It is the week after Spring Break and the kids in my neighborhood are outside playing with their parents in the middle of the day. I walked into a crowded doctor’s office yesterday and cleared my throat and the entire waiting room shuttered. The city of Plano has closed the rec centers and we are no longer allowed to eat inside restaurants. My grocery store is half empty and people are shopping with gloves on. I can’t help but think that we are living in a scary movie.
Que the scene of panic on Wall Street. One month ago Brinker (EAT), the parent company of Chilis and Maggiano’s, was worth $40 per share. As I write, it is trading at $7.50. That is where it traded in November of 2008 in the throws of the financial crisis. Brinker has about $1.2 billion in debt and its stock market value is down 80% to only $275 million. I can’t imagine how stressful it would be to work at a restaurant, hotel, or travel related company during this time of social isolation.
One of my college friends will be able to tell his grand kids that he started working for El Dorado Casinos at the craziest possible time. El Dorado has grown fast and their stock has gone from $4 to $70 in only five years. In only one short month, it is has crashed to under $7. Every casino in the U.S. is currently closed. How long will it take elderly people to not visualize Corona Virus oozing all over the slot machines? I helped guide clients through the Tech Wreck of 2000 to 2001 and the Great Financial Crisis and I am still in awe of the recent news.
I have been stupefied by the roughly $15 trillion of foreign government bonds that had a negative interest rate before Covid 19. I was shocked to learn last Summer that over that there was $1 trillion of corporate bonds with a negative rate. I know it is mostly owned by Central Banks, but I still can’t believe that this many investors and institutions are paying governments and now COMPANIES to borrow. Until recently, I was confident we would never see the 10 Year Treasury Bond go below the July, 2016 low of 1.34%. On March 9, 2020, it kissed .4%. Who would want to lock in less than a 1/2% return for ten years? The extremely low interest rates represent a major problem for insurance companies, pensions, and retirees. That will be a worry for another day.
I love documentaries like Enron, The Inventor, and Wild Wild Country because the truth is stranger than fiction. The speed of the drops in some of these stocks and the drastic measures being taken have been unbelievable. A lot of people are going to lose their jobs very soon and I expect a lot of companies to close shop forever. I am ready for this bad movie to end soon.
Nassim Taleb’s book about the opposite of fragile was groundbreaking. The book covers a lot of topics, but the major theme is why we need to build systems that are antifragile. Antifragile systems get stronger with small shocks over time. Fragile things like wine glasses do not. When you lift heavy weights, your muscles literally tear and break down causing a shock to your system. Your brain thinks you aren’t strong enough to survive and it rebuilds your muscles stronger while you rest to make sure you don’t become extinct. Your body is an antifragile system.
The restaurant system in the U.S. is another example of an antifragile system. We have all seen the corner restaurant location that has had five restaurants open and fail. It is a really competitive business and for every success, there are dozens of failures. Because there are always new competitors that innovate and put pressure on the competition, we have delicious food and good service in the U.S. compared to the restaurants of the old Soviet Union. Better restaurants constantly putting lesser restaurants out of business makes this system antifragile.
While there are systems within the U.S. economy that are antifragile, the system as a whole is not. I wrote How to Handle the Next Recession (That May Have Already Begun) in May of 2019. While I don’t make predictions and have a cloudy crystal ball, I wanted to start preparing my clients for an overdue recession. Cracks in the economy were starting to appear and it looked like Germany and Japan (two of the largest economies) were already in recession at the time. On October 4th, 2019, the Federal Reserve decided to start printing money to bail out the banks (again) because the largest banks weren’t willing to make guaranteed money lending to each other in the overnight repo markets. The idiots running the Fed papered over the fiasco by beginning Quantitative Easing 4. I watched with my jaw dropped how quickly the Fed came to aid the banks close to an all time high in the stock market during supposedly “The Greatest Economy Ever.” There was something very fishy, but Wall Street soared higher on the back of the Fed’s largess.
The almost 500 points the S&P 500 increased from 10/3/19 to 2/20/20 were all fake. If the Federal Reserve would have not intervened, the markets wouldn’t have had the artificial gains that have now evaporated in the last month. After only a month of Covid 19, the Fed has panicked again dropping the Federal Funds Rate back to 0%. Maybe the Fed starts to buy stocks like the Japanese Central Bank did if things get worse. Our financial system is far too fragile.
An antifragile system would allow businesses to fail and corporate executives to be prosecuted instead of allowing them to pay fines without admitting guilt. If we had allowed more shocks during the last ten years, we would have a stronger system that could better handle our current crisis. Instead, the artificially low interest rates caused by the Global Central Banks allowed companies to go deep into debt to buyback their shares to make the C level executives’ restrictive stock appreciate.
On March 5, 2019 the geniuses running Delta Airlines decided to borrow $1 billion more to accelerate “opportunistic” stock purchases. They were buying their stock in the $50s and today their stock traded below $20 for a bit. While they couldn’t have predicted Covid 19, they should have expected a recession during the longest expansion in the history of the United States. There are a lot of people in this world living on the margin. Hospitality, travel, and entertainment make up a lot of jobs that don’t often pay great. Tens of thousands will lose their jobs very soon and will likely experience the toughest time of their lives. If we are going to bail anyone out, let it be the bar employees, the restaurant workers, etc. We don’t need to bailout the big banks and mega companies again–this only benefits their stock and debt holders. Delta went bankrupt in 2005, American filed in 2011, and GM filed in 2009. They are still around with thousands of employees. A bankruptcy doesn’t necessarily mean the company goes away forever and the jobs never come back. Since there are no capitalist in a crisis, it looks like a giant bailout is coming soon and Nassim Taleb will be ignored once again. If you want to read more about our broken system, “The Lesson” blog post by Sven Henrich was a true gem.
