As the impact of the COVID pandemic unfolded, the speed at which the fiscal and monetary responses were rolled out seemed almost too fast. My thought was that people barely had time to miss one mortgage payment.
Well, the data is in for April and it seems like lots of people did just that.
“At 6.45%, the national delinquency rate nearly doubled (+3.06%) from March, the largest single-month increase ever recorded, and nearly three times the previous single-month record set back in late 2008.1”
Data is only available through April. May will be interesting.
- Black Knight’s First Look at April 2020 Mortgage Data (https://www.blackknightinc.com/black-knights-first-look-at-april-2020-mortgage-data/)
- Calculated Risk Blog (https://www.calculatedriskblog.com/2020/05/black-knight-national-mortgage.html)
A word on the Hertz Bankruptcy.
One of the most leveraged companies in one of the most impacted industries, managed to limp along and delay the inevitable for almost a full quarter. The Hertz filing is likely just the tip of iceberg…
I wrote previously that the velocity of change is much more difficult for companies to handle than the magnitude. Hertz had to deal with both. The travel industry has been one of the most impacted (velocity & magnitude) sectors during the COVID pandemic and response.
Hertz’s fleet of 700,000 vehicles, which are mostly rented from airports, has largely been idled due to the slow down in travel caused by the pandemic. Complicating the matter is the value of these assets are falling as vehicle sales slow and used car prices fall.
Hertz also has $21 billion in long term debt.
All of these factors combined into this bankruptcy filing came with lightning speed – relative to filings – adding Hertz to the short list of companies in the “no coupon club.”
Bankruptcy filings are going to be a lagging indicator. And there’s going to be more to come.
The recession no one believes in is here to stay.
My vantage point for the COVID pandemic and response has been somewhat unique – sitting here in Lower Deer Valley Utah since mid-March. I am fortunate to fall into a line of work that transitioned to work from home seamlessly. However, that’s not the case for many, especially around here. No tourists, no work.
The same concept applies to many parts of the economy. No shoppers, no store sales. No diners, no restaurant sales. No vacations, no travelers. No sporting events, no ticket sales, etc.
The likely outcome appears to be a fairly broad, deep, and lengthy economic recession (80% probability). But that expectation looks to be in the minority using the S&P 500 as a proxy of the consensus view.
There seems to be a disconnect between the reality on the ground and expectations. I think there are few things going on:
- Velocity of the pandemic & response
- Lag in economic data & company reporting
- Demographics of those impacted by initial shutdowns
- No single source of issues
- Hope for a rapid return to normalcy
Velocity: I wrote earlier about the absolute stunning velocity of the global shutdown due to the COVID pandemic. It’s almost incomprehensible. It’s like nothing anyone alive today has ever experienced.
Lag: Given the speed of the fallout and the fact that impacts to U.S. companies did not truly start until mid-March, barely any of the financial impact is being reported in Q1 financial reporting. Q2 results will be telling. Those won’t be available until July; still two months away. Same issue with most economic data; it’s a lagging indicator and barely incorporating the impacts yet.
These next two charts are not helpful – folks have barely had time to miss one mortgage payment and it’s not in the data yet.
Demographics: The initial stay at home orders have had a disproportionate impact on certain cohorts. Many white collar workers (like me) simply picked up our laptops and started working from home. No fear of lost income. No major life setbacks – other than Mrs. SFTE zoom-bombing my meetings. Not the case for many lower wage, retail and service jobs.
Guess which of these cohorts is more invested in the market? Hint: The groups not being impacted (yet). So be careful about using their views to assess the current state.
Source: During the Great Financial Crisis, the source of the issues was concentrated in the financial system. I’m not sure if the breadth makes the current situation better or worse over the longterm, but it does make it harder to understand.
Headlines like this are more tangible than hand-made cardboard signs in windows of thousands of small businesses.
“A single death is a tragedy; a million deaths is a statistic.” ― Joseph Stalin
Return to Normalcy: There’s also quite a bit of hope for a rapid return to normalcy. I’m all for hope, but let me quash that notion. I would love to get back to normal, but that doesn’t exist anymore. This is like 9/11 in terms of resetting normal. I will never touch an ATM or gas pump handle with the same innocence again. There is no f-ing way I am getting on an airplane any time soon. “Any environment that is enclosed, with poor air circulation and high density of people, spells trouble.”
Mrs. SFTE would fight you tooth and nail if you tried to take her into a restaurant. Those dentist appointments for mid-Summer, cancelled. Check with me in six months (and no, I will not have two cleanings back to back so no pent up demand here). Summer sports camps, ha. Summer vacation plans, cancelled. This is all lost income to someone, somewhere.
Yes, we’re a bit weird, but I bet not that weird. If you haven’t noticed, this virus can kill you. I’m 101% against being killed. My guess is so are most people. That is why the data shows trends like this:
So if people did not wait for stay at home orders to alter their behavior, how much will changing those orders affect their behavior? Not enough to make the recession go away.
