We have never been in a crisis like this before. Not ever. To survive, and prosper in these markets, I honestly believe that you have to get this concept firmly, and squarely, in your head. You cannot look back at the financial crisis of 2008/2009 or 1987 or even the Great Depression to deal with what we are dealing with now. In fact, I would state, there is no comparison in American history.
We are in a medical crisis that has caused an economic crisis which has become a financial crisis. The corona virus pandemic is ruining our personal lives, our business lives and the markets. The hedges that worked before are not working and the issue of liquidity has shot to the forefront. I speak to plenty of large institutions and money managers and one after another tells me that bond trading has become a “by appointment” moment. You may see a bond on your screen that is evaluated at 90 and yet, to trade it, it is probably 85 or 86 by the time you are done.
Nothing is safe these days. I still put Treasuries at the top of the heap but even there, with the amount of debt that America is piling up, the risk has increased. Whole sectors of our economy are going to face, in my view, more bankruptcies that can almost be imagined as I stare at the hospitality industry, the travel industry, hotels, restaurants, shipping, Real Estate, property and casualty companies, shopping malls, and a multitude of other industries.
The strategies that you have used before, that have worked before, are no longer working. A whole other mindset is now required to navigate both the bond and equity markets. A new methodology of thinking must now prevail.
“Preservation of Capital,” Grant’s Rules 1-10, are always at the top of my mind but now they are almost the only thing in my mind. I am not an avid fan of “Cash is King” because you will earn almost nothing on it but I do advise a stash of cash to carry you through until we climb out of our morass. The one thing that I will state, that I will definitely state, is that eventually we are going to get out of this mess. There will be a vaccine, there will be a cure, but the world, and the financial markets, will be forever changed by what we are experiencing now.
No more will cost be the only driving factor. Having 95% of America’s pharmaceuticals produced overseas will never be a reality again. “Made in America” will no longer be a slogan, in my opinion, but a Congressional mandate for many industries. When you get whacked on the side of your head by a virus coming out of nowhere, lessons will be learned. Eventually, this will be a positive for American companies, though we are nowhere near that point in time yet.
In terms of trading, my forty-six years on Wall Street, has taught me a few lessons. No “Hail Mary” passes. I would proceed cautiously, slowly, with a lot of consideration, before putting money in or taking money out of your portfolios. One thing that I can virtually guarantee you is that a good size rebound is coming in both equities and debt. “When” of course, is the big unknown, but one will be coming. The coronavirus has ambushed us, but the boys are coming out of the “OK Corral” to deal with this slovenly medical creep.
The biggest issue now, for most people and institutions, is the timeline. Just how long will this all take and what do they need to make it to the other side. The issue here is cash or cash flows which is one reason why I like closed-end funds. Dividends are likely to decline, in my view, but if you are starting with double digit ones, you are likely, in my estimation, to weather the experience. No guarantees of course, but then whoever thought that Ford and Delta and any number of other companies would cut their dividends to Zero.
There has also been much concern about the oil and natural gas industry lately. Russia and Saudi Arabia are having a stand-off, but this situation will nor prevail for long as neither country can afford it. I think there is now good value in many of the pipeline companies and the well-capitalized energy companies but when I say, “well-capitalized,” I mean that exactly and with specificity. I would not be going down the chain of risk here as the timeline to higher prices may put some of the weaker companies into reorganization before prices begin to move up.
Make no mistake, these markets are scary. Having said that, however, I honestly believe that if you can make it through the coronavirus timeline then you will do quite well. I am cautious, and somewhat bearish short term, I honestly believe that a lot of money can be made by investing some money prudently now. There is definitely “blood in the streets,” but that also means that the opportunities are far higher, far higher, than in most markets.
In the longer term I am decidedly bullish though I fully understand the negative psychology that is present in the markets these days. Also, you have to sleep at night, and I do not advise anyone, or any institution, to take risks that cause you to lay in bed and sweat it out each evening. Not a good plan!
As I stated before in a prior commentary, we are in the “Heart of Darkness.” Soon, soon, light will prevail. I have great faith in human ingenuity, and I have no doubt that we will get through all of this. It is just a question of time.
Watching a coast as it slips by the ship is like thinking about an enigma. There it is before you, smiling, frowning, inviting, grand, mean, insipid, or savage, and always mute with an air of whispering, “Come and find out”.
– Joseph Conrad, Heart of Darkness
We will all eventually find out!
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.