Where Are We Headed?
A Collection Of Charts.
When investing I’m trying to assess the probability of certain things happening, or not happening in order to make positioning and risk management decisions. Likewise, CEOs and executives need to try and look towards an uncertain future and try to assess what will most probably happen. Considering what you believe the probability may be, you need to make decisions accordingly.
There is always some good
It’s not all bad news! As a reminder there is always some good news. There are people alive today due to the decrease of general activity. Less car crashes, murders, etc.
Ok good news over.
Australia has done well to flatten the curve, but does this mean it is over? Maybe, maybe not. As a reminder of Sydney’s experience in 1919, it was the second wave that was more deadly.
Looking at the experience of others
Singapore, a country viewed as one of the leaders in supressing the virus, has seen a significant upswing since the beginning of April where new cases are accelerating away from discharged cases.
What will it look like once restrictions are eased? Will we have a different experience to places like Singapore?
From an investing point of view, keeping an eye on the rate of change of new cases once restrictions are lifted will be important.
Separating the curves
To me there is a virus curve, and an economic curve and we need to view them separately. In terms of the economic curve, there is a lot of hope that we “V” back into action.
Hope however, is not a risk management strategy. Let’s again look at the experience of others.
Here are the traffic congestion levels for Wuhan. Day to day traffic is still way down, but weekends are even worse.
But Wuhan was the epicentre, so maybe it is fine in the rest of China?
Here is the same data for Beijing. Daily traffic is reasonable but look at the weekends. Even in a region that was not the epicentre, there is clearly a psychological effect and behaviour is changing. What will the effect be on consumer spending and investment?
GDP in China has taken a massive hit, but how long will it last? When will consumers return to normal? If China isn’t having a V shaped recovery in reopened areas, will we?
Employment drives consumption
US unemployment claims continue to be scary. The below data goes back to 1976, and the current situation renders the rest of the graph almost irrelevant. But these are initial claims, what about continuing claims? Maybe people are losing their job and then finding other work?
Continued claims are also off the chart. Technically the end of a recession usually coincides with continued unemployment claims starting to drop. We are one month into this situation so if history is anything to go by, we will keep seeing continued unemployment claims grow for months, if not years. So, does this data support the V shaped recovery the stock market is hoping for?
It is playing out in the retail sales numbers. April will be impressive.
Industrial production is significantly low. The last time it was this low was 2016 when the Chinese launched the largest stimulus program in their history, dragging US and many other countries out of an industrial production recession. Can they do it again to save us? Why aren’t they doing it now if they can?
Want a new car? Might be a few cheapies available. How far can it fall?
Watch earning reports
By the week ending 17th April, 47 of the S&P 500 had reported earnings for Q1 (Jan to Feb). So far, an average earnings growth fall of 30.83%. Q1 online really has 4-5 weeks of Covid-19 uncertainty, so what will Q2 look like?
How long can people last in hibernation?
55% of US small businesses would not survive more than a 3 month
shut down, and more than half of households have no emergency savings.
Where are we today?
If we look back at the 2000/2001 period and overlay the current retracement in April 2020, it is interesting to note that the Nasdaq has today (21st April 2020) recovered roughly what it recovered after its first fall in 2000. It then fell more than 70% over the following two years. It is a reminder that bear market bounces happen early in bear markets. Have a look at the other bounces along the way.
And with the FED firing up the printing press, there is an early correlation between the expansion of the FED’s balance sheet (essentially the assets it is buying, and thus pumping money into different parts of the economy) and the total US market. How long can this last? Who knows … but do you fight the FED?
Never ever has there been an abrupt end of a bear market. This situation is an unprecedented supply and demand shock, on a global basis.
It is not a story of equality, however. Those who have benefited from massive scale over the last 10 years continue to outperform and be strong.
OIL
Oil is not so well at the moment, as the Hedgeye cartoon below highlights.
As I type this, the front month (May 2020) has gone negative. Holders of this contract are paying people to take the contract off their hands, so that they don’t have to take physical delivery.
Why? Well demand has fallen off a cliff, and we are still producing. The problem now is that we need to store it, and we are running out of places to store it.
Gold continues to be a store of value
Gold is again demonstrating its ability to secure purchasing power. It is a currency in real terms, and for centuries has been a store of value relative to other assets during times of distress. Here is what 1 oz. of gold can buy in terms of barrels of oil.
The Gold to S&P 500 ratio strengthened during and post the global financial crisis and has started to see an uptick.
The S&P 500 seems to be pricing in a strong recovery, but there are a few other market signals that disagree. The CRB commodities index is not front running a V shaped recovery.
What is there to learn for next time?
Was Covid-19 and the subsequent events forecastable? No. But was everything rosy beforehand? No.
Like other recessions, something came along that accelerated the underlying situation, and this was no different. Here are 3 data sets out of about 100 that were signalling trouble around the corner.
For more charts, review the article I wrote in September 2019 laying out a case for being conservative and getting ready for a slowing – https://adizes.com.au/is-distruption-ahead/. It is just more significant than anyone could have predicted, but if your preparations were on the right side of it, this wouldn’t have mattered.
- The yield curve had started to invert across a range of pairs against a back drop of historically low unemployment:
2. Delinquency rates for a range of US consumer loans were already moving higher with no sign of slowing:
3. In Australia, the cycle had peaked for job ads in mid 2018 and had kept trending down:
So a slow down was definitely on the cards, we just didn’t know a catalyst like Covid-19 would significantly accelerate the underlying.
For those of you tracking the data and getting ready for a slowing around the corner, well done!
For those of you who didn’t, what are you going to learn and do differently in the future? As an investor or CEO, what data do you need to be tracking to contextualise the world around you?
How have you handled the rate of change? Have you been proactive and ahead of the curve? Or have you been behind the curve?
Stay safe.
Don McKenzie
