9 Apr 2020
"In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497." – Warren Buffett
Close your eyes and imagine this. In six months’ time a virus vaccine is announced and starts becoming available. Business activity quickly returns to normal and by that time Reserve Banks have cut interest rates and governments have announced large amounts of fiscal stimulus via business support packages, tax cuts and infrastructure spend.
Unfortunately, our crystal ball is cloudy, and we cannot say with complete certainty that that scenario will happen, but it is a scenario that is more likely than endless disruption and turmoil.
There is currently an arms race by biotech firms on COVID-19 vaccine research. On the 16th of March the first participant in a clinical trial for a COVID-19 vaccine, conducted by the Kaiser Permanente Washington Health Research Institute in Seattle, was given the first experimental dose. It is not if, but when a vaccine with arrive.
The New York Fed has quietly been injecting huge sums into the banking system via the repo market since September 2019. This was already being called QE4 by some. If there was any doubt about further quantitative easing, the New York Fed has now cut rates to nearly zero and announced it will buy $700b in bonds. New Zealand has cut interest rates to all-time lows.
Fiscal stimulus talk was becoming more prevalent before COVID-19. Trump wanted it. Our Reserve Bank Governor wanted it. Quite frankly, why wouldn’t you borrow money at close to zero interest rate that you don’t need to pay back for 20+ years and build all those roads, bridges and tunnels that we need? And now there is a likely to be an unprecedented policy response by governments around the world. Trump and Congress can finally agree on something and have introduced the first of what is likely to be several fiscal stimulus packages. The New Zealand Government unveiled a $12.1 billion support package for the New Zealand economy, with almost half of the cash going to a wage subsidy package for coronavirus-impacted businesses, with more coming in May.
It is a known psychological bias that our opinions are anchored by near-term events. They can even be anchored by completely irrelevant and meaningless facts. James Montier of GMO once asked in a behavioural finance questionnaire for people to write down the last four digits of their telephone numbers and then say whether the number of doctors in their capital city was higher or lower than the last four digits of their telephone number. He then asked people for their best guess as to the number of doctors in their capital city. Those with the last four digits greater than 7000 on average reported 6762 doctors, whilst those with telephone numbers below 2000 arrived at an average 2270 doctors!
This is not a cheap party trick, there is academic research on this, which Montier has also noted. ‘In a 2001 research paper, Englich and Mussweiler took criminal trial judges with an average of more than 15 years of experience as subjects. The judges heard the cases at the end of which the prosecutor asked for either a 36-month sentence, or a 12-month sentence for exactly the same case. Those prosecutors who asked for a 36-month sentence extracted a jail time that was 8 months longer than those who sought a 12-month sentence. Intriguingly, these findings were independent of whether a true prosecutor or a student played the role of the prosecutor!’
Currently all the news is negative. Virus cases are increasing, and countries are shutting down to slow the progress of COVID-19. There will be an economic impact and some companies may fail, but it is not the end of the world.
We cannot predict the future, but we can observe that given the massive amount of negative news, forecasts are likely to be negatively biased. We can also observe that times like these induce irrational panic selling.
This is obviously a concerning time and health and well-being are the priorities. But it is also times like these that fantastic investment opportunities arise. Good companies can be bought at bargain prices. And while some companies may fail, the vast majority will survive and prosper.
News around COVID-19 is undoubtedly going to get worse before it gets better, but it will get better. How do you want to be invested then?
Note: article was first published 18 March 2020.