I had a lot of time away from screens this weekend which is probably a good thing. Always good to get to step away and get a different perspective away from the constant bombardment of news, opinions, and, dare I say, conspiracy theories.
People never lose their collective shit more than during times of crisis and uncertainty.
But I’m not here to talk about conspiracy theories, rather I just wanted to offer some perspectives. And feel free to disagree with them. We’re all working with an evolving set of data points (health, macro, interventions, etc.) and lots of global emotions ranging from ignorance to hysteria during a time of great uncertainty.
But here’s a few thoughts to consider as we collectively navigate through this mess.
First off, this is not a drill, and everybody’s lives are affected in one or the other, many severely, many are losing their lives and it’s a horrid tragedy.
Yesterday I actually ventured on the roads here in England in earnest for the first time in a couple of weeks. It was not by choice, but as I had mentioned on twitter we had an unexpected houseguest. Not somebody we ever met before, but it was someones’s elderly mom who got stranded in Heathrow as the Sougth African government shut down all flights. With hotels on lockdown she literally had nowhere to go and after a frantic phone call from her daughter in the US we agreed to take her in.
Her job and life is in South Africa, now she was in a foreign country with no place to go. Her job likely gone at this point. There are many horror stories like this. So we took her in and she stayed with us for 10 days with still no visibility as to when she can return home. A family friend agreed to take here in, but they live in Northern England and there was no practical way to get her there other than by car and I’m not going to drop a grandma off at the train with all the health concerns that come with it.
So we drove. And a trip it was.
I posted some impressions yesterday, just amazing to see the motorways so desolated for long stretches:
Drove hundreds of miles today to drop our stranded guest off at her new temporary home in Northern England.
Some impressions from the lonely journey on largely deserted freeways and roads in a country on lockdown. pic.twitter.com/CV3yEI0udd
— Sven Henrich (@NorthmanTrader) April 4, 2020
So while I hear and see news reports that people are not taking lockdowns seriously, my experience on the road was quite a different one. That bridge in the video is Dartfort Crossing, it’s usually packed all the time. Hardly a car on it. So it was eerie.
Which brings me to a larger point: Most people we know here are seeing their livelihood in jeopardy. I see business owners seeing their operations blow up. Workers get furloughed and believe me: They are all saying government assistance is not enough.
You all know that to be true all over the place. For years we’ve been posting news items about how a larger portion of the population either live paycheck to paycheck or don’t even have enough savings to cover an emergency.
I even highlighted this again last year:
The consumer is in good shape as long as the consumer has a job.
78% are living paycheck to paycheck. 50% have no saving, no retirement & keep adding to revolving credit card debt to fund expenses.
The judge consumer health as good when things are at their best is a fool’s errand https://t.co/kwVbxMIrl2— Sven Henrich (@NorthmanTrader) September 21, 2019
And now we are finding out the hard way that the consumer is indeed in terrible shape despite a long running bull market driven by cheap money. Why? For many reasons, one of which of course was that wages did not keep up, poor paying jobs in many cases, yet housing prices skyrocketing by the very cheap money that again made housing unaffordable for many and of course the same sins as in every cycle, but perhaps worsened by this last cycle: The illusion that things will always be good and that with cheap money and low rates all kinds of debt can be sustained.
Take your pick or desired combination: Many people were incredibly vulnerable and are now paying the price.
Which brings meto the difficult decision part. How long can shutdowns be kept up, hence my tweet a few days ago:
I hate to say this: But there may come a moment where ugly choices will have to be made.
You can’t keep the global economy on permanent shutdown.
This is not sustainable no matter how much the Fed prints.— Sven Henrich (@NorthmanTrader) April 2, 2020
Twitter being twitter my tweet prompted me being accused of calling for “racial cleansing”:
You can’t make this up. I despair sometimes at the utter stupidity thrown around sometime.
But that’s neither here nor there.
What is here are parents out of jobs or furloughed, dependent on government assistance with their kids out of school for months to come. This creates all of sort of stresses that go beyond just the financial component, but also to the mental health of children. Sure you can keep this up for a few weeks but not months on end. Zoom only goes so far as a social replacement. I suppose we are lucky to have these tools today, but it’s not a substitute in the long term.
Which brings me to the virus. We are now finally beginning to get some encouraging news of slowing of death rates and infections out of hard hit areas such as Italy and Spain.
