CoronaPanic, edition 7

“Cash is trash” (January 21, 2020) are the famous words that were spoken by Ray Dalio just before the point where you actually wanted to have cash. This should have been a warning sign to sell everything.

As much as I like Ray’s writings, I think he was the only person that was more worse positioned than myself during this CoronaPanic. Unfortunately for him (and his hedge fund), he will probably be the profile guy that was similar to Ralph Acampora saying in October 1998 during the pits of the Long Term Capital Management unwind and Asian financial crisis that “we are in a full bear market”, right before the Nasdaq tripled over the next 18 months.

There is also another phrase, which goes as follows:

You don’t have to make money the same way you lost it.

As far as the stock market is concerned, I think this week will feature the maximum of volatility. Since everybody is talking about flattening curves these days, the curve that is being flattened right now is the second derivative of bad news coming out of the CoronaPanic. The whole world knows that the USA is going to receive a whackload of Covid-19 cases and all of these doom-and-gloom headlines are under Drudge (including -10% GDP, millions dead, etc, etc.) which are complete fiction, but this is what the media is designed to do.

So today, at the risk of sounding like Dalio, I’ll make the proclamation that cash is trash. Today feels like a “normal day” in terms of how things are trading, and how the markets are once again facing a ‘wall of worry’ as they inch higher. This confidence will eventually culminate in some form of “fear of missing out”, just after droves of people start liquidating their portfolios – they will see the markets climb up higher and higher, and then curse their fortunes.

You can invest your money now in practically anything that doesn’t involve tourism, extraction of oil, and GICs and in half a year, you will very likely be up. While of course I don’t ever give guarantees, relative to interest rates, large-cap equity is going to make too much of a return on capital relative to government bonds – the risk premium to holding equity right now is huge.

So if you don’t even know where to put your money, there is always the option of the S&P 500, which can easily be done by just purchasing futures and shutting off the media. Most of the large-cap demand will float here regardless. Take a look at the top 50 of the S&P 500 and intuitively other than Chevron and Exxon (27 and 29 currently on the list) all of the other companies you can easily envision not being mortally wounded in any manner post COVID-19.

Now I’m going to talk about currencies and a little political commentary on Canada.

The Canadian dollar has gotten hacked to death, and is sitting at 70.5 cents to the USD, and my guess is that this is going to go lower, probably bottoming out to 65 cents after everything is said and done. The correlation with oil and gas is well known, but also contributing to this is the lack of our competitive capacity – this is what happens when you have a government that is all too eager to subsidize and allocate capital to those companies that provide little in the way of economic substance (what ever happened to these so-called “superclusters” that was part of the excuse to hand billions of dollars to partisan supporters’ companies?). Couple this with uncompetitive regulatory and taxation regimes, and you get exactly that result – a loss in purchasing power. Life will be getting more expensive in Canada, simply because collectively as a nation we don’t have our act together. What happens when you promote one industry over the expense of another is that you still have a lack of confidence in the “favoured industry” simply because you never know when the government of the day will flip the switch and go against you.

Fortunately this can be corrected, but it takes time and a change of cultural mindset, the latter of which unfortunately I do not get the sense is going to be happening. If we weren’t propped up by the USA, it would very likely have slipped into an Argentinian-type scenario (early 20th century) where eventually the erosion of competitive strength results in an economic collapse.

The only good news for individual Canadians is that they can hedge themselves against this by buying American equities.

The US currency itself is not exactly a safe haven in the medium term – they are going to be blowing out records amount of money in the next half year, and this is going to result in some form of depreciation. However, most of this capital is going to get dumped into assets with return features that are inflation-adjustable – those companies that can maintain pricing power in an inflationary situation will be golden. Get ready for the costs of everything going up, much more so than we have traditionally seen in the past. The only solace is you can protect yourself.

You can also buy gold. It should do reasonably well as long as the liquidity crisis is over.

I’ve been slowly adding a lot of diversification to my portfolio. It is very spread out right now. I’ll discuss some positions in future posts.