Market Thoughts: Roses Are Red, Violets Are Blue, We’re Outta Here, Won’t Wait for You
For the right and, mostly, wrong reasons, Wuhan will go down as forever taboo in history. Call it COVID-19 or what you want, but kids just term it “the Wuhan” in urban lingo. For us, Wuhan will be a black swan event that comes just as the most popular K-pop group in the world, BTS, released their Black Swan single on the 17th of January.
We will be first to admit that we bolted for our lives the minute the lady at the MRT station hollered, “masks for sale” in “China-sounding” Mandarin. Never mind the exorbitant price or the tiny 25ml bottles of hand sanitiser being sold for 8 bucks each. Give us a bunch of tourists looking suspiciously of “China origin” and the feet automatically take a detour.
But it is not the Chinese anymore, it is at community level now with even Bangladeshi workers and random folks involved as the internet swarms of citizen vigilantes spark runs on toilet paper and instant noodles in supermarkets. Surely that would warrant a headline soon of someone catching “the Wuhan” or COVID-19 from the supermarket or from the face mask queue at Mustafa?
Back to work and it has been utterly unbearable toggling between virus-on and virus-off news till headline-fatigue hit for a virus-truce and virus-ok mode, because it is not as deadly as SARS. But still, there is a risk taking a Grab or taxi to work.
Restaurants lie empty because people bought too much food after the orange alert trigger that they have to eat home to finish that 6-month stash of instant noodles and canned ham. What has life become? Entire floors of banks under home quarantine and folks told to go home if they have attended certain churches in the past month for a free 2-week break (as if)?
It is tiresome to trade in uncertainty and yet having the S&P 500 make four all-time highs in a viral week makes one feel silly to a point of absurdity with nothing undervalued these days. Check out the table of year to date gain increments in the past week below. Everything has rallied in the past week suggesting peak-virus, as if markets are better at predicting that the medical experts.
2020 year to date gains. Source: Pension Partners
We spoke to a fearful friend who had confessed that SARS was the absolute most traumatic year of her early career, which still haunts her a bit today—despite the invaluable lessons learnt, along with all the other crises before and after. Recounting the days of majorly poor decision-making that she is glad to get off her chest, we realise the question would be what would we say if someone asked us in the future, “What did you do during Wuhan?”
“How should we approach this and what are you thinking right now?”
First, there are too many unknowns about the virus and the tests are pretty unreliable. We cannot even ascertain for sure if it is fully or partially air-borne. There is so much noise, conspiracy theories and doubts, such as if the infection numbers are accurate or how Indonesia can remain virus-free as long as they do not test people. The death toll outside of China is negligible and the epidemic is manageable as long as the quarantines start in place and movement is restricted, but it is really early days into the community outbreaks in Hong Kong, Singapore and goodness knows which other country will dare to declare one.
“How do you see the epidemic shape up in the markets from your experience?”
The Chinese have just gone back to work at half strength as several hundred million remain in shutdown mode. As it is, supply chains around the globe are disrupted given China’s larger share of the global economy and manufacturing. FT reports, “Fiat Chrysler warned this week that one of its European plants could be forced to halt production within a fortnight and Chinese copper traders have delayed imports of the commodity from Chile to Nigeria, highlighting how the economic consequences of the outbreak are extending worldwide”, just as ST reports Singapore firms face supply delays on our shores due to closed factories in China.
Bad news cannot be quantified immediately and the slowdown will show up in quarterly earnings, taking time to feed through as markets price in a V-shaped recovery (like in 2003 while the H1N1 epidemic took place in 2009 as the global economy was reviving with the help of QE).
On the other hand, we should be vigilant about the euphoria that will grip markets when news of a successful vaccine or treatment or early test kit.
Yet the fact remains that in the previous 3 epidemics: bird flu (1997), SARS (2003) and H1N1 (2009), there was no industrial shutdown of such scale (500 million people quarantined) which is bound to hurt while government stimulus will only partially manage the pain. This is not to mention the number of offshore companies affected such as China-dependent Burberry, the airlines and more, in the weeks and the months ahead as we cannot expect life to go back to normal instantly.
The disruption is real. Indonesian garlic prices have rocketed as the locals of the virtually virus-free nation empty grocery shelves.
“Why are we getting such mixed messages from the markets and economic rhetoric?”
Have you ever heard a central banker admit defeat and say their policies have failed?
Who is lying now?
Nonetheless, they are coming closer than ever to that admission in the past week where we had first, ECB’s Lagarde proclaim the ECB is running out of room to fight global threats and then we had Powell suggesting that the Fed may lack ammo to combat the next recession which is a tad strange to stomach as we watch stock markets continue to make new highs.
Then again, we also know roughly that the top 10% of US households own 84% of the stock market, which means they are just buying and selling amongst themselves as their wealth continues to balloon with the meteoric rise. And there is something diabolical when we read that the White House is considering tax incentive for more Americans to buy stocks right now. At all-time highs!
“What would you be doing now?”
It’s Valentine’s Day weekend and people on Financial Twitter are coming up with their poems, so here’s ours.
Roses are red,
Violets are blue.
We have a virus,
It can’t be true.
Market are at
The all-time highs.
Pack up our bags,
Run for our lives.
Cashing up is a good idea even if we get another leg-up in stocks from all the stimulus plans because even politically correct folks like Mohd El Erian suggests to “resist our inclination to buy the dip” and Charlie Munger sees “lots of troubles coming” from “too much wretched excesses”.
Nearly 70% of the total returns year to date for the S&P 500 come from just 4 stocks which are Microsoft, Apple, Google and Amazon (MAGA) because Apple and Microsoft combined accounts for more than 10% of the S&P 500’s total value. Finally, the fact that Tesla is now larger than more than 90% of the S&P 500 while still making 4 consecutive quarters of losses tells us a lot about excesses.
For sure it is a political mess out there as well, and we should not put it past Trump to declare martial law if stocks were to collapse. In fact, it would not be surprising at all because America chose the mad man over the liar in 2016 and the madness will sustain and permeate for 5 more years because Bernie Sanders versus Donald Trump looks a lot like Jeremy Corbyn versus Boris Johnson—fat guys convey more security, perhaps?
It is impossible to expect any sense of normalcy in the days ahead because this black swan has come at the worst possible time, after a wondrous year of returns in 2019 and we do not want to be part of this stupidity of expecting another round of global QE and yet another round after that.
The best time to get out would be while there is still ample liquidity which should not be taken for granted as banks strive to reduce risk in the days and months ahead.
Cipolla’s five fundamental laws of stupidity on Wikipedia states:
1. Always and inevitably everyone underestimates the number of stupid individuals in circulation.
2. The probability that a certain person (will) be stupid is independent of any other characteristic of that person.
3. A stupid person is a person who causes losses to another person or to a group of persons while himself deriving no gain and even possibly incurring losses.
4. Non-stupid people always underestimate the damaging power of stupid individuals. In particular non-stupid people constantly forget that at all times and places and under any circumstances to deal and/or associate with stupid people always turns out to be a costly mistake.
5. A stupid person is the most dangerous type of person.
Yes, the black swan has shown us the terrifying aspects of a totalitarian regime and the extent of surveillance is pretty horrific where everyone is dog-tagged and barcoded for ID. The pace of tracking down the “infected” has been astoundingly efficient and the implementation of lockdowns is like something out of a sci-fi flick.
The biggest lesson learnt from SARS was patience. There is just too much stress to be fully invested to think clearly. Don’t be stupid for everything will be alright sooner or later.