Another Pandemic - August 20, 2020
It has been six weeks since my last note, and I have received a few inquiries (to my surprise) from people wondering if they had been taken off the list. The answer is no. A friend suggested I add a famous quote to my notes; I liked the idea. I also like the idea of suggesting an occasional book as a friend does in one of his newsletters. The quote that made me reflect a lot in the last month is:
“Start by doing what’s necessary; then do what’s possible, and suddenly you are doing the impossible.”
I think this is sage advice. This instruction is telling us to be present. There is no point in worrying or being afraid. Accept the cards you’ve been dealt, do what is necessary, then do what’s possible, and before you know it amazing things are being accomplished. I will leave you guessing whom the quote is from (sorry!).
The book I would like to suggest is written by Dee Brown: Bury My Heart at Wounded Knee: An Indian History of the American West Thanks to my oldest son, Augustus, and Providence College’s Western Civilization coursework for drawing it to my attention. It is an apt book to read at a time when so many people in our society rightly feel abused by the system. I would argue that to truly understand “facts” you need to really understand alternative perspectives of those historical facts.
On to observations of the market, news flow, politics and risk: Okay, Covid-19. I must admit to being surprised at how long lasting the fear of Covid has dwarfed all other risks we face. I worry about older people in the population, but I also worry about young people. My concerns pertaining to the risk of contracting Covid are not nearly as profound as they are to contracting another disease, FEAR. My personal emotions run particularly high when I see how fear is impacting some of the most vulnerable children in society.
I am not judging those that are emotionally paralyzed by fear and emotion, but I feel sad about the ramifications it will have for themselves and others. We have been dealt the cards of the Coronavirus Pandemic. The question becomes, how do we live our lives in the age of this Pandemic and the risks associated with it? We don’t have all the answers, but we know a lot about mitigating risk to contracting the disease (social distance, stay outside, wear a mask, stay away from crowds, etc).
So, “Do what’s necessary...”: Go on living your life, be social, exercise, enjoy all of the amazing things life has to offer, but mitigate your particular risk to Covid by taking the necessary precaution. It doesn’t mean
ignoring people or shaming people, and it doesn’t mean being anti-social. Anti-social behavior is likely going to be far more detrimental than the disease will ever be. The NY times reports interesting statistics on Covid. In general, the likelihood you will contract it are extremely low, and the risks you will die from Covid (if not elderly or with underlying conditions) are even lower. We have collectively focused nearly exclusively on preventing Covid at the expense of nearly all other risks. This will result in profound implications for the future.
“...do what’s possible”: If you are an essential worker (think Healthcare and saving lives), you know it is possible to mitigate your risk even further by taking extra precaution because of your situation. Healthcare workers go to work because they do what is possible to save lives. I personally believe teaching can also save lives, and to me it seems essential. I tutored young African American boys in Bridgeport, CT for a time, and what struck me was what one of the program directors said. If by the third grade these children (boys in particular) are not near grade level in math, reading and writing, there is virtually no possibility they will ever catch up. I am no expert, but I suspect the structure of school in the lives of these children is essential and could quite possibly save their lives.
It may not be possible to stop the spread of Covid among children in school (grade school, high school, and college), but it would be possible to protect teachers and administrators. This will arguably save many more children over time. Most children that contract Covid will survive without issue, they know this, and their logical reaction is to socialize with their friends regardless. However, they will miss the rules, structure, meals, and social needs that provide them the essential tools needed to help them mature and become happy adults. Perhaps the closing of schools, sports and the reliance upon only on-line learning is going to be far more deadly over time than the disease itself?
“...and suddenly, you are doing the impossible”: Unfortunately, we do not seem to be doing the necessary and possible, so we are unlikely to achieve the impossible. Many of us (including myself) have been conditioned to believe that avoiding discomfort, danger, and pain at all costs is the appropriate action to take. If most of us place our own well-being above others, the consequences for us individually and collectively could be disastrous. I want to convince you that it is as easy as reflecting on the quote I highlighted.
“Do what is necessary...”: If you are the person best placed to ease someone’s pain, and potentially save their life. This is necessary. By saying no, you hurt the person, and in the long run, you hurt yourself.
