard definition of a 20% reduction, this bear market is unlike any previously. Other bear markets have been created because business was bad for one reason or another. In this particular case, business was not bad, it was great, it only became bad because the government insisted that it be bad. Now we have to evaluate whether and when the economy will once again start up for real.
I have to admit that the actions of the Federal Reserve have been remarkable and thank goodness we have a chairman of the Federal Reserve that saw the need and met the need by an overwhelming response to Americans as a whole. Fortunately, we do not have a Federal Reserve that sits back on its hands, as we did in 2008 and waited for the crisis to get here before acting. This time the Federal Reserve brought out the so-called “Bazooka” of help for Americans. While the skeptics are everywhere and the dire news floods the media, they just really do not understand the economic power that the Federal Reserve has unleashed. As I opened, I mentioned that I do not know much about medicine or the spread of this virus. However, I am pretty good with numbers. As of this morning, the weather channel reports that less than a thousand people in Fulton County have contracted the virus. The population of Fulton County, Georgia is roughly 1.1 million and that means that less than 1/10th of 1% of the County population has contracted the infection. There is no way of knowing exactly how many have recovered, but let’s assume that reported number is correct. If that is in fact correct, then over 99% of the population has not contracted the virus and deserves a right to earn a living in this weird economy. I am not suggesting that Americans be allowed to go back to work immediately, but I am suggesting that come May 1st, businesses and businesspeople be allowed to resume their economic life.
I have never seen a situation where we keep a daily tally of sick people. If you look at the most recognized chart on the subject, as I write this posting, there is roughly 1 million net cases in the entire world. If that is the case that means that there are seven billion people that do not have the virus. My point is you cannot deprive seven billion people from making a living by governmental intervention. Free society will only survive if businesses are allowed to fend for themselves. We will never be able to solve the unemployment issue in America until these companies are allowed to work. This is a case of clearly some have never stopped working and yet specific industries are all but shut down by governmental intervention.
A funny, and too true, quote
There are enormous economic benefits that are occurring right now to help the economy. I read all of the financial press comparing the current situation to the recession in the 1930’s or the recession that followed the 2008 financial crisis. I read about the depressed world after 9/11 and after the dot-com explosion around the turn of the century. While each of those financial realities were severe, not a single one of them had the calvary coming to rescue the economy as we have today. How will all of this work in the future? No one knows. However, I have studied the economics and cannot be as negative as the financial press seems to be.
Ava working hard on her homework
Already the Federal Reserve has come in to create liquidity in the bond market and the municipal bond marketplace. In addition, they have guaranteed the money market accounts and have moved liquidity throughout the economy. In 2008 if they had moved so quickly, a large portion of the financial decline would have been avoided. The true winner, and the move that might save millions of American jobs, has been the Treasury and the Federal Reserve working to create liquidity. The announcement of the $2.2 trillion in financial stimulus that the government is in the process of handing out, is beyond amazing. First you must understand that virtually all of this money is basically a gift. The $350 billion gifted to small businesses is an outright gift. It is not a loan; it can be forgiven if businesses continue to pay their employees. The stimulus checks that will go out in late April or early May are an outright gift. They do not reduce your taxes and it is money that you will not have to repay. Americans, being Americans, most likely will spend this money immediately, creating commerce. None of this has ever happened before.
I understand the economic effects of a $2.2 trillion stimulus package. When I was studying economics in college, we learned that the velocity of money has a seven multiple. What that means is that you spend a dollar at the grocery store and that dollar is used to pay an employee and that employee uses that money to buy food and the restaurant pays their employees, etc. Basically, the same dollar is spent seven times in an economy before it is completely extinguished. Under that assumption, you also assume that at some point a portion of that $1 is saved. I doubt very seriously that in the economic upheaval that very many will be saved, but I understand the effect of this $2.2 trillion. If you assume that the multiple is seven times, you are talking about an economic stimulus to the country of $15.4 trillion over the next several months. When we talk about trillions of dollars, most people have no concept of exactly how much money that is. Maybe I can give you an illustration to better understand. Remember months not years!
With a GDP potential of $15.4 trillion, we are talking about pumping into the economy a potential GDP that is greater than the entire GDP of the country of China in one year. Let me emphasize again, we are talking about creating, in this country, a potential GDP greater than the entire economy of China over a one-year period and we are talking about creating it in 90 days. A further illustration would be that this amount of money is over 3.5 times the entire GDP of the country of Russia for an entire year. Never ever in any economy anywhere in the world has there been such an enormous amount of money injected into the economy over such a short period of time. If anyone out there tells you that they understand what the economic effect of this will be, they are clearly delusional since it has never happened before.
