At Berkshire Hathaway’s AGM last Saturday Warren Buffett offered a few thoughts on severity of the Covid-19 shock.
“It’s been a flip of the switch in a huge way in terms of national behaviour, the national psyche. It’s dramatic. There’s a wide variety of possibilities on the health side, and on the economic side. Of course, they intersect, bouncing off each other. The range of possibilities on the economic side are extraordinarily wide. We do not know what happens when you voluntarily shutdown a substantial proportion of your society. In 2008-9 our economic train went off the tracks. There were some reasons why – because of the banks and all that. This time we just pulled the train off the tracks and put it in a siding…unavoidably breeding a huge amount of anxiety and changing people’s psyche, causing them to somewhat lose their bearings in many cases.” A V-shaped recovery? I think Warren is probably in the extended U-shaped recovery camp - see what you think: “I don’t know the consequences of shutting down the American economy. What we do know is that for some period – certainly during the balance of this year, but it could go on a considerable period of time, who knows – our operating earnings will be less, considerably less than if the virus hadn’t come along. It hurts some of our businesses a lot, it affects others much less.” “We don’t know how long this period lasts. And nobody knows. Most people think the virus will, to some extent, decline in its spread during the summer months. I would think that it will come back at some later date. How the American public reacts if they get their hopes up through some reopening, and how they react to a second attack by the virus – it’s like Dr Fauci says, the virus is going to determine our behaviour. You’re dealing with huge unknowns, and the degree to which it has disturbed the world’s habits and endangered businesses indicates you’ve got to be not too sure of yourself or what it’ll do in the next six months or year or whatever.” Buffett gives special mention to Boeing and Airbus (not BH investments) who “don’t know what their future is…the real question is whether you need a lot of new planes or not. It’s a blow to have essentially your demand dry up”. As an example of the knock-on consequences: Boeing buys from BH’s Precision Castparts who are now badly affected. “It won’t be any fun with the businesses where the world has really changed. You’re seeing a lot of change. If you own a shopping centre you’ve got a bunch of tenants who don’t want to pay you right now. The supply and demand for retail space may change… and for office space…significantly.” Why haven’t you been buying shares or preferred stock? “There was a period right before the………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
0 Comments
Ray Dalio is a billionaire investor, having founded Bridgewater Associates as a youngster in 1975 and turned into a mammoth $160bn fund. He is author of the best-selling Principles: Life and Work and a renowned philanthropist. Last week he was interviewed by Sal Khan. Below are his thoughts given in that interview. There are the plenty of warnings about division and violence within societies and across borders; about the rise of populists and dictators, and; about the risk of inflation, making money a poor store of wealth. But he seems to think the US stock market will be bailed out by policymakers. I would question whether they really do have infinite firepower to fill every “hole”, especially when the economic winds from the 82% of the economic world that is not American are blowing so cold.
A damaging virus “I think of the virus like being a tsunami…when it goes away there’s still terrible damage…to incomes and to balance sheets. Every individual, every company and every government has a certain amount of revenue and a certain amount of expenses, and they have savings, a certain amount of balance sheet. Those have been severely damaged…necessitating cutbacks. Think about companies like Disney [cut half its staff] or small businesses; great, great damage.” The hit to the economy “This will be the worst economic downturn since the Great Depression. The unemployment rate will approach 20%, and the financial wreckage will be of that magnitude.” Can policymakers stop it? “The good thing is the government is acting to fill those holes [in income and balance sheets of individuals and companies]. The resulting social unfairness is dangerous “When you think of the economy there’s the rich and the poor. I think there’s going to be a restructuring. People and policymakers will think: who’s going to pay for what? So they’ll be a reallocation of resources. Tax rates are going to change, and also spending. What really worries me is the fragmentation, the anger, or the carelessness of one extreme or the other to mess up the continued improvement of the pie…Restructuring will probably take a few years.” Geopolitical danger "Hitler came to power in 1933 because the internal fighting was so great. And there could be a move to a more autocratic and confrontational type of politics. And because this is a world problem there’s going to be competitions going on all over the world - China is a rising power. And then there’s a lot of the world that that won’t have the support the US has had because we’re blessed to have the world’s central bank – we can produce dollars…they can be spent around the world. Very few currencies are like that. Those other countries will not be able to fill holes in income and balance sheets. We’re gonna see a change in the world order, and there could be fighting. So how it is handled is the most important thing. It’s very similar to the 1930 – 1945 period. What happens when y………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Howard Marks, a very thoughtful investor (which have made him a couple of billion dollars) has recently commented on the crisis and recovery. I have collected what I believe to be the most salient points.