A few comments on this: First generally my impression is that countries that have invested more in their medical infrastructure and are more quick to test appear to be able to manage this virus much better. Germany and South Korea come to mind. I’m not saying they are handling it perfectly, but it suggests that the virus can be managed better then it currently is or has been in other places.
The world is waiting for a vaccine which by all accounts (including Bill Gates) may still be 18 months away, a dreadful long time in a current period of need, but also super fast considering the historicity of developing vaccines to new viral agents. But there are no guarantees either.
But while we may be now getting good news on slowing infections and death rates in some cases how much of this is really the virus dying down versus just our social isolation efforts contributing to the slowing in growth? If it is really just the latter then we may be faced with a much more difficult task.
While there is still hope about seasonality such as the flu, the fact that this virus is global in many different climate zones raises the question whether it really is seasonal. We simply don’t know.
What I do know is that the pain and burdens on families are real. And on companies. The longer these shutdowns go on the more severe the long term damage and the long term consequences:
Fwiw: Any notion that we get back to where we were before this virus hit is a fantasy.
Companies will be under significant margin pressure to cope with the hit they just got. Many jobs will not come back any time soon.
There will be belt tightening.
Better yes. But not the same.— Sven Henrich (@NorthmanTrader) April 3, 2020
Workers currently furloughed may find out that for some, or many of them, the jobs will no longer be there when the lockdowns end.
The hope for a full and quick recovery may well be displaced. I can’t say of course, but we are facing this crisis with a financially vulnerable population, a globe already massively indebted and now adding more debt at a faster clip than ever before.
None of this is sustainable in the long term. The debate about the consequences will come once the immediate crisis is managed, but the solutions employed today may set the stage for the next crisis already.
But the really tough decisions for this crisis will come much sooner than that. When and how to get back to normal without a vaccine. Is it possible without seeing the virus flare up again and risking more lives?
Frankly one concern I have: I see more and more reports of younger people succumbing to the virus. Even people without underlying health conditions. And there are no clear explanations that I have seen. Why does the virus hardly affect some people but is so devastating in others? Science hasn’t been able to provide a definite answer which suggests many aspects of Covid-19 remain unknown.
This raises the concern that a return to normal anytime soon may be prohibitive from a medical perspective, but not to return to normal is economically and emotionally not viable either. Yes, we can all talk about adapting, but that’s easier said than done for millions without jobs or income other than government assistance which doesn’t make them whole.
Entire businesses can’t sustain themselves with crushed revenues and ongoing fixed costs. It’s impossible.
So tough decisions will have to be made and all of them will come with a heavy price tag. On a human, financial, economic, emotional and psychological level.
The longer this drags on the higher the probability that many jobs will not come back making this eventual recovery, while sharp at the beginning, also destined for a lower trajectory recovery as then the full consequences of the damage will come apparent.
Underneath it all there are again lessons crystalizing that were once again ignored: Those that saved during this cycle are able to withstand the shock, those that didn’t or couldn’t can’t. While this business cycle was the longest it didn’t magically extend. It was paid for with cheap money and constant central bank intervention. These very central bankers that once again are intervening at a new record pace created the illusion that they are all powerful. In 2019 there was even fantasy talk by people who should know better that recessions could no longer occur, that the boom and bust cycle had been eliminated. It hasn’t. The bust is here in a big and unexpected way. And it’s here to say.
So yes, hope for the best, take comfort in a slowing of a infections and deaths, take an optimistic view of human ingenuity finding ways to combat the virus, find relief once market rally again, but don’t lose sight of the long term damage inflicted and the short term damage that will be felt in consumer and business pocketbooks for years to come. Spending plans once made will be reduced, hiring plans once made will be scaled back, budgets once in order are no longer. This shock will reverberate for years to come.
And also don’t lose sight of the fact that none of the tough decisions that will have to be made are clear, easy or consequence free. All have negative side effects.
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Categories: Opinion
Sweden and Netherlands – there is ONLY one viable strategy to deal with this: herd immunity. Everything else is self delusion, and self-harm. Politicians must face this, and (very very) soon – or we really are all doomed.
Hi Sven,
I wanted to let you know that you’ve been a voice of reason during all of this. So many people (including so-called highly-respected economists) have self-motivated biases that distort their outlook.
Keep up the good work,
Adam
Hear, hear; agree with Adam; thank you, Sven!