Whether or not this will work, of course, is the major question. However, there are a few examples of a smaller situations occurring. During the 1930’s, Franklin Delano Roosevelt created the WPA (Works Progress Administration). F.D.R. was a big believer in putting people back to work, but not outright gifts. They created jobs for people to help them out of The Depression and paid for it with the government’s money. At that time, it was believed that there were 10 million jobless men in the United States. The WPA effectively put three million of those back to work creating national parks such as Yellowstone and huge infrastructural jobs such as building highways, schools, hospitals, airports and playgrounds. Of course, one of the most notable achievements of WPA was the building of Hoover Dam, which controlled the water through the Colorado River through Nevada and opened up an entire state with water that can be used to grow food, etc. Much positive work was done from the WPA, and by 1940, the country moved into a much stronger financial economy which accelerated during the years to build up for the war effort beginning in 1942. I understand that the Public Works Program took years to implement and put the money in the public. What we are talking about in this case is not years, but months, and there is no time for government planning. These amounts are going to small businesses which are outright gifts to the economy.
As this money starts to flow from the government out into the public, you are going to start to see businesses start back up. There is no question that many businesses will never reopen, but the vast majority will give it a try. This money will allow them to pay their employees, rent, and operating costs. The question will be whether the public will use their businesses as they have in the past. I am betting for the American spirit that the public will once again support private business and shop at malls, go to restaurants and buy things online, as they always have. I understand it will be a slow process for people to develop confidence, but too many people seem to miss the point that a great many Americans have been paid during this shutdown. Most employees have not lost their jobs and they have been hunkered down through April 30, for at least six weeks. There is a huge build up of demand since they have not spent their money on restaurants, travel or their normal pleasures. I am betting on what I believe to be a fact, that once Americans are free to spend money again that they will accommodate the economy by participating.
Ava and Dakota enjoying the beach
Yes, I can tell you a lot of negatives regarding this program. Just so that there are no misplaced illusions of how this is happening, this is a situation of the government printing presses working overtime. We are lucky that we have a country where all we have to do is throw a switch and print more money. Yes, I understand this is never a good thing, but in this particular case, it is required. The government does not have the time to issue bonds to pay for this huge amount of money. It must finance it internally, and that means getting the printing presses to work. Yes, eventually they will have to issue bonds to support it and that is a long-term negative when it comes to the national debt. Yes, we all worry about what will happen in the future for our children and grandchildren with the national debt, but as the Secretary of the Treasury said recently, “Now is not the time to worry about debt!”
Almost assuredly what will be created with this huge flood of money into the economy over the short term is inflation. Inflation is not always bad (in moderation). Inflation makes companies’ inventory more valuable and real estate values will go up. I am betting that as we get back to normal, residential real estate will increase in value due to the low interest rates and the potential inflation effect of house prices. If that is the case, that will be a welcome economic event. We can live with inflation.
I could point out many of the negatives of printing money. During World War II, the world was fascinated by the economics of Germany where essentially a relatively small country took on the rest of the world in war. How could such a small country afford armies large enough to basically conquer the world? It was pretty simple. They just printed more Deutsche Marks to pay for everything. As the war progressed, the Deutsche Marks continued to lose value and inflation was running at a 1,000% or higher per year. It got to the point where inflation was so bad that the German government was required to pay the soldiers on a daily basis since money would be worth much less the following day. Much of the same has happened in Argentina and Venezuela today where inflation runs at a 1,000% annualized rate due to the printing presses working overtime.
While that certainly is a potential negative, the ability that the United States government has to finance debt is extraordinary. The U.S. dollar is still the safe haven of the world and no country has the ability to print money and absorb it into the economy as the U.S. government has. I think there is no question that this entire flood of money will create inflation over the coming year, but I also know that the upcoming inflation will be welcome. If you are talking about investing in bonds that pay nominal interest rates, inflation will almost assuredly impact these bonds negatively. The 10-year Treasury bonds earn less than inflation.
So, what is the timetable to get back to normalcy? We now know that the country is in essential lockdown through April 30th. April will be a most difficult month as the number of cases go up and the deaths occur. But look at China’s example and you will get some clarity. China first recognized the virus outbreak at the beginning of 2020. Three months later the country is back almost operationally at 100%. McDonalds and Starbucks report that all of their retail stores are open in China and manufacturing has recovered over 80% of its prior production. People are back at work earning salaries and the economy is going to pick up. So, if that three-month recovery period in China is the same as we will witness in the United States, then recovery should be realized by May 15th. Not full 100% capacity, but certainly a good start.