Becoming Personally Antifragile
A couple of years ago, I kept reading about how all these smart, Silicon Valley types, were all reading about Stoicism. I read a few books to learn what the big deal was and came across the idea of practicing misfortune. Many of the Stoics were wealthy and they would take a day or so a month to wear the cheapest clothes and eat the cheapest food (or go without) to help themselves face their worst fear. They would practice being poor so that they could learn to overcome the worry of “what if I lose all this fortune?” Practicing misfortune has made me a tougher and better person.
In only the last 12 months, I have slept four nights in a tent in below freezing weather, fasted eight straight days, lived out of a backpack for five weeks, and eaten only one meal a day for over 100 days. Like Nassim Taleb, I don’t want the bellboy to carry my bag and deny me the ability to get stronger by carrying my own bag. While I like nice things as much as the next person, I remind myself often that I don’t need them to be happy. While I could afford to drive a luxury car, I enjoy scooting around town on my $700 moped. It is fun, but it is also a good reminder that I can be plenty happy if one day $700 transportation is all I can afford.
Extended travel with only one bag to less wealthy countries like Nicaragua, Bolivia, and Colombia has done me wonders. Exploring different foods and cultures invigorates me. I am so curious and I love meeting people with completely different backgrounds than me. Some of the happiest memories I have of the last few years are from living out of a 40 liter backpack with a few clothes, a computer, and my phone. Traveling around less fortunate people and being content in $15 per night hotels has changed me for the better.
In addition to realizing I don’t need stuff to be happy, eating one meal a day (OMAD) has been a game changer for me. Most Americans are carb-aholics and if they don’t eat every couple of hours, they get hangry. My practice of fasting is like a super power. It was easy to train myself to eat this way. I know I can go a long time without food and I often feel better in the midst of a longer fast (certainly better than after too much food after Thanksgiving). What can you implement to make your family more antifragile?
As I mentioned last month, no one knows how or when this will end. I certainly didn’t expect Texas to shut down so many things when only 132 people are confirmed out of 30 million people. This is a stressful time and we are living through episodes we haven’t experienced before. It is estimated that 10,000 “economic suicides” were committed between 2008 and 2010. Please take the time for self-care. Your worth as a human and your net worth are not the same. I am walking my dogs more than ever and working as much as I can, but making time to relax and recharge. This is not going to be a sprint, but a marathon. We will get through it but it will be difficult and trying.
Where are we now? Stocks have gone straight down without a nice string of up days. We could be in a situation like 1987 where people panic and lose a lot of money quickly and then life goes on in 1988 without a recession. A more likely scenario is that shutting down business is going to cause a recession. The Stoic in me would advise you to mentally prepare for a recession and think about how tough it was in 00-02 or 07-09. If XYZ pharmaceutical comes out with a vaccine tomorrow and we are back to business as usual in April or May, you will be pleasantly relieved.
If we are in for a recession, stock markets usually drop, rally, drop, rally, and then go to an ultimate low. You can see that pattern below from 2000 to 2002 with the blue lines representing the drops and the green lines representing the bear-market (sucker) rallies. Unfortunately, a recession might mean the ultimate low will not be seen for a year or 18 months from now.
You can see the same pattern during the Great Financial Crisis of 2009 below. I have to say that identifying patterns like this in real time is impossible. Bear markets wreak havoc on our emotions. It is said that the market will do whatever harms the most people.
While my best guess is that shutting down large parts of the economy has begun the Recession of 2020 or the Covid 19 Recession, I also know from experience that I am awful at timing markets and so is everybody else. The S&P 500 is down about 33% from its recent peak. The last two recessions saw it lose about 45% and 57% respectively. A very large bounce should be expected soon and it will be impossible to know for certain if this scary movie is over or if we will be in the midst of a sucker rally that will make everybody feel better only to break our hearts when we go on to hit a new low.
If you are in your 30s or 40s you should view this time period as one of best 3 to 5 buying opportunities that will show up in your life. Keep saving each paycheck and stick with it. One day, this will be a small blip on chart. If you are retired or close to retired, lets just admit that this is really scary. While we couldn’t predict Covid 19, a bear market every 5 years is to be expected. Hopefully you will live long enough to see 5-7 bear markets in your retirement. Since timing them is far to difficult, the best strategy is to buy, hold, and re-balance. Try to focus on how many years you have in safe bonds and stick with your investment plan that anticipated many recessions would occur during your retirement.
If you aren’t following it already, Johns Hopkins has a great website with data on Covid 19 cases. This report says that more than 99% of people who have died in Italy had other illnesses. There are only 42 Apple Branded stores in the world that are open and they are in China. I am hopeful that a few weeks of social isolation can slow down the confirmed cases in the rest of the world, too.
Take care of your mental and physical health, be the best employee, and be compassionate. We will get through this.
Let me leave you with two of my favorite market quotes:
The only value of stock forecasters is to make fortunetellers look good. -Warren Buffet
Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves. -Peter Lynch