Here is some economic data we do have:
The Initial Claims graph just broke the y-axis:
Lots of jobs have been lost (stunning velocity):
Unemployment rate is currently worse than at the peak of the Great Financial Crisis:
Approximately 70% of the economy is based on consumer spending, so no good news in this chart:
The handicap to the magnitude and duration of the recession is the amount of fiscal and monetary intervention being deployed. This also falls into the incomprehensible and unprecedented category.
- Federal Reserve interest rate cuts – from 1.50%-1.75% to 0.00%-0.25%. I still cannot explain negative interest rates to my mother.
- Federal Reserve asset purchases – Due to a myriad of programs, “the Fed’s stash of assets is up nearly 60% from just $4.2 trillion in early March” to $6.70 trillion. Why is the Fed buying corporate bond ETFs?
- CARES Act – “authorizes more than $2 trillion to battle COVID-19 and its economic effects”.
- Unemployment Benefits – magnitude TBD
- Congress is considering $3 trillion in additional fiscal measures.
However, by and large, these measures do not seem to be creating jobs, simply offsetting the financial impact of the shut downs. At the end of the day though, it is jobs that matter. Jobs will drive spending, and spending drives over two thirds of the U.S. economy.
“A better measure for how real people experience the business cycle: the ebb and flow of jobs creation. Losing your job is a recession; finding employment represents recovery. Looking at the business cycle through this lens paints a more complicated picture.
Perception on Main Street is always important for recoveries, and that will be true in the extreme this time. Given the sharp, dramatic jobs losses, which will probably get worse, sentiment in the broad population will be highly relevant for charting the path of the post-recession trend. On that front, jobs will arguably be the most relevant stat.
With that in mind, consider how private employment has fared on a rolling one-year basis in the past. As the next chart below reminds, the labor market often contracts through a recession and for a number of months after the downturn officially ends, based on NBER dates. In some cases, a positive one-year gain in private employment doesn’t arrive until several years after the recession’s official end.” Source: CapitalSpectator.com
Based on history, jobs do not recovery quickly from recessions:
And the jobs picture is likely to continue to deteriorate. My sense is that there are also a lot of tough decisions going on in corporate boardrooms all across the nation. You don’t know what Q2 is going to look like for most companies, but by now the current reality is fairly clear for most managers.
This chart is through March:
My investors are encouraging all their portfolio companies to renegotiate leases, defer 401k payments, stretch payments to vendor, and renegotiate contracts. There is someone on the other side of each of those decisions who is going to be missing some income.
Somewhat obscured by the COVID pandemic is an oil crisis and simmering trade war, each with their own economic fallout. The oil crisis is threatening a major source of high paying jobs in many parts of the U.S. The opposite was true during the Great Financial Crisis, when the budding shale boom was counteracting that recession.
So, as you assess the likelihood of a deep and prolonged recession, keep in mind that the velocity and disproportionate initial impact is creating distortions in the data and news cycle.
Broader impacts are coming.
You don’t see trends like this every day.
I’m not sure what it going on, but something isn’t right: 41% discount to NAV; 120% yield.
Patience is not a virtue I possess in great quantities. However, I’m working on it.
It’s hard. Things are happening fast. And look like big moves.
But are they big moves?
Right. Patience. Working on it.
Chart Source: CEFConnect.com
The market went down…
- That’s total bullshit. I didn’t event know that could happen.
- It dropped so much that it’s back to where it was (checks notes)…four months ago.
Four months of paper gains…gone just like that. Oh the humanity!
Maybe the bigger story is that the market went up 13% [insert gain of your choosing] in four months [insert time period of your choosing] with no real catalyst?
And please stop comparing this to 2007 / 2008. People were losing their life savings (this happens when you save more than you spend, strange I know) and their homes (yes, home prices can go down too…but don’t start calling me to Nostradamus yet).
Darts are fun. Especially when virtually every spot on the board is a bullseye.
[Insert basically any chart for any asset class.]
What’s going to happen when that isn’t the case?
I don’t know, but I’m thinking it’s less fun than today.
Also see Reflexivity.
Seems like there are lot of opinions on the increased popularity of indexing, so I will add one more to the mix.
I think indexing will continue to increase in popularity until it stops working. What does stop working mean? It means when the average market performance is down (for a period of time longer than two weeks).
Sure, everyone likes indexing when the average performance is up. Or significantly up. Folks don’t feel bad about being average, because of their low cost, low effort strategy. Plus there are news stories about how their strategy is beating some smart hedge funder to make them feel good.
I’m guessing that they’re not going to care about how low cost their strategy is if the average market performance is a loss. Average will become unacceptable. They won’t feel smart.
And then there will be news stories about investors who aren’t average, who didn’t lose money. At that point, investors will be start looking for other strategies.
To be clear, I am not predicting market losses. I’m just saying that it’s going to take sustained market losses across broad asset classes to create an inflection point in the current index investing trends.
Also, this is not a referendum on the effectiveness of indexing investing. In all likelihood, it’s the the most optimal strategy over the long run for the vast majority of investors out there. Is your thesis really based on most investors doing what’s optimal at all times? Since when has that happened?
That’s my two cents…
It’s felt pretty good, on average, to invest in *anything* the last three years….