Some people will die and their jobs will be open and filled quickly by someone out of work. The numbers are very small versus the damaged that was done by the government shutdown. If I worked in the government, I would be very worried for my safety that a quick recovering doesn’t materialize. I would be triply worried if I lived in a state were they let the criminals out of jail.
i>”And now we are finding out the hard way that the consumer is indeed in terrible shape despite a long running bull market driven by cheap money. Why? For many reasons, one of which of course was that wages did not keep up, poor paying jobs in many cases, yet housing prices skyrocketing by the very cheap money that again made housing unaffordable for many and of course the same sins as in every cycle, but perhaps worsened by this last cycle”
A very thoughtful article Sven. Although I don’t lean toward purely technical interpretations of the markets, visiting your site in the last few months was one the few references points I could use to keep from going insane, as day after day the markets posted ludicrous new highs.
But the issue unaffordable housing is as old as society. It’s just the Fed’s intervention accelerated the process. I fear the Feds’ recent interventions will turn the majority of the US population into indentured rent bound serfs forever.
Henry George (1839-1897) observed in the 1800’s that people were being displaced in formerly vibrant communities as society ‘progressed’. His work “Progess and Poverty” described many of the ills we see in today’s world. Whether you believe his economics is another matter, but the book is free online and full of many profound insights.
https://en.wikipedia.org/wiki/Progress_and_Poverty
Great commentary and perspective, Sven. Thank you. Stay well.
Great trip video. How’d you get the UK government to paint the fields green? All ours are white with splotches of brown. Given how fast the US economy ricocheted back from the Spanish Flu; despite all the disadvantages of that era, “The flu ended; the forgetting began.” https://www.pbs.org/wgbh/americanexperience/films/influenza/ . I respect your senior market education & experience. Yet, consider not under estimating the rebound of the pent-up demand. Even in the face of, “The War on Normal People” to rush to AI solutions to replace workers – which is occurring but takes time. The FTs opeds that, “The System Has to Change” and “Virus Lays Bare” remind us that social change occurs responding to crisis. Crisis is the catalyst to blow away the guardians of the past, paraphrasing Maurice Maeterlinck. Yes, please keep up the great work and retaining your quant.
That’s a good and accurate summary Sven. We truly don’t know what effects this near global shutdown will have, nor the emergency actions to mitigate those effects. It will reverberate for years. For the many of us ‘in hiding’ and only interacting via media the extent may not be really obvious, but venture out and the ‘normal’ world has changed, radically.
I’m reminded of the original BBC ‘Survivors’ series from about 1976. That plague was different in that almost everyone got it and almost everyone who did, died. That dislocation was total, ours isn’t – but it will still be major and longlasting. It might even ‘break this system’, who knows?
Thanks for your humanity and perspective in your commentaries, it seems honestly and truly felt to me. I think you are a good person, fare well.
Thanks for this Sven. You are always a principled gentleman with an intelligent viewpoint. Always much appreciated. Also the fact that you took this person in under dire circumstances is inspiring to say the least. Thanks for all you do. you have helped me immensely in my investing decisions.
From here: https://www.foreignaffairs.com/articles/americas/2020-03-30/us-economy-uniquely-vulnerable-coronavirus
“Putting the economy in a freezer for six months or longer would destroy what’s left of its social fabric along with its growth model. But restarting it could turn the pandemic into a plague that could cause as much damage as the freezer.”
It looks like the US mortgage market is about to lockup solid…
https://www.theinstitutionalriskanalyst.com/post/calabria-s-fhfa-fans-the-fires-of-contagion
The restrictions and lock downs will be lifted shortly. Pent-up demand for things we need will be high until those needs can be filled. Then the psychology of what the politicians did to us will cause a shift in attitudes towards spending and saving. That’s when we will know the true cost of what was a HUGE mistake in shutting everything down. Secondly, accountability courts for the medical experts whose models were wrong and deeply flawed, the Main Stream Media who pumped the panic and fear campaign, the lying cheating Chinese Communist Party hardliners who hid this from the world for months and the Politicians who blindly followed them all and led us down this rabbit hole. Finally………shame on all of us for not stopping them! Why do you think America’s founding Fathers created the Constitution specifically with the Second Amendment!
Thanks Sven – good analysis. My 2c is that we’ll have an 8-10 week lockdown in most places, then a phased re-opening with the people who’ve recovered from the virus and least vulnerable heading out first. This re-opening could take 18 months until we have a vaccine. This is more bearish than most I think; many people expect we’ll be back to normal by June. I would love to believe that, but don’t. In line with this, I’m cautious on risk assets for now.
