Most right thinking people are now well on the road to accepting the scale of the public health crisis. Despite his early very public displays of Denial and Anger, even Donald seems to be getting there. Without hard intervention we were likely looking at world war level casualties. In some less developed countries that is still sadly on the table.
But what is the price for that intervention? I think we’re heading through the same process all over again with respect to the economic impact of the crisis.
The scale and rapidity of job losses we’re seeing throughout most of the world is as far as I am aware, without precedent. And we are only two to three weeks into the process in most of the West.
The cashflow squeeze to businesses large and small is on another level entirely to 2008 and the various government lending schemes are unlikely to much help anyone but those that did not need to borrow. Without the near universal “extend and pretend” we’re seeing from lenders, delinquency rates in loan portfolios would blow through any stress test a financial regulator would care to throw at a bank. The stability of the financial system will soon depend on tax payers either directly bailing out the banks, or as is being attempted in some places, an indirect bail out by taking huge swathes of commercial lending onto the government’s balance sheet (albeit largely in the form of contingent liabilities).
The coming contraction in GDP reminds me of my studies in Ancient Classics, when entire cities would sometimes be suddenly scrubbed from the map in conflict. From the perspective of GDP, that’s the equivalent of what we’re seeing in most major nations. The equivalent of their main economic centres being removed from the game before calculating national economic output. With a cheery wave from almost everybody not to worry, it’ll all somehow be all ok come October, companies will bounce back just fine.
Sure, physical capital is not being destroyed like in a war. But the economic dislocation of human capital we’re seeing, is arguably more egregious in the largely knowledge based economies of the Western world.
The scale of the health crisis for covid was almost universally missed by observers due to quite understandable psychological defence mechanisms. Normalcy bias, optimism bias, cognitive dissonance. Whichever you choose to focus on. Those of us that realised early enough were able to prepare ourselves practically and financially. And for those that trade, to profit.
Now the pending economic crisis is being almost completely ignored by most observers, who instead choose to pass comparison to 1998, 1987, or the more bearish to 2008. Well this isn’t any of those. And there’s a horrific possibility it’s something beyond most people’s ability to conceive.
I’ve been absent from this forum for a few weeks but it staggers me there are still those on the main board who are seeing the rise and fall in TSLA in glorious isolation to what is happening in the rest of the world. “It’s short sellers... it’s journalists... it’s manipulation”. No doubt there will be much disquiet at what at the time of writing seems to be the scrubbing out of After Hours gains post the P&D report.
But the smack that TSLA and everything else has received these weeks, is nothing to what it will feel like if the market adopts the view that we face a depression that blows away anything found in the history books.
I still think Tesla will emerge from this crisis stronger. But there are risks that were not there only 3 months ago. Tesla make cars. Luxury ones at that. Doesn’t matter how good their product is, this crisis is going to whack demand. Maybe they’ll get a juicy loan package from the government. But this crisis is still likely to set the mission back by years not months.
My personal base case now is that the health crisis will not come close to being resolved until sometime in mid to late 2021. Maybe a positive black swan will positively surprise me. But I hear from health professionals in the Infectious Disease unit to expect rolling waves of infection into that timeframe. And there’s a very high likelihood of these waves being accompanied with continued social distancing and blockage of economic activity. Who knows in such a scenario when the economic crisis itself bottoms.
However I am not trading my view. And I freely admit that my view is relatively fringe right now. The positions I took in Phase 1 of the crisis were sufficient to cover the economic needs of my family for two years and I am safely in government backed cash, with some inflation protection. Right now it’s too hard to predict the timing of the market’s realisation but more importantly it causes too much psychological disturbance to bet against the market when it means you’re also betting against humanity. Makes you feel a bit dirty, like how Chanos must feel every morning.
I post this because this place is a brain trust and I want you to rip the macro bear view to pieces. With reason and logic, rather than hope.
