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April 27, 2020 | The Outcome

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Stocks up again. Volatility down. Portfolios restoring. Man, this drives some people nuts.

Not a day passes without a renowned macroeconomist wag or savant quant analyst in the steerage section telling you, ‘markets will make new lows,’ or ‘the worst is to come.’ But it’s not happening. It’s done. Mr. Market hit the bottom in the third week of March. If you’ve been waiting with cash to jump in, you probably waited too long.

But, but, but, how could it be? This very blog has detailed the blood-and-guts status of the economy. Retail slaughter. Eight million on the dole. Oil heading back to ten bucks. Record household debt. Real estate Armageddon. Missed rents. Mortgage mayhem. Intestines and oozy juices everywhere. How come rich people with financial assets are getting a free ride? The over-leveraged, under-capitalized, no-savings deplorables demand blood!

It’s true. Stocks cratered 35% or more when the virus invaded. Since then there’s been a serious retracing. The S&P has zipped higher along with Bay Street. Fear’s gauge, the Vix, has plunged. Balanced and diversified portfolios took a tumble of 15% or more, then quickly reversed. Soon it may be as if a pandemic never happened, leaving investors whole while so many others in society are whacked.

So, yeah, why?

Markets retracing in a V pattern

 

First, as this pathetic blog has said repeatedly, pandemics are blips. They pass. This mess is not the result of a structural failure. Banks are not wobbling nor big corps failing. Politicians turned the economy off and artificially curtailed demand in order to deal with a health emergency. It was shocking, disruptive and hurtful, but also temporary. Markets and investors get this. Growth will be back in Q3, when I can finally get a haircut and stop looking like the lead guitarist in Black Sabbath.

Second, the response by central banks and governments was overwhelming. The Fed and the Bank of Canada crashed interest rates within days, then started buying up securities by the vanfull. The system is awash in liquidity. There’s no credit crisis of the kind that killed us in 2008-9. Governments followed this with the greatest amount of public spending since WW2. Trillions. Everybody is getting a cheque of some kind. It’s astonishing.

Third, we went into this coronavirus hell with a relatively strong economy – certainly in the US. Unemployment at a 50-year low, corporate profits robust, trade barriers coming down, record high consumer confidence, rising real estate markets, peak stock values, low inflation, cheap rates and a pending American presidential election. A lot of big companies report earnings this week. Prepare to be surprised.

Fourth, Covid didn’t kill us. Yes, many perished, sadly, and by the time things are done there may be two million infections in the States. But Canada has largely escaped. The curve flattened. The health care system didn’t buckle. Restrictions will be slowly lifted here, as is the case in Italy, China, New Zealand, several US states and elsewhere. What was believed to be a massive shortage of ventilators in the States turned into a surplus. Most of the fatalities have been among the aged, or those with underlying medical conditions. Society as a whole is not threatened. And when therapies or a vaccine emerge, CV19 will be just another thing. Remember measles used to kill. Diabetes was fatal. Markets are saying this is the beginning of the end, not the end of the beginning.

So as the economy turns back on corporate earnings can restore, taking the place of government and central bank stimulus. This would suggest the bottom was a month ago. It does not mean stocks won’t have some brutal days ahead. But it does signal a brighter future. Hope. The way out.

However, there’s bad news, too.

Remember this blog told you Covid would make the wealth gap grow? Yup. Happening. People with financial assets are emerging relatively unscathed. Gains beckon. But folks with big debts, no savings, no reserves and (for a while now) no incomes, are even more pooched. Says Deloitte economist Craig Alexander: “One of the great legacies of the current crisis is that after the pandemic has passed, we’re going to have more indebted households.”

The other big deficit is confidence. Wall-to-wall pandemic coverage by the Coronavirus Broadcasting Corp, and other MSM outlets has parroted the message of governments anxious to control and modify behaviour. History will tell us if they went overboard or the message was justified. But polls suggest a majority are quite happy to collect pogey instead of a paycheque and are terrified of being infected and quickly dying. That the number of active cases of the virus today (26,800) amounts to .07% of the Canadian population seems moot. Folks don’t care. They’re scared

Worried people are not risk-takers. They eschew investing. They buy condos, instead, using big leverage – which is perfectly safe because the bank gave them the money. They don’t trust financial markets, believe the government will look after their retirement and get new vehicles with 84-month loans. Household debt explodes. That’s understandable (if risky) when the economy’s firing on all cylinders. When a crisis hits, disaster. If a legacy of the virus is falling house values, business failures and structural unemployment (all likely), the chasm grows. The rich hold assets. The rest hold debt.

Which are you?

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April 27th, 2020

Posted In: The Greater Fool

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