Living In The Future
What does the future hold? For optimists, the future is defined by net improvements and net progress. Optimism doesn’t require perfection and human ingenuity is a powerful force. Someday the virus will be gone, we will be able to travel the world worry-free, go to any restaurant at any time, the economy will be chugging along again and those who need a job will find one. With significant price increases in markets, is the market saying it’s time to be optimists? What would that mean?
Do we ignore today for the benefit of tomorrow? (Tomorrow = 2021+)
We’re being told by Trump, economists, Jim Cramer on CNBC and rising S&P 500 prices that 2020 economic activity in 2020 is irrelevant. Even the virus is starting to feel somewhat irrelevant, as Georgia and other states start their re-opening process. Gilead seems to have a treatment that reduces the impact of the virus. The narrative, “ignore today for the benefit of tomorrow” is working to boost confidence. That narrative is healthy for markets, investors and business owners, even if it feels disconnected from reality.
Look to where you want to ski and your skis will follow your line of site. Ever rising stock prices are telling us to focus on what the world will look like in 2021 and onward. The depth of the recession or the length of recession seems less relevant now. Successive quarters, starting with Q2 will give us a better look at the future. For starters, large tech companies are looking more resilient and therefore more attractive with each passing day.
How far out do you have to look?
The general rule is current prices discount events six to nine months into the future. Imagine it is now Thanksgiving 2020, infections are down dramatically and you can gather in modest groups to watch the NFL, no fans in the stands. Will there be any headlines for bankruptcies given the near unlimited support from the Fed and Congress? By November, we will be thinking about what the next six to nine months will look like. Unemployment may be 20% but the unemployment benefits may be strong enough to support what could be a version of universal basic income.
Uncle Sam is very generous
When it comes to support, there’s nothing like being a US business. “My international friends, business owners, would kill to be in the US to get PPP loans” – a global entrepreneur and friend of Osbon Capital told me on Tuesday. As of Wednesday, the Fed has pledged to keep interest rates at zero until full unemployment and inflation return. By the numbers, this year we’ve erased more jobs than have been created since 2008.
Every market advance must have its naysayers and the naysayers are pointing to things that used to be big negatives: like multi-trillion dollar deficits, medicare for all, modern monetary theory and no room left to lower interest rates. Lingering in the background is the vague uneasiness that instead of providing needed stimulus during a pandemic, we have instead ended the possibility of ever using stimulus again. Most importantly, we don’t know for sure how long the virus will be a factor.
Separating Main Street and Wall Street
“The economy is not the stock market”. I see this phrase on a daily basis. We see small businesses struggling and income levels deteriorating leaving many households struggling. At the same time, Wall Street revels in the Fed-engineered “recovery” in the stock market. The disparity may be deciphered in one word – liquidity – which Wall Street has plenty of from government handouts, while Main Street remains strapped from the bleak prospects during the shutdown and resultant job losses. This main street recession will likely last far longer than the wall street recession.
Do we need to get back to 4% unemployment by next year for the market rally to sustain itself? Will oil be above $50 per barrel so that US energy companies (now only 3% of the S&P500) can be profitable again? If that’s the case, the Fed would begin raising short term rates up to 2 percentage points and the next recession would be years away.
The war against the virus has spurred a warlike response: treatments, vaccines, masks, diversion of business activity for the greater good, and businesses forced to pivot on a dime to working from home. The luxury of time now seems to have disappeared completely. Fortunately, the mobilization is working.
While headlines and hedge funds are designed to be nimble, investors of family wealth are better off focusing on fewer and more deliberate actions. The last few months have given investors incredible insights into investment decisions for the coming years. While this experience has been exceptionally challenging for everyone, those who can use this data constructively will continue to grow and thrive in the post-COVID world. Contact us if you would like to learn more about how we are investing for families going forward.