Will the market dip again? “Markets rarely rally in a straight line. Rather, their movements represent a continuous tug-of-war between the bulls and the bears, and the result rarely goes just in one direction. After the optimistic buyers of the initial dips have responded to the low prices and bought, the pessimists find the new, higher prices unsustainable and engage in another round of selling. And so it goes for a while…The bottom line for me is that I’m not at all troubled saying (a) markets may well be considerably lower sometime in the coming months and (b) we’re buying today when we find good value. I don’t find these statements inconsistent.” The future is unknowable, but is subject to informed extrapolation “I’ve defined investing as the act of positioning capital so as to profit from future developments. I’ve also mentioned the challenge presented by the fact that there’s no such thing as knowing what future developments will be. This is the paradox we must deal with.
Will there be a quick recovery? “One of the greatest uncertainties we face toda………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Capital Economics, a highly respected organisation supplying immediate and highly relevant economic analysis, has gathered some interesting data on the economic and the potential recession facing us. We investors need to make a judgement on likely future scenarios for various industrial sectors and so we must consider the macroeconomic environment impacting those sectors.
Whilst the Capital Economics team are very able, it must be noted that the level of unknowns on the persistence of the Covid-19 health crisis means we all have to accept a high level of uncertainty in any forward looking economic analysis. How long will severe lockdown last? When it is eased, will it only be by a small amount or will we go back to normal within days? Nobody can answer these questions with certitude. But we can make reasoned assumptions given what we know. Capital Economics has assumed that severe lockdown will be in place across most of the world for April and there will be a gradual lifting of restrictions in May. You and I might think that its optimistic to think that we can start to open-up society in May. Perhaps we won’t have the testing, taking and tracing regimes up to speed by then? Perhaps the government may want us to go back to normal, but families refuse to take the risk of going to work or the shops, airports and restaurants? My judgement, for what its worth, is that Capital Economics are erring on the more optimistic side – there is a distinct possibility that most of the restrictions will remain in place as we go into 2021 and therefore the economic impact will be worse than what it shown below. There is a list of Capital Economics publications from which I have taken these quotes at the end of the end of the Newsletter. Virus waves “Broadly speaking, there are two different ways in which viruses recur: through subsequent waves of a mutated virus or through multiple peaks of the same one. The 1918 flu is thought to have come in three waves with each more severe than the last, although reporting and recording was patchy. Flu pandemics in 1957 and 1968 had multiple waves. And more recently, the 2009 H1N1 “swine flu” started in April and was followed by a second wave in the autumn. Pressure to ease containment measures before the virus is fully under control, most notably in the US, might cause an unintentional resurgence. And we have already seen a renewed pick-up in infections in North China, Singapore and Japan, at least partly due to re-infection from elsewhere in the world. Hopefully, a vaccine will be found in time to prevent multiple peaks from occurring. But it is worth considering what the economic impact of any resurgence might be in the meantime. There are several reasons to think that the effects might not be as severe as the current wave. For a start, there should be increasing immunity in the population which could limit the need for containment measures.” “For some companies that are just about surviving now, a second wave might be the final straw that tips them into insolvency even if the related containment measures are less severe.” “The