We need “most” people to have had this virus to be able to have any sort of proper re-opening. Until then, no social gathering, no theaters, no close contact. If ONE person caused this thing, then why wouldn’t ONE remaining person who has it re-ignite it again? Unless people become immune, it will always re-ignite. Even H1N1 is still going around. I said it right from the beginning when it was in China, how do you stop a virus that has no symptoms for 2 weeks and spreads through the air, all it takes it one person to sneeze on the wrong train, bus, crowded platform, etc. The 2 week no symptoms part of this virus makes it impossible to stop unless all normal contact between people is halted altogether. The virus is the vaccine at this point.. although some have gotten better only to apparently catch it again. Any hopes for a vaccine could be futile, we’re not even 6 months into this thing, 1918 virus mutated after 6 months into a super deadly form that killed in about 12 hours. If that happens.. forget about anything to do with markets.. you won’t see ANYBODY outside. That’s why.. better prepare now. Food, water.. that’s where to invest.
PERSPECTIVE
Each and EVERY year 60 Million people die. Where is the panic over that fact?
https://ourworldindata.org/births-and-deaths
The real disease is central banking and the insane economic shutdown will devastate WAY WAY more peoples lives than the virus itself.
One fact to consider: In New York state 30 people per million are dying per day from Covid. That doubles the normal death rate of all causes, which is 25-30 per million per day. This is real.
https://www.lewrockwell.com/2020/04/ron-paul/end-the-shutdown-its-time-for-resurrection/
Sven couldn’t have said it any better, thank God someone is in touch with reality
“Why does the virus hardly affect some people but is so devastating in others?”
I think I can answer this for you. It all depends on the ‘viral load’ of rec’d at the time of infection. Think of the Person A who breathed in a couple of viruses that stick to their lungs. In that case, if the person was healthy to begin with, their body can probably muster up a descent containment program and voila! they are infected, but asymptomatic. Now think of Person B, who had the unfortunate happening of a sick Covid-19 person coughing right in their face. In that situation there would be an overwhelming number of viruses attaching to Person B’s lung tissue all at once. Needless to say, poor Person B is going to get pretty darn sick. This theory has not yet proven, but it makes a serious amount of sense.
Not sure who or what entity drove the markets up 7% today, but I used this opportunity to make up all my previous losses, so thanks to whoever went long today, as I am out of the casino for a short while as they crank it up towards previous highs. Not sure how current $160 earnings will not be reduced 25% to $120, so $120×20 =2400. Note tha t$120×30=3600 and $120×10=1200. So SP500 will be somewhere between 1200 (10P/E) and 3600 (30P/E). Will probably short once “they” push this dog beyond 3000, as I am confident this is not a six week event (so is Jamie Dimon and Janet Yellen as of today. 15-20% unemployment and SP500 at 3,000 with a 25 P/E ratio…LOL, thanks central banks for the gift that just keeps on giving, mostly to the top 1% quarantined in their vacation homes…
I do think this will not be a two month event, it could be with us for months if not years. This is not the flu, and having had pneumonia as a child and having almost died from it (and having a small part of my lung collapse permanetly even after recovery), I can tell you the flu is a joy ride compared to getting viral pneumonia. Below is an article from Bloomberg today detailing an editor who just got this coronavirus and barely recovered. It really sucks when your lungs fill with fluid and you can not breathe. This is a really serious virus due to the respiratory risk it presents. Wall Street may get the SP500 to 3400 again soon, yet I’d still play it safe out there in the real world, at least until we get a vaccine. What MSM is not telling people is the amount of virus you breathe in matters, do some research on “viral loading”. Basically if someone coughs and you are near it and breath the virus into your lungs heavily (with no mask), you odds of getting viral pneumonia are much greater than say rubbing your nose with the virus, and keeping it out of your lungs. That is why it is comical that the CDC just this week said “wear a mask”. In 1918 during the last Spanish flu pandemic, they recommended wearing a mask, so basically it is a 100 year old policy. I would guess those telling you not to wear a mask were stocking up on masks while lying…or just not smart enough to know otherwise.
Stay safe!
https://www.bloomberg.com/news/articles/2020-04-06/gasping-for-air-delusional-and-all-alone-one-survivor-s-story?srnd=premium
Sage, as usual.
You’re a good man, Sven. God bless you for helping that lady from South Africa.
Their are at least five strains or mutations of the coronavirus. At least one of the strains is extremely deadly. Kevin Durant was lucky. He got one of the weaker strains.