Monday, March 16, 2020

The Real Tough Questions About This Market

The last post asked an important question:  Are we seeing a nasty correction or part of a larger bear market?  This post asks a very tough question:  Are we seeing the opening phases of something worse than a nasty recession?

As a psychologist working with traders and investors, my job is to ask the tough questions that, in our desire for comfort, we may not be asking ourselves.  The goal is not to convince anyone and certainly not to frighten them.  Rather, the objective is to encourage open-minded awareness of ourselves and the world around us.  Whatever decisions we make, we want to do so with open eyes.  As I've noted in the past, my role is not just to comfort the afflicted, but also afflict the comfortable.  Unquestioned answers and assumptions are part of our (sometimes false) comfort.

Prior to the Great Depression in 1929, financial markets experienced many "panics", indeed every 20-30 years or so.  With the strengthening of the banking system, including the role of central banks in economies, we have been without a "panic" for a record number of years.  Yes, there have been shocks like in 1987 and major recessions as in 2008, but nothing like a depression that not only wipes out investor wealth, but impacts the entire social structure through shortages, unemployment, and day-to-day insecurity.  My grandparents lived through the Great Depression, and it affected their outlook and behavior for the rest of their lives.

Recently, we're starting to see hints of such impact with the coronavirus pandemic.  Falling markets--even in the face of coordinated central bank action--are certainly part of it, as are reports of overrun supermarkets and hospitals.  Recently, I'm hearing more about concern for failing markets, as speculation about complete market shutdowns increase.  Businesses--from restaurants and bars to cruise lines, hotels, airlines, entertainment venues, and schools--are in shutdown mode, almost certainly creating a quick shock to the economy through unemployment.  In a short time, we've gone from complacency (It's just another flu) to the hoarding of food and supplies.

How do municipalities and companies pay off their debt if money isn't coming in?  What happens to bondholders who are already battered by falling stock prices?  Suddenly we have "risk parity" in reverse--and a phenomenal loss of wealth for families and institutions.  

And how does all this unemployment, social distancing, and broad financial loss *not* affect young people for years to come, particularly if the virus--like Spanish Flu--comes back a second year in an even more virulent form?

So, yes, it's a good question to ask whether this is a nasty correction or a bear market.  It's also a worthwhile question to ask whether this is a recession in the making or something more generational in its impact.

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