History tends to repeat itself. The most dangerous words are "this time it's different."
What is the significance of this New York Times article?
The Fed has been secretly saving companies through the Repo market.
Here's a magnified version of the article above.
Through the repurchase market, they can privately and globally send money
to companies in need.
Before the great depression of 1929-1930, there was the last hurra in November before the great crash.
Now I am not in the business of predicting macro-economics, but it has been more than a decade since the last recession of 2008, and the bond market tends to tank before the stock market.
Bill Ackman recently made a lot of money on credit default swaps. 2 billion for 29 million. Sounds like a great return on investment. But we won't short or play with derivatives, because that's not our game.
After bonds tank, equities then follow suit.
In general, bonds with a longer maturity entail greater risk and they are compensated with a higher coupon rate, but when short term bonds have a higher payout than long term bonds, the yield curve is inverting.
As Laura Hoy mentioned, "Greed is driving the rally, not fundamentals. There is a high chance the market hasn't reached the bottom yet."
The volatility experienced now is absurd.
https://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_Dow_Jones_Industrial_Average
In over a century, there hasn't been so much volatility.
In the Panic of 1893, the DJ industrial average experienced a loss of over 24%.
In the 2008 financial crash, there was a drop of 61-62% which lasted until March 2009.
We have experienced the largest drop in history on March 16, 2020 due to the Corona Pandemic in one day- 2997 points. The largest point gain, 2113 came on March 24. These extreme point swings may signal that there is more to come.
I don't believe in timing the market. If there is a collapse and hold on to your shares, provided that it is not heavily leveraged, bought at the right price and has consistent cash flows, you can wait out the low tide. However, I would rather hold cash and wait.
"I think it’s in the nature of long term shareholding of the normal vicissitudes, of worldly outcomes, of markets that the long-term holder has his quoted value of his stocks go down by say 50%. In fact you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations." - Charles T. Munger
If you don't have years to wait for investments to recover, it is important to anticipate what will happen next by referring to history as a guide.
The Spanish flu, which caused 50 million deaths, lasted from January 1918 to December 1920.
It infected 500 million people, which was a third of the population at the time.
World War I lasted from July 28, 1914 to November 11, 1918.
In both of these cases, the Spanish flu and WWI, it still took time before the market reached the bottom. For WWI, it took more than 30 months, and for the Spanish flu, it took more than 100 months.
No one knows when the market will hit. The market is unpredictable.
As the market went down the the early months of 2020, investors bought more.
The market hasn't fully priced in all the economic damage from the Corona Virus,
and it hasn't fully affected equity prices.
In the short term, the market is a voting machine, in the long term, it is a weighing machine.
The Corona virus has
revealed fragility in the financial system-- the reliance on high leverage as a magical route to elevated profits has led to
private profits and public bailouts. The governments across the world have implemented monetary policy in the form of central banks
and governments-- a gigantic scale rescue. It had
to do so.
Scholar Martin Wolf on FT claims, "Since the global financial crisis, indebtedness has continued to rise. In particular, the indebtedness of non-financial companies rose by 13 percentage points between September 2008 and December 2019, relative to global output. The indebtedness of governments, which assumed much of the post-financial crisis burden, rose by 30 percentage points. This shift on to the shoulders of governments will now happen again, on a huge scale."
He continues, "But we must learn from this event. Last time, it was the banks. This
time we must look at capital markets, too."
"The
IMF’s latest Global Financial Stability Report details the shocks: falling
equity prices, soaring risk spreads on loans and plummeting oil prices. As
usual, there was a flight to quality. But liquidity dried up even in
traditionally deep markets. Highly-leveraged investors came under severe
stress. The pressures on the financing of emerging economies have been
particularly fierce." - Martin Wolf
Sources:
Martin Wolf, FT
Laura Hoy CCN
https://www.ccn.com/this-stock-market-crash-isnt-different-youre-a-fool-to-think-otherwise/
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