Study the analyses to conjure up your own Covid-19 crystal ball
• With so many opinions about what the future holds, it is best to make up your own mind
There has been no shortage of financial advice from pundits as to how investors should best respond to this crisis — what to do, what not to do. But, as Kate Andrews pointed out in The Spectator: “We’re all flying blind. Is this or that inevitable? We’ll find out soon enough.” Which for now at least suggests we may be better off knowing which questions we can’t answer, rather than trying to answer them.
That’s not to say those best placed to give advice shouldn’t do so, but that what’s likely to be more useful is more analysis, to better understand what lies behind the advice. What might that look like?
In his latest memo to Oaktree Clients (March 31), Howard Marks warned that asset prices may not be providing “enough scope for the possibility of worsening news”, and that “the most important thing is to be ready to respond to and take advantage of declines”.
What’s more important than the advice is Marks’s explanation of how he came to it.
Starting with the unknowns. “The prices of financial assets have moved down: appropriately, too much or too little? In other words, we have to consider the outlook and the appropriateness of value, in the context of unprecedented uncertainty and the total absence of guidance from analogies to the past … I think it’s important to take time out for a serious discussion of possible scenarios,” Marks goes on to say, before doing just that over the next six pages of the eight-page memo.
The positive case — the optimist’s view — is built around the early cessation of bad news: the earliest countries to contract the virus have shown good progress; the virus will be brought under control within three months or so; the negative effect of the disease on the economy will be sharp but brief; the price declines of securities will draw in buyers; ample capital is available for a rebound.
“When I read the more positive views I can’t help but think back to my favourite newspaper headline, ‘Bankers Optimistic’,” concludes Marks. “The story in question was published on October 30 1929 reporting on the prior day’s stock market crash. On the day of optimism, the Great Depression still had 11 years to run.”
When it comes to the negative case (which takes up three pages and comes with the forewarning that he is more of a worrier than a dreamer), Marks is concerned that the headlines are going to get much uglier, that the number of cases and deaths will continue to rise, and the economy will contract at a record rate. Many millions will be thrown out of work. Essentials such as food may run short.
“I’ve seen predictions that S&P earnings would decline by 120%,” says Marks.
“That’s right: in total, the 500 companies would shift from profits to losses.”
In addition to the disease and its economic repercussions, there’s another important element: oil. “While many consumers, companies and countries benefit from lower oil prices, there are serious repercussions for others.” As to the potential effect of the proposed (US) government programmes (another page), Marks essentially tries to answer two questions: is that OK, and is it enough? He comes to the conclusion that “without serious vetting and a conscious decision to adopt it, modern monetary theory is here. Whether we like it or not, we’ll get to see its impact much quicker than we thought.”
When it comes to summing up, “rather than reinvent the wheel and to show how others view the situation”, Marks turns to a note from Jason Klein, CEO of Memorial Sloan Kettering: “The bull case seems to be that monetary policy will work, fiscal policy will kick in, valuations have reset, society will follow effective health-care policies, the real economy will adapt, and geopolitics will remain subdued. The bear market seems to be the flip side of each issue and has the potential to be much darker.”
And a tweet by @yourMTLbroker: “Bull case: Everything opens in 6 weeks. The unemployed go back to old jobs. Economy back to normal within six months. 2T$ in PE dry powder, low gas prices and 0% interest rates pour fuel onto the economy. The roaring 20s mean the 2020s now. Bear Case: Unemployment goes to 20%+. Everything does not go back to normal before at least a year or two, and in the meantime, there is a huge demand shock. The effects of the lockdown on business as well as the oil shock create depressionlike conditions.”
“In the global financial crisis,” concludes Marks, “I worried about a downward cascade of financial news and the implications for the economy of serial bankruptcies among financial institutions. Today the range of negative outcomes seems much wider. Social isolation, disease and death, economic contraction, enormous reliance on government action and uncertainty about the long-term effects are all with us, and the main questions surround how far they will go. My own reaction to all the above is to expect asset prices to decline.”
Whether we agree doesn’t matter; that we’ve been given enough to decide for ourselves does.
THE MOST IMPORTANT THING IS TO BE READY TO RESPOND TO AND TAKE ADVANTAGE OF DECLINES
BULL CASE: EVERYTHING OPENS IN 6 WEEKS. THE UNEMPLOYED GO BACK TO OLD JOBS