Fragile economies are incredibly vulnerable to external shocks. When an economy has very little savings, massive amounts of debt, and asset price bubbles everywhere, it doesn’t take much to plunge into a recession. The Coronavirus, as it turns out, isn’t just especially dangerous to fragile people. It’s especially dangerous to our fragile economy as well.
“These are the times that try men’s souls.” Thomas Paine, The Crisis.
The Coronavirus is an unpredictable event that has disrupted supply chains, shut down economies, and created fear and panic in the markets. Any time there are sudden declines of this magnitude, we can expect prices to rebound in some fashion. This is often referred to as a “dead cat bounce”, which is perhaps not the best visual at times like these. But it’s meant to convey the idea that even things that are destined to end badly can have moments of optimism.
We too live in a “pretending age”, where in-depth evaluations of important subjects are rare. Often, shallow analysis is passed off as game-changing discoveries instead of the fodder they are for title gazers. Such is the case with the recent obituaries published for the 60/40 portfolio. When it comes to investing, there is perhaps no issue more important than asset allocation. It is, in fact, the greatest determinant for portfolio returns over time. So with that in mind, let’s discuss the death of depth in the death of the 60/40 portfolio.
Most investors are simply unprepared for what is coming. They continue to believe their 60/40 portfolios will do fine. But in addition to the stock market being 50-60% above it’s fair value, the bond market is incredibly vulnerable. It’s time for investors to change their strategies. By the time you see the corporate zombies on the front lawn, it’ll be too late to move.
The capitalistic social order acquires meaning and purpose through the market. Hampering the functions of the market and the formation of prices does not create order. Instead it leads to chaos, to economic crisis.
Federal Reserve wants to avoid an economic slowdown and they think cutting interest rates may do it. Unfortunately, like a daisy flower in front of an avalanche, the Fed can’t stop the economic slowdown.
While the rest of the world’s stock markets have struggled through snowy economic conditions, the US is enjoying Christmas while avoiding winter altogether.
In our most recent newsletter, we outlined one of the biggest challenges facing the US economy going forward: the debt avalanche. And there is no better example of the massive debt increase and it’s increasing risks than “zombie” companies.
Having an idea of where you want to go is great, but it isn’t the same as knowing where you are going. Many investors can articulate where they want their portfolios to go, but very few can follow the directions to get to their destination.
In his 2001 interview with Fortune, Warren Buffett pointed to what he called the “best single measure of where valuations stand at any given moment”. This metric has become known as the “Buffett Indicator”. It measures the total value of all publicly traded securities as a percentage of the countries total business (i.e. GNP). It is currently indicating something important.