WASHINGTON – For at least the past several weeks, Americans have been pelted 24/7 by the most absurdly overhyped and inaccurately portrayed news headlines and stories in memory. Namely, that we’re all going to die from contracting the Wuhan virus (which we’re not allowed to say). And that the Wuhan virus, in combination with the Saudi-Russia oil price wars, will lead all American businesses off the cliff as well. Probably tomorrow.
End result: The Decline and Fall of the United States.
But the media’s drive to terrorize all Americans also involves US stock, bond and commodities markets, all of which seem to be traveling The Road to Oblivion.
Traveling down The Road to Oblivion
Continuing a pattern we’ve been seeing for the better part of two weeks, a big up day for stocks generally gets matched with a much bigger downward move the very next day. Then up again. Rinse, repeat. In honor of 2020’s early first day of Spring, stocks predictably sprang up sharply Thursday after a lousy Wednesday. Next, while opening on a positive note Friday morning, stocks made a sharp U-turn in the afternoon. The Dow closed down nearly another 1000 points at the 4 p.m. bell. The other major averages performed in a similar manner.
Even bonds and commodities continue to follow this pattern.
“U.S. oil jumped 23% on Thursday, putting it on track for its best day on record, clawing back more than half of the losses from Wednesday’s steep slide.”
But that was Thursday. What happened Friday?
“Oil dropped 11% on Friday, giving back early gains, even as the world’s richest nations poured unprecedented aid into the global economy to stop a coronavirus-driven recession and U.S.
So, the Wuhan virus continues to lurk and attack. And the oil price wars threaten simultaneously to undermine what’s become a great American industrial revival story.
So what’s an investor to do, besides jump out a 10th floor window?
Frankly, it was tough for this writer to keep up with US stock and bond markets this past week. Equities themselves seemed infected with a lethal strain of the Wuhan virus. Each day, even as you try to punch out a timely column, the market contradicts what you’ve just written, even before the bits and bytes are dry. Your subjects, your topics, your approaches, your analysis are promptly obliterated and you have to start over.
This experience is similar to what most small investors have been trying to deal with all week when it comes to salvaging what’s left of their dwindling portfolios.
For the better part of the last four weeks or so, the media has been hammering on the same old Wuhan virus stories, but with new excuses. Hit with the double whammy of not one but two “black swan” events – the Wuhan virus invasion and the diabolically, poorly-planned Saudi-Russian international oil price wars – it seems that the entire, panicked investor community, including the headline-driven high-speed machine trading operations all headed for the exits at the same time.
The result? An Instant Bear Market. By the averages, stocks have already exceeded that 20% down move that defines a Bear as far as most analysts and economists are concerned. But will it be a “secular” bear: a bear market that lasts many years, like the Great Depression? Or is this one a “cyclical” bear: one that generally lasts a year or less before a prevailing secular bull market takes over once again? How do we know? What do we do?
It’s hard to say.
Answers for investors prove hard to come by
The apparently just-ended 11-year bull market seemed to be getting long in the tooth, that’s for sure. But it could be many months or even a year or more before we know whether the current bear has completely finished off the Great Bull.
In the meantime, investment analysts and advisors and every day home-gamers alike will struggle to answer that question. That’s because the eventual phoenix-like recovery of their portfolios depends on coming up with the right answers. Not to mention looking to the Federal government to accelerate the search for a reliable Wuhan virus remedy and an end to the oil price wars. And in the current confusion, it’s really hard to tell how this all works out.
The worst problem right now is that pair of black swans: the Wuhan virus and the Saudi-Russian oil price wars. Sensational daily headlines, relentless (and probably meaningless) coronavirus death count revisions and a media industry whose CEOs and reporters should be institutionalized aren’t helping matters. They’re obscuring the real news about bear and bull markets and international economies that’s unfolding by the minute. But that real news remains hidden underneath the hood of more sensational – and ad-attracting – headlines.
The real investing story involves short-term credit or the lack thereof
The real story here for investors involves an ongoing short-term credit crunch and run on the US dollar. Both items point to serious problems within world banking and currency systems. And both have been unfolding since at least September of 2019.
Short-term credit is what lubricates day-to-day business, at least in normal economic systems. When, for whatever reason, the short-term lending and credit business finds itself stuck in the mud, small and large businesses start getting stressed, particularly if they’re over-leveraged, which so many of them are.
Since last September, the Fed has resorted to any number of short-term actions to inject liquidity back into the short-term (commercial paper) markets. But the twin black swans flew in without much warning late February and overwhelmed the Fed’s earlier efforts to solve this issue.
Result? As stocks plummeted due to the widely-hyped black swan issues, bonds and preferred stocks – in a highly unusual move – plummeted along with them. This was partially due, in this case, to the lack of short term liquidity. Bond and preferred shareholders suddenly feared that the dodgier companies that issued preferred stocks and bonds wouldn’t be able to honor their obligations; or, as is often the custom, roll them over into new obligations at lower interest rates.
It keeps going from there.
Money supply, short-term credit issues, black swans = the Great Market Crash of 2020
The complexity of the money supply issue is beyond this writer’s capacity to explain in plain English. What it boiled down to for preferred stock and bond investors is that these instruments crashed as quickly and violently as common stocks. That proved particularly true for those and similar instruments possessing lower credit ratings (or none at all).
Bottom line: This left seriously conservative investors (like this writer) with losses as bad or worse than those who held arguably riskier common stocks.
So absolutely everything in the market crashed violently. Exceptions were statistically insignificant. The ongoing crash was so bad that the occasional dead-cat bounce was inevitable. But after each successive oversold bounce, the investment dump-a-thon resumed with even greater vigor. And the sickening decline may not be over yet.
Can the Fed’s late moves have much effect?
Late to the funeral, as usual, the Fed continues to make any number of unconventional moves. Their goal: to shore up investments without violating current statutes. Meanwhile, Congress continues to crank out monstrously expensive legislative antidotes to the unprecedented, Wuhan virus inspired shutdown of most American industries to an extent we’ve never witnessed before.
It’s a bad scene, tailor-made for professional media sensationalizers. But what we, as investors, really need to do is to ignore as much as possible the sensationalized (and intentionally political) “reporting” on the twin black swan events; and then focus instead on what Congress is passing, what the Fed is either executing or planning to execute, and how this might stem the current tsunami of impending economic disaster.
Only when investors can see a reasonably clear path to financial sunshine will we see markets stabilize and have the chance to crawl back out of its (and our) colossal market losses. I’ll have more to say about that in another column.