behavioural implications of a second, or indeed multiple, peaks could be very different to those of a one-off pandemic. If the virus seems set to recur regularly, it is much more likely that people will permanently change their behaviour to avoid crowds. This would increase the risk of sustained economic damage, with industries like leisure and tourism particularly exposed. The upshot is that there are reasons to think that any resurgence in cases in the months ahead will have less severe immediate economic effects than the first peak. Nonetheless, it would make any recovery much slower and increase the permanent loss of output likely to occur as a result of all this.” What about the global economy? Global GDP will fall at its steepest rate since WW2; a contraction of 5.5% this year. For comparison, in the 2008 financial crisis world GDP was down only 0.5%. Even though Capital Economics says “once the virus is under control output should rebound” they also note that it will take years to get back on the path we were on pre-Covid-19. “Policymakers’ bold action should prevent this recession from turning into a depression… And most countries’ banking sectors are healthy enough to stop this morphing into another financial crisis.” “Once the “shutdowns” are eased, the global economy’s capacity to produce goods and services should rebound strongly. Firms will re-open and people who were temporarily laid off will go back to work. That said, restrictions may be eased in a gradual and piecemeal manner. On this front, there is a risk that some of the rebound that we expect in Q3 ends up coming later than that.” “Moreover, we suspect that some demand weakness will linger. Consumer and business confidence might well remain subdued for some time, not least if fears of a second wave of the virus linger. In some countries, there might be the prospect of a new wave of austerity to repay the rise in public debt. “When world GDP contracted by 0.5% in 2009, pre-tax earnings of global non-financial corporations plummeted by 45%. We’re expecting a 4.5% decline in world GDP this year, so there’s a good chance that earnings will fare worse than they did in 2009. Even if they fall by the same 45%, the overall interest cover ratio (pre-tax earnings coverage of interest expenses) should fall to a historic low.” “Banks can hardly escape large loan losses in the worst global recession since WWII…Even where banks’ direct exposure to affected firms is small, they will face losses on loans to households that are struggling in a weak labour market”. Banks are also exposed to leveraged loans. Fund managers are also in trouble: “[There is a] risk tha………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 A negative bubble? Professor Robert Shiller’s take on likely human reactions to the crisis16/4/2020 Professor Robert Shiller, a renowned student of behavioural finance, was awarded a Nobel Prize in economics in 2013.
He recently wrote an interesting piece for the Project Syndicate group entitled “The Two Pandemics” He is most interested in the less obvious pandemic that is starting to sweep across nations - it is “a pandemic of anxiety about the economic consequences of the [COVID-19] pandemic”. His arguments draw on the ideas of imperfect rationality and heightened emotion, leading people down a path of feeding on each other’s fear, ending with panic. Understanding this phenomenon might help us gain some grasp of likely market trends. Shiller says that the source of our anxiety is that we are unsure what action to take. Furthermore, the two pandemics may feed on one another: “Business closures, soaring unemployment, and loss of income fuel financial anxiety, which may, in turn, deter people, desperate for work, from taking adequate precautions against the spread of the disease.” If these pandemics were confined to one country the demand drop there may be lessened due to the continuation of its exports. But now recession “threatens ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 On Tuesday the International Monetary Fund peered into the future, providing its informed guesses on what is going to happen to our economies (World Economic Outlook). It does not paint rosy pictures.
