CORONAVIRUS DRIVES A CAPITAL MARKET MELTDOWN
As a real estate analyst and urban economist with a minor in monetary policy from University of Southern California, I have had a lifelong fascination with the Baby Boomer generation who changed the world after WWII and continue to dominate nearly every aspect of modern day living. Humanity has benefited and endured more advances in my lifetime than in the aggregated history of mankind. Human beings are having trouble keeping up which is why 40% of Americans yearn for the simpler days of yesteryear as evidenced by their political leanings which is in essence a mass protest against rapidly changing lives and technological dislocations.
We are Darwinian creatures which makes us self-interest driven yet empathetic during times of crisis when survival of the tribe is at stake, making for confusing and impossible to predict outcomes. Animals stampede and so do humans when threatened with frightening unknowns or issues they don’t understand; it’s in our DNA. As an avid follower of the economic community, one of whom happens to be our neighbor and without a doubt is one of the smartest humans I have ever met; not nerdy IQ smart but rather a real world economic forecasting savant. We had dinner Thursday night and as I left asked whether it would be better to overdose on OxyContin or razor blade my wrists given that his predictions were beyond scary as to what is going to happen as the Coronavirus spreads. This is a summary of what Julian Brigand had to say as a proven futurist.
You haven’t seen anything yet with panic accelerating on a massive scale over the next 2-3 months. More social isolation will be necessary if the health care system is not to be overwhelmed. With roughly 330 million US citizens at a 20% infection rate, 65 million people will need to see a doctor. If 5%-10% require hospitalization that means 3-6 million potential patients and should 20% of those cases require ICU admittance, then 600,000-1,200,000 people will need advanced care in a system that has about 50,000 beds. The CDC is trying to elongate the outbreak so as to prevent a systemic breakdown because if it does physicians will be forced to make triage decisions as to who lives and who dies which is going to make the public very unhappy.
The bad news here is the goal of longevity. As noted in in a prior email this is not a structural economic correction but rather a health epidemic that could burn out by year end. 2020 will be an economic disaster as global supply chain disruptions continue, employees furloughed, and business shuttered as evidenced by Vail Resorts closing all 37 ski resorts for a week while they reassess. The market opened Monday morning with another staggering sell off. The S&P is down 18% over the last 17 days and 30% from its 3300 index record high.
The only good news is that there will be opportunities to buy underpriced assets that will bounce back after the virus gets under control and it will. With the FED taking massive action it just announced a 100 bhps interest rate reduction while committing to increasing QE by $500m which includes mortgage backed securities that could ultimately drive rates to 2%. The question for places like Vail is that the rich typically don’t sell in downturns and if this a one or two year event that duration might not be long enough for real discounting to appear. During the GR it took two and half years for distress to set in because the wealthy don’t run out of money in months but rather years and are prone to riding out recessions rather than taking losses on long term hold assets they don’t have to sell.
While no one can predict magnitude and timing train wrecks can sometimes be seen coming if you are paying attention. The most reasonable plan is to wait for more information, try to predict a bottom, then buy distressed assets that are overly discounted. My hope is to come out of this mess whole, which is going to go down as nothing short of a historic black swan outlier event. The global economy would do well if it recovers by year end but depending on the carnage it might be 2021 before some semblance of normalcy returns.
While many of you are bound to disagree with these prognostications it only makes sense to wait until more information becomes available which is what I recommended during the summer of 2007. The hurricane is here, we’re all starting to hunker down, but waiting for the storm to pass as the hard part.