May 11, 2020 | Into the fog

Will the virus forever change the future? Or is this just recency bias talking? After all, it’s a human failing – projecting current conditions forward.

For example, when assets rise (stocks, houses, gold, Bitcoin, fine art) people think they’ll rise forever. So they buy into inflating markets. But when stuff plunges (like equities in late March, or Vancouver detached houses now) buyers vanish as the meme spreads that losses will continue without end. So, we buy high and sell low. Almost always.

But this pandemic challenges every assumption. Financial markets have rallied bravely. House buyers have vanished as prices fall. Doctors are running the country. Unemployment has surged as the economy turned off.  Governments have moved hard to blunt the impact of their own actions. Nobody has a convincing argument about what happens next. However we can all grasp the destruction taking place. This virus will not just go pffft. We gotta live with the sucker.

But how?

For example, I have a fancy corner office with giant windows overlooking Toronto’s downtown and Lake Ontario on the 53rd floor of a 68-storey building at the corner of King and Bay. These days I’m not there, instead taking the sea breeze in NS, where people still talk to each other.

The elevator banks are highly computerized, requiring users to punch in a floor destination then wait for a car dedicated to delivering a selected group to identified floors efficiently. But the group can be 20 or 30. And the trip back down is indiscriminate. Doors open, people flood in to swarm the shopping concourse, restaurants and food courts below.

What happens when my entire floor – now vacant – is repopulated with hundreds of colleagues? How do they get there in an age of social distancing? Most come by streetcar, subway or GO Trains, then walk through clogged tunnels to the elevator banks. Stairs are not an option. Car traffic and parking is prohibitive. Few live close enough to cycle. What to expect in a few weeks, or months, when this gleaming tower – which sold a few years ago to a REIT for $1.4 billion – reopens? Will people balk at commuting via mass transit? Or stepping into those lifts? Eating in the giant take-out emporium downstairs? Squeezing through the underground passageways?

Will my corporate partner decide leasing a few floors on Bay Street is foolish, when it can operate with a remote workforce – people at home paying for their own Internet provider, accommodation, heat and toilet paper? Will this shave value off those neighbouring downtown condos which folks bought to avoid commuting – where elevator quagmires also exist?

See what I mean? This is just a sliver of working life. And it’s all messed up. Increasingly it seems the virus threat will be long-lived. As time drags on, changes will become ingrained. I may never ride that elevator, nor gaze through those windows, again. But I bet the corporation ends up making more profit as the virus revamps the workforce, empties expensive rental space and slashes costs.

What else is going to change?

Leon Cooperman is the CEO of a company called Omega Advisors. A few weeks ago he was on CNBC (almost as bad as BNN) and presented a list of long-term implications of Covid. Some of these will come as no surprise, as we’ve touched on such themes recently on this pathetic blog. He said…

• Capitalism as we know will likely be changed forever. When the government is called upon to protect you in the downside, they have every right to regulate the upside.
• Taxes will have to go up. Quickly if Biden (Trudeau) wins, slowly if Trump (MacKay) wins, but they will have to go up. Things like carried interest, capital gains, ability to rollover real-estate sales tax free all will have to be eliminated (for the good).
• Consistently low interest rates are indicative of a troubled economy and should not be viewed positively. We have negative interest rates in Japan and in Europe. Yet their P/E ratios are lower than the U.S. The level of interest rates are not bullish.
• Demand is likely to come back slowly. If you think about large gatherings like sporting events or concerts. We can’t imagine them coming back until we have a vaccination. With the possibly of a mandatory “vaccination card” to gain admittance.
• Business is going to incur larger compliance costs.
• There will be a lot of equity issuances to replace lost capital. Airlines are the perfect example, they bought back billions of stock at high prices that were previously sold at low prices, so there will be a ton of new issues to replace lost capital.
• Stock re-purchases, which has risen EPS for the last half dozen years, will largely be over.
• Looking at Warren Buffet, who is obviously the greatest investor of our generation, and has always been a buyer on weakness not a seller. He’s been very quiet. Our guess is that he’s having difficulty figuring out what’s going on and if Buffet hasn’t figured it out, who are we to make a judgement?

What to do when the future fogs in?

If you had a balanced, diversified, low-cost and liquid ETF portfolio when this crap started, then change nothing. No reason to cash out, run to gold or crypto, or bargain-hunt oil companies and airlines. Just stay the course and seriously bone up on tax-avoidance strategies. More on that in a future post.

On a personal level, Covid should have taught you this: don’t speculate, leverage, gamble, be an Airbnb host or amateur landlord. Save some money, have reserves, trash debt and live within your means. Value your job and do whatever it takes to keep the damn thing. Curb your house lust. Arrange an emergency LOC. Pay your cards off monthly. Have a retirement plan. Stay married. And never go to work on the 53rd floor.

Garth Turner May 11th, 2020

Posted In: The Greater Fool

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