(BTW: I’ve gone even more into cash with the sale of my shares in the industrial and office property company J Smart) Far worse than 2008 IMF: “The output loss associated with this health emergency and related containment measures likely dwarfs the losses that triggered the global financial crisis. Second, like in a war or a political crisis, there is continued severe uncertainty about the duration and intensity of the shock. Third, under current circumstances there is a very different role for economic policy.” The worst economic conditions we have faced in a long time “It is very likely that this year the global economy will experience its worst recession since the Great Depression. The Great Lockdown, as one might call it, is projected to shrink global growth dramatically.” Baseline scenario There are various paths we might be forced down, but the main determinant on how bad the path we follow will be is the length of the lockdown. The IMF start by assuming a fairly short lockdown period of three months (Q2) and then “the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound,” resulting in a total loss of 8% of working days this year for severe epidemic countries and 5% of days for other countries. Then “the global economy is projected to contract sharply by –3 percent in 2020, much worse than during the 2008–09 financial crisis”. This scenario assumes that global growth in 2021 will be positive 5.8% as economic activity normalises. The IMF acknowledge the “extreme uncertainty” around this forecast. “Many countries face a multi-layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital flow reversals, and a collapse in commodity prices. Risks of a worse outcome predominate.” In the baseline scenario the western world is hit far harder than the developing world where GDP for the latter is 1% down for 2020, pushed up by a China rebound this year. The West does not recover all lost ground by the end of 2021 – see table. IMF projections using its baseline 2019 growth 2020 GDP falls projection, % 2021 GDP rise projection, % World 2.9 -3.0 5.8 USA 2.3 -6.1 4.5 Euro area 1.2 -7.5 4.7 UK 1.4 -6.5 4.0 Emerging Market & Developing Countries 3.7 -1.0 6.6From the table I conclude that a three-month lockdown is likely to result in 2022 GDP only being about the same as it was late 2018 in the USA, the Euro area and the UK, after having put the population through the appalling experienced of a slump in supply and demand. The mechanism for falling output Initial shock “Curtail[ed] mobility, with particularly acute effects on sectors that rely on social interactions (such as travel, hospitality, entertainment, and tourism). Workplace closures disrupt supply chains and lower productivity. Layoffs, income declines, fear of contagion, and heightened uncertainty make people spend less, triggering further business closures and job losses. Domestic disruptions spill over to trading partners through trade and global value chain linkages, adding to the overall macroeconomic effects.” Amplification channels “Flight to safe assets and rush to liquidity put upward pressure on borrowing costs and credit has become more scarce, aggravating financial strains. Rising unemployment………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Mohamed El-Erian, formerly CEO of PIMCO bond investors, IMF Deputy Director economist and chair of President Obama’s Global Development Council, is lauded for his clear thinking on financial and economic affairs. In the last two weeks he has granted interviews to discuss the crisis. Here are the highlights.
Economic stops are worse than financial stops “Economic stops [as opposed to financial stops] sneak up on you. They reach critical mass before you realise what is going on. And then dealing with the underlying source is very difficult. In this case it’s a health issue.” “Economic sudden stops are very unfamiliar to people who haven’t lived in fragile and failed states, who have not gone through a big natural disaster. They bring everything to a halt. They destroy supply and demand simultaneously. It starts small (China) but it spreads, and it reaches critical mass which is what has happened in the global economy.” Dealing with sudden economic stops “Stimulus policies do not work. No matter what tax break you give to people; no matter how cheap their loans are; no matter how much cash is in their pockets, this will not let them go out and spend. They will wait. You can help with the balance sheet, but, unfortunately, you cannot reactivate economic activity until your health issue is addressed”. “The only way you can contain and counter this virus is by denying it the oxygen it needs to spread – people’s contact. People put health before anything else. In California, well before we were mandated to stay at home, my hair cutter said, ‘I’m staying home’. Why? ‘I’m scared’. I asked: ‘but what about your business?’ Answer: ‘I put my health ahead of my income.’” “Fiscal policy can help people through the sudden stop, support their balance sheets, make sure they can afford payments, or press pause on certain payments, make sure liquidity problems don’t turn into solvency issues.” After yesterday’s announcement from the Fed that it would buy junk bonds yesterday: “one of the concerns the market had is that we would have a massive round of downgrades – it has already started – and that companies would thereby lose the indirect support of the Fed. What the Fed has said today is: No, I am going to take a snapshot of where the economy was, I want to make sure than liquidity problems don’t become solvency problems, and therefore I will not penalise companies that were downgraded because of liquidity issues. That is a very clear statement, it’s a very strong statement.” Thus some highly indebted large US companies are to be saved. A market ripe for falling “In 2019, despite sluggish economic and corporate fundamentals, the S&P 500 was up 30%. More risky assets were up even more. At the very same time that that happened you also made money on government bonds. So, you made money on the risky stuff, and you made money on the risk-free stuff. That is not supposed to happen. And at the same time volatility was very very low. What that tells you is that the marketplace had been conditioned to care about only one thing to the exclusion of all else, and that is central bank liquidity. Particularly the predictable and ample injection of central bank liquidity The result is a market that underappreciated liquidity risk, credit risk and equity risk. And we now, unfortunately, are reversing all three.” “Every single segment in the economy, except for a handful, will go through the demand and supply destruction that the airline industry has gone through.” Has the market fallen enough yet? “I’m pushing back against this notion that we have established a bottom. It’s a counter-trend rally. We are still on a downward trend.” “Most people haven’t priced in the unc ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Professor Nouriel Roubini, economic consultant and teacher at New York University's Stern School of Business (formerly IMF, World Bank, President Clinton’s senior economist) is renowned for warning of impending disaster prior to the 2008 financial crisis. He has long been a student of emerging market crashes, and this knowledge helped him spot the looming disaster in the U.S. 12 years ago, "I've been studying emerging markets for 20 years, and saw the same signs in the U.S. that I saw in them, which was that we were in a massive credit bubble,"
He has been speaking out in a series of interviews and an article in the last two weeks. Here are some of his ideas. He quoted some Goldman Sachs and JP Morgan research indicating that US output will fall at an annualised 25% rate in the second quarter, “worse than the Great Depression because the freefall in output occurred not in three years but in three weeks. Everything is in freefall. We are now on the verge of something that could be worse than the Great Financial Crisis. We could get into another Great Depression.” Despite central banks doing the right thing in supplying money “with half a million cases of COVID-19 we are not going to be able to reopen economic activity. If the contagion is not stopped then we’ll have the conditions for a Depression, not a recession.” In the Great Depression (GD) and the Global Financial Crisis (GFC) stock markets collapsed by 50% or more, credit markets froze up, massive bankruptcies followed, unemployment rates soared above 10%, and GDP contracted at an annualized rate of 10% or more. “Already US Treasury Secretary Steve Mnuchin has warned that the unemployment rate could skyrocket to above 20% (twice the peak level during the GFC). Every component of aggregate demand – consumption, capital spending, exports – is in unprecedented free fall.” He dismisses self-serving commentators who have promoted the notion of a V-shaped downturn – with output falling sharply for one quarter and then rapidly recovering the next, “it should now be clear that the COVID-19 crisis is something else entirely. The contraction that is now underway looks to be neither V- nor U- nor L-shaped (a sharp downturn followed by stagnation). Rather, it looks like an I: a vertical line representing financial markets and the real economy plummeting.” Never before has economic activity just shutdown like it has now, not even in the GD or the GFC. The best he can hope for is a downturn that is shorter-lived than in the GFC but it will still be more severe. “This would allow for a return to positive growth by the fourth quarter of this year. In that case, markets would start to recover when the light at the end of the tunnel appears”. But this depends on several things going right:
In China some shutdown measures have already been eased. Does that mean its economy will rebound to the a priori position soon? If so, then perhaps westerners can stop worrying about deep recession because all we need to do it copy the Chinese anti-Covid programme and get going again.
