You know you have a financial crisis when it looks like Charmin Ultra-Soft toilet paper might be replacing the U.S. Dollar as the world’s preferred reserve currency. And this because a guy somewhere in China ate a live bat. Who could have predicted that? Well, as Yogi Berra famously said; ‘Making predictions is hard, especially about the future’. Speaking of China, it’s worth noting that the Chinese character for ‘crisis’ is also the same character as for ‘opportunity’.

The funny thing about moments of crises is everybody can find the kind of news that they are looking for, are afraid of or (even occasionally) find useful. Take for example this from Reuters:

WASHINGTON/SAN FRANCISCO (Reuters) – The Federal Reserve will continue to use all the tools at its disposal until the U.S. economy begins to fully rebound from the harm caused by the novel coronavirus outbreak, Fed Chair Jerome Powell said on Thursday, even as he acknowledged the limits of the central bank’s powers.

“Many of the programs we are undertaking to support the flow of credit rely on emergency lending powers … We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery,” Powell said in prepared remarks for an online event hosted by the Brookings Institution.

Powell said there was every reason to think the economic recovery, when it comes, would be “robust,” noting that the strength of the economy before the outbreak shut down large parts of the country should support a firm rebound.

What I think is the main take-away from Powell’s comments is pretty positive. Specifically, I like — and agree — with “…the economic recovery, when it comes, would be robust”. And yet, our two-handed economist friend is quick to point out that, for the Fed to be using such strong language and severe measures, we must be in really bad shape!

There’s more Ying and Yang over in the employment figures. In the last 3 weeks, the cumulative number of people filing 1st time unemployment claims tallies out at about 16 million. SIXTEEN MILLION! That’s not only unprecedented but it is unprecedented by a few orders of magnitude. But wait! There’s more! 85% of those who lost jobs have received notices of ‘temporary lay-off’. So, most of the jobs are still there, they are just unattended.

Here’s some more two-handed stuff to think about. A lot of financial analysts are freaked out about the next wave of corporate earnings reports and also falling GDP data. They know it’s going to be pretty ugly and markets could react negatively. However, do keep in mind that reacting to earnings reports can be like driving while looking only in the rear-view mirror: you see where you’ve been but not where you’re going. We like to use earnings reports primarily because of inertia. We presume that the past will influence the future. That’s OK because it often does. But when the past also includes a cataclysmic event, we need to separate its potential residual impact alongside the economy’s recovery capability.

The coronavirus is still with us. It is evil and deadly. Sadly, many lives have been lost. The silver lining is the projection of lives claimed by the virus has been now revised downward three times. The current estimate from IHME is about 60 thousand. It had been as high as 240,000. For sure, 60K is still a huge number but it is lower than the 2018-2019 CDC figure for the seasonal flu: that figure was 70 thousand.

We’re looking forward to having our crystal ball transferred from the ICU any day now. We’ll let you know how he’s doing. Meanwhile we wish you a Happy Easter, Happy Passover or whatever you may be celebrating this weekend.

Ron’s Market Minute – What’s in the Pie?

Most mornings I see additions to the pundits’ comments on the future direction of markets.  Digging a bit deeper it appears that any comments they make are based on some sort of model.  And MOST of the models are based on longer term historical happenings in markets – in particular the models are often based on market reactions in either the previous bear markets OR previous ‘virus’ markets.  I’d like to point out that the current markets, while they certainly exhibit similarities to past markets, are in several aspects quite different from the past markets.  We’ve not ever seen (in the US markets) a drop so fast and so far, we’ve not seen a market drop of this magnitude when the underlying economy has been this strong, and we’ve NEVER seen anything like the current government intervention into the economy. 

So, think of working with a model of the economy like using a recipe for making a pie.  If you happen to have a normal recipe, you can create your pie easily and expect to see a predictable result.  That makes sense.  However, if the recipe contains directions such as, ‘add 2 to 6 chopped pears or chicken breasts, or garlic cloves or something similar if you have it on hand’- well, that’s going to affect the taste of your pie- by a lot! You can make assumptions about the correct ingredients and the quantities – and those are assumptions.  If you make too many assumptions in your pie process you may end up with something entirely different than what you expected.  And you won’t likely know which ingredient or assumption was the culprit. 

Over the next few months, you will likely see a great many different predictions about COVID-19 outcomes.  They most likely will not all agree.  Note that just because they are based on assumptions doesn’t mean they are worthless.  On the other hand, depending on the correctness of the assumptions some will be more correct than others. 

We’re hungry for some predictions (now some pies also) and someone needs to do some baking. Be sure to check into the assumptions that go into the pie- or economic futures.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

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