“...Do what is possible”: There are ways to mitigate the risks of spreading or contracting Covid, so if you can help a person in need, DO IT. It does not matter if politicians, interest groups, cynics, or societal trends try and convince you otherwise. Do not delude yourself by listening to a crowd or finding an excuse. Do what is possible anyway.
“...and suddenly, you are doing the impossible”: Before you know it, you are doing what you thought to be impossible. You are saving one life, you are comforting one person, and you are at peace with yourself because of it. The collective benefit would be miraculous.
Again, I am not judging anyone; these decisions are hard, but I recently had an example of choosing to help a friend, despite knowing the horror and pain that would come with choosing to help. I was put into a position of being the one person who could alleviate my friend’s suffering, but it would come at great pain and expense to myself. When I finished my duty and came home, my daughter asked me, “Dad, how could you do that? I cannot believe you were able to do that”. My answer was simply the question: “How could I say No?”
His pain would occur anyway, and I would watch from the comfort of my home knowing that I was the one person who could have helped alleviate his pain. Despite my own suffering, saying NO was worse than saying YES. I do not take credit for being a “good person”; I just follow the steps of that quote as my guide. It is far better to accept discomfort and be at peace. I know this to be true.
What is the point of all this for markets? Well, quiet reflection allows me to separate reality from emotion, assess the risks, assess the probabilities across time, and express myself through the asset allocations that I believe will eventually benefit from an adjustment of people’s perception.
Where to now? Democratic political strategy is emphasizing Covid, the fear of it, and accusing Trump of mismanagement of the pandemic. It is the one attack against Trump that is clearly sticking, and it may well be the ticket to a Biden presidency and perhaps a Senate majority too. It is too late (too close to the election) for Trump to change direction on finding better solutions to manage the pandemic. Until the election is over, I suspect we will not see any constructive leadership on finding solutions to what is possible to move forward.
It looks probable (currently) that we will have a Democrat in the White House, and it looks like a 50/50 chance that the Democrats control both houses. Once the election is over, it is possible we will move forward with more pragmatic solutions for living with the pandemic as incentives for using fear to sway votes wanes. Contrary to negative opinions about Democrats increasing taxes and regulation, I think that any ability for one party to push their agenda could add fuel to the fiscal fire! As I discussed in my first note back in March of this year, we will see an unprecedented and unchecked spending of money, underwritten by a central bank with no fears of inflation. If fear of Covid continues to impact economic growth, new fiscal stimulus is likely to come. There are likely limits on the monetary side, as the USA is unlikely to embrace a negative rate environment like Europe, but fiscal expansion is another story. Would it be surprising to see enormous infrastructure spending? Converting to clean energy is a good idea that will come with a big price tag in the short run. So, we may have higher taxes and more regulation, but it is possible that economic growth will explode anyway.
Public and market support in the Federal Reserve and unorthodox central bank policies around the globe are likely creating unfounded confidence in central bankers ability to provide market and economic stability. Lending money at negative real interest rates perverts the very foundation of money. It will cause all sorts of alterations to market relationships that will be difficult to comprehend. In the short run, I believe this means traditional measures of valuation are nigh impossible, and the market trends we are witnessing are likely to continue.
The China / US relationship is not likely to improve, and this is not a partisan issue. Global supply changes have been disrupted and are likely to become more so. Any large infrastructure spending, and any push toward domestic manufacturing by building supply chains in the USA, is likely inflationary. Resources, unlike money are in fixed supply, and there is likely to be a surge in demand once the fear of the Pandemic subsides.
My base case for market allocation is still broadly the same. My view is that we will continue to see some rotation from growth to value, into small caps, into energy, metals and mining, and I think international equities remain attractive on a relative basis while also providing protection against a depreciating US Dollar.
What’s the Risk? I do not see another shut down of economies as a real risk to markets because I believe the money from fiscal and monetary sources will continue to be delivered in such a scenario. The risk that I do see in the next few months is the election. If key states become tighter races, that may be a problem. It is a good bet that Trump will not go quietly; he is likely to contest an election loss if it is a close result in key state contests. A long drawn out contested election result is a big risk. Therefore, I will keep a very close eye on election probabilities in the coming months and adjust risk accordingly.
Joseph Cardello, Principal August Wealth Advisors, LLC The Loft, 101 Franklin Street, Suite A Westport, CT 06880 Direct (916) 461-9451 toll free (800) 985-9477
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