Other models to follow are Singapore, South Korea, Japan and Hong Kong which have done a relatively good job of containing the virus. Does this mean that their economies will suffer little damage and get back to normal soon? Today I’ll look at how these countries are faring. China There is some good news to report: the official rate of infections has slowed dramatically, as has the death rate – see chart. China went through a period when it was operating at only 60% of normal economic output. Since then GDP has risen as reflected in purchasing managers indices, which indicate that there are more factories and service companies open for business in March than in February. We can see the improvement in some statistics. For example, congestion in major cities is now only 25% down on its 2019 rather than the 60% drop in February. But note: people may be more willing to get in their cars, but they are still very reluctant to ride the subways, which are down 50% on normal, despite government shutdowns being eased and the Communist Party desperately encouraging people to return to work. Also families will still not mix with others in cinemas. And they are buying 25% less property than they did in a typical day in 2019. Heat and electricity are still required in households, but overall demand for coal is still significantly less than in 2019, presumably because many factories are drawing electricity from the grid. Economic activity, as proxied by intensity of light in industrial parks, is still around 25% down on 2019. We can conclude from the above, firstly, that China is nowhere near back to normal, and second, that it is looking its first recession since 1976. “The real unemployment rate in China is likely to go higher than 10% for sure,” said Diana Choyleva, chief economist at Enodo Economics in London. “Q2 [economic activity] is shaping up to be very weak as disruptions to production in China linger and, more importantly, demand from the rest of the world evaporates.” Last week a team of ANZ economists projected that China’s first quarter GDP would fall 9.4% YoY, with another annual decline up to 2.1% possible for the second quarter. But China have opened up Wuhan and other Coroaavirus hotspots haven’t they? So it’ll get back to normal soon, surely? The prospect of China getting rid of restrictions Yesterday, health authorities reported 62 new coronavirus cases (in Shandong and Guangdong). As a result of regular out-breaks China has imposed strict rules on who can enter the country and enforces quarantine measures in a bid to prevent a wave of imported infections. When relaxation of lockdown occurs people fear a second wave of infections as exemplified by Wuhan’s lifting its official ban on travel today, “But for many of Wuhan’s 11m residents, the formal lifting of restrictions on movement is just the start of a long recovery for a city in severe economic distress and a population fearful of a second outbreak. Activity has picked up on the streets of Wuhan but many businesses remain shut. Scores of residential districts around the city are still sealed off, barring free movement. Many people ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Our lives are going to be shaped by the coronavirus, not just our health, work, relationships, politics and social interaction but, of more direct relevance to an investment newsletter, economies, businesses and shares. If we are about to enter a depression as deep and widespread as the one in the 1930s hundreds of millions of people will suffer and millions will die, not just directly because of the virus but from the knock-on economic effects: starvation and poor access to basic medical care as dislocation lowers production and destroys the political and business order in poor countries and in pockets of “rich countries”. Expect foodbank queues to be as long as those of the soup kitchens of the 1930s. Expect personal bankruptcies, domestic violence and suicides to rise. Businesses will fail by the tens of thousands, large and small, and stock markets will fall dramatically from where they are now in over one hundred countries. And these effects will be played out over years, with many false dawns, and more violent downward shifts. There will be a strung-out deficit in consumer demand at the macro-economic level, as people become increasing afraid to buy for consumption, or to buy investment items. If that is the most likely outcome we need to position our personal finances and our portfolios to reduce the potential for regret, to hedge the downside, to have cash at hand to both weather the storm and to take advantage when green shoots come through. Some very able analysts are saying that another Great Depression might very well occur given the public health and fiscal errors made so far in fighting the virus. One even goes so far as to say it could be a “Greater Depression”. In future newsletters this week we’ll look at some arguments for and against. The Great Depression In the 1930s real output of the US economy shrank by 30% and unemployment went to 23%. It wasn’t quite so bad in the UK with 20% unemployment, but in Germany hyperinflation reigned as well as 30% unemployment – and we know the political consequences of Germany’s economic travails. Worldwide GDP fell by an estimated 15% (compared with 1% in the so-called Great Recession of 2008-10). International trade halved and construction virtually halted. There is no agreed definition of a depression other than saying it is a severe and sustained downturn. For our purposes I’ll use a decrease of GDP greater than 15% as a benchmark. A deep recession A deep recession is not much to celebrate, but it is perhaps the best we can hope for. It will result in the quantity of goods and services being produced in Europe and North America and many other countries being reduced by at least 6% and quite possibly by over 10% compared with the amount in 2019. That is just the first-order effect. To consider the second-order effects transport your thoughts forward 12 months from now and consider what you might have experienced. If you are British you might have s ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 |
Glen ArnoldI'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact Jackie.Tran@henryspain.co.uk investing is about making the right decisions, not many decisions.
Categories
All
Archives
May 2023
|