The first real recognition of the virus in the United States was around February 15th and three months would get us back to May 15th. If we get back to work around the first of May, I see realistically May 15th as potentially being a recovery time period. While we all feel sympathy for the people that have died, there does not seem to be any perspective of the numbers in the media. As an example, in China less than 5,000 died by virtue of the virus. Now, you can question the numbers all you want since no one will ever know the exact number of deaths. But if you put into perspective in a normal year in the country of China, ten million people die per year. Ten million people die without the virus and 5,000 deaths due to the virus is hardly a rounding error.
We have to unleash American spirit to get going. We need baseball and basketball to begin again on May 1st. We can play without fans, but we need to get playing. Both of these leagues have enormous financial capabilities and they can test every single player and person in that stadium daily to see if they are well. To operate a baseball game without any fans, you are talking about less than 200 people to make it happen. You could easily test those people every single game to avoid any sick people. A professional basketball game would take even less people to operate. To assume we cannot function in empty stadiums borders on ridiculous. We can turn them loose so the American spirit can once again increase out of this incredible discomfort.
I have no idea what or why the media is fixed on this subject. My reading of the media at the current time would be that no American will actually ever go back to work. I really cannot get my hands around whether this incredible flood of negative information is designed to further hurt the economy or if it is to be a public service. Might their negative publicity be to hurt the economy, by hurting the economy it becomes a political realization. I would hope that were not the case, but given the exaggeration and almost hyperventilated reporting, you would have to believe it was.
Joe, Ava and CiCi in matching shirts
So, the question that everyone wants to know is when the stock market will recover. I guess I will have to quote my favorite quote-master Yogi Berra. “It’s tough to make predictions, especially about the future.” Yes, Yogi was very good in explaining things in his own sort of way. I have to admit, I do not know when the stock market will recover, however I know that it will. It will move to new highs.
There needs to be a better understanding that many businesses have operated through this down-cycle and have prospered. Obviously, the grocery stores, online sellers and computer companies have continued to operate and prosper. There will be winners and losers at the end of the day. However, I am convinced that once this $2.2 trillion starts running through the economy, there will be a quick return to normalcy. Admittedly, we will never be what we were. Social distancing will continue for years until a proper vaccine is prepared, but much work has been done already and antibodies have been created that will help people get well. The American ingenuity regarding healthcare and cures will be funded by governmental money at unprecedented levels. I have high confidence that by late summer, we will see significant progress.
So, it appears that the first quarter will be a slightly negative GDP and the second quarter will probably be negative by at least 10%. But it looks like to me that by the third quarter, the GDP will basically break even and by fourth quarter, marginally positive. If those predictions are somewhat accurate, by the end of the year stocks will have gained back much of the losses that we have incurred. To not be invested now is a mistake.
Actual tickets to the Beatles concert in Atlanta.
August 18th, 1965; $5.50 each ticket
I get a lot of clients and I hear a lot of commentators complain about the swift losses that we have incurred, which is unprecedented. Yes, the speed in which it occurred is unprecedented, but the losses are not. For the first three months of the year, the S&P 500 Index was down 19.6%. It has been an extraordinarily painful downfall, but certainly not unprecedented. As early as the fourth quarter 2018, the S&P was down more, percentage-wise, in that quarter. And what happened after that date? In 2019, the S&P Index recovered a sterling 31.9%.
So you ask, as you should, when will the market recover? None of us actually know, we just know that it will. It always has. Unlike 2008 when the market went into Bear Market conditions, it was for a very good reason. A large and important section of our economy was broken. The banks were essentially broke and they are the cornerstone to American finance. In 2020, the banks are stronger than ever and will benefit from the stimulus.
In 2008 we did not have the intervention of the government to basically give away free money to create commerce. No one knows what the effect of this will be, but as pointed out above, it is likely to be extraordinary. So, while I think the market is going to continue to be volatile, the trend will eventually be up. It makes me sick to watch the machines operate on Wall Street every day going up or down 500 or 1,000 points on a regular basis. These machines are not investors, they are spectators.
I wish I could explain to investors that these moves are not investing. They are outright speculation and mean nothing long-term. Yes, your portfolio is down, but America is not down for the count. If you believe, like I do, that recovery is four or five months away, giving up on America is always a bad choice.
On that note, stay healthy and come visit with us soon and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email. We welcome you.
As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins