Talk about Markets Be Irrational more than you can stay solvent - perplexed

[tooqk4u22]

I just don't get it.   I am on record in many places here that I am not (or should I say was not) afraid of a market drop.  I kind of expected a 30% drop due to all this, but I didn't expect it this fast in crash mode.   Generally I am still of sound mind with all this as I FIREd with a conservative AA and sub 4% WR - honestly with all the carnage in the markets I am probably back to a 4% WR assuming we dial back some of the excessive spending that we did in the last 6 months.   

I also am not all that worried about the coronavirus other than for the elderly and immune compromised, maybe I should be.....maybe "they" know more than they are telling us.   There are very limited testing kits in the US and only people that are showing significant signs can get tested.  It can be 2-14 days for people to be infected and a carrier/transmitter without any symptoms whatsoever - think about how many people even the least social come in contact with in a two week period.   All that means is the number of actual cases is significantly higher than confirmed/reported......way higher.

I somewhat take comfort with the fact that the numbers are likely way higher bc if mortality is 3-4% on a much lower data set then the actual mortality rate would be way less.  The problem is we don't know.  There just isn't enough experience or data with the virus to know.

I like numbers, I like research, I like weighing probabilities and risk/return scenarios.   

Will this pass quickly? Don't know.  I think so.  90 days?

So I don't fear big market drop or virus.  What do I fear - I fear the self fulfilling prophecy of cratering all economic activity for too long of a time that becomes deflationary and depression like.   

I will stay the course but I just can't wrap my head around it.

[Alternatepriorities]

I'm with you. I don't get it.

As far as I can tell the treatment is worse than the actual flu and our "leaders" are more panicky than anyone else. Logically the absolute worse case scenario is that everyone in the world gets the virus, everyone misses out on two weeks of work and something around 4% of us die...  While that would be awful and terrible in ways numbers can't describe it's still only an 8% drop in productivity this year and then things pick back up 4% lower next year. Maybe my math is bad but it's looking like the market might decided to price in 50% less productivity for ever?

[Arbitrage]

I'm with you. I don't get it.

As far as I can tell the treatment is worse than the actual flu and our "leaders" are more panicky than anyone else. Logically the absolute worse case scenario is that everyone in the world gets the virus, everyone misses out on two weeks of work and something around 4% of us die...  While that would be awful and terrible in ways numbers can't describe it's still only an 8% drop in productivity this year and then things pick back up 4% lower next year. Maybe my math is bad but it's looking like the market might decided to price in 50% less productivity for ever?

Maybe that's the worst human cost, but not the worst economic cost.  We (the world economy) could, and likely will, spend enormous sums of money to attempt to mitigate that human cost.

Think of it this way - did the cruise lines suspend 4% of their trips for the year, lower prices 4% to entice customers, or just eat a 4% vacancy rate?  No, some of them suspended operations altogether, for months and potentially more.  Some of them could go bankrupt and/or cease to exist altogether.  The NCAA just cancelled 100% of the tournament.  I could go on and on, and this is likely just the start, but the economic impact could be huge.

Maybe the market is being irrational, but you can't assume that you know more.  That's why you create a plan that incorporates the ability to weather market crashes and stick to it.

[Alternatepriorities]

That's what I mean about the treatment being worse than the actual flu. It's all the ineffective running around closing barn doors after the cows are already out that will hurt the economy and the markets. It's not just the markets being irrational, it's everyone. I am very much in favor of having an AA that the investor is comfortable weathering such storms with because large groups of humans always seem to act irrationally so there are likely to be more to come...

[afox]

Part of it might be that we were overvalued before the start of corona.

Part of it may be that the market is pricing in the incompetent US response to the outbreak so far and our health care and employment benefit systems which will make it harder to contain the outbreak in the US compared to other countries (ie. underinsured/non-insured, lack of paid sick leave, etc).

Without real fear of an economic crisis we would never get such a significant market drop. ie. I don't think anyone ever expected a 30% correction for "no good reason", the fear has to be real and tangible to have a significant effect. Like people losing their homes in 2008, September 11th, etc...

[MaaS]

Speaking from a market perspective, this is only partially about the Coronavirus.

The fed has been injecting massive amounts of money into the repo markets to prop the system up, with each day requiring tens of billions more than the last. This is after a rate cut that was supposed to increase liquidity.

Businesses are withdrawing their entire revolving credit lines, which amounts to a corporate bank run.

There's an all-out oil price war, which exposes the banks to significant default risks during said bank run.

The corporate debt and bond markets are showing serious weakness.

Just to name a few.

I don't have the slightest clue what happens next, and I'm not suggesting anyone sell, but if you think this is all about the virus, you're not paying attention.

[Alternatepriorities]

Yeah, those are both fair points. It's not all virus panic and i still don't fully understand what plan is with the repo markets.

[Mr. Green]

I'm with you. I don't get it.

As far as I can tell the treatment is worse than the actual flu and our "leaders" are more panicky than anyone else. Logically the absolute worse case scenario is that everyone in the world gets the virus, everyone misses out on two weeks of work and something around 4% of us die...  While that would be awful and terrible in ways numbers can't describe it's still only an 8% drop in productivity this year and then things pick back up 4% lower next year. Maybe my math is bad but it's looking like the market might decided to price in 50% less productivity for ever?

Except you aren't limited to infection one time. In the event this virus becomes uncontainable then it simply becomes a part of life moving forward every year. I imagine an annual 4% mortality rate would be quite a departure from current conditions. A vaccine would no doubt help that but it would still be significantly worse than how life is now with the flu.

[Alternatepriorities]

That would be gruesome. I’m not sure even a 50% drop would do justice to randomly losing an extra 4% of the population every year.

[bmjohnson35]

Fear and Perception has the ability to impact the world economy more than we would like to admit.  Currencies are debt based and governments across the world have been manipulating interest rates and money supply for some time now.  Commerce and economies in general are more internationally tied than probably any other time in history.  It's a delicate balance.  It should be no surprise a world pandemic (which is what the virus is being labelled now) is having a significant impact to economies across the globe.  We have roughly 350 million people in the US alone, 1% of that number is 3.5 million.  I understand that analogy is an over simplification, but when people hear 1-3% potential mortality rates, they could easily think of it in those terms.  It explains why people are scared and reacting so strongly.  Fear does not foster rational thoughts.


BJ

[Buffaloski Boris]

I disagree with the premise that markets are acting all that irrationally.  Or perhaps, any more irrationally than normal.  As regards the viral impact on the economy, take a hard look at what has happened in China and what is happening now in Italy. Parts of China have been on de facto lockdown for a couple of months. That'll impact an economy. We're also in an oil price war and dealing with the implications of a lot of build up of asset prices over time. Not to mention the corporate debt buildup.  And it's all coming to a head at once.   

On the medical side, Italy is showing what happens when a first world country has it's medical system overrun. It's not pretty.  We might talk blithely about losing "only" 4% of our population if this runs amok, but that is a hellacious impact on a country emotionally and economically. I have no doubt that doctors in Italy are making some really hard decisions right now.  Like who gets care and who gets left to die.  Someone I or you care about might get left on the wrong side of that equation here in the US if this gets out of hand.     

[Travis]

At least you can look at the market drop and actually point out the reason for it. This isn't fear of interest rate changes or smelling something in the political winds.  A major export economy stopped exporting.  The biggest links in our transportation infrastructure are barely moving. This is about the most rational thing going on right now.  The run on toilet paper and racism towards infected populations is stupid, but that's not what is causing a 20% market drop in the space of two weeks.  Once we get a handle on the virus through attrition or vaccinations and the global market starts normalizing again, we'll probably see some more realistic valuations for a while as these companies consolidate or recover.

[bwall]

Businesses are withdrawing their entire revolving credit lines, which amounts to a corporate bank run.

This is the second time that I've read this statement and I'm not sure that I understand it. I thought that the banks extended credit lines to businesses and it would be up to the bank to withdraw, not the business? What am I missing?

@Buffaloski Boris ; I also agree that the markets aren't at the irrational point yet. It seems like it, but this is still quick selling, not irration. Stock in cruise ship companies down by 75-80% seems completely rational to me when one of them will probably go bankrupt. (Did I read that someone sued the cruise ship that kept them in quarantine?) We don't know which one would go bankrupt, though. The rest will survive and do well and probably recapture the losses in a short amount of time. But, since you don't know which one will go bankrupt (maybe two???) why take a chance? Perhaps cruises will fall out of favor after this thing runs it's course, like fur coats or asbestos, once-thriving everyday industries that are now dead, buried and not mourned. So, the selling is extreme, yes, but irrational? Not yet.

[tooqk4u22]

I'm with you. I don't get it.

As far as I can tell the treatment is worse than the actual flu and our "leaders" are more panicky than anyone else. Logically the absolute worse case scenario is that everyone in the world gets the virus, everyone misses out on two weeks of work and something around 4% of us die...  While that would be awful and terrible in ways numbers can't describe it's still only an 8% drop in productivity this year and then things pick back up 4% lower next year. Maybe my math is bad but it's looking like the market might decided to price in 50% less productivity for ever?

Except you aren't limited to infection one time. In the event this virus becomes uncontainable then it simply becomes a part of life moving forward every year. I imagine an annual 4% mortality rate would be quite a departure from current conditions. A vaccine would no doubt help that but it would still be significantly worse than how life is now with the flu.

It already is uncontained, there absolutely 100s of thousands if not millions more that have or have had the virus.  It's unrealistic to think that it is all over the country but only a few hundred people here or there have it.  There aren't tests available.  Even still, most people with mild to moderate symptoms are unlikely getting tested - partly bc they can't but mostly bc they are and should just treat it like a cold or flu, stay home, rest, hydrate, recover.   That could be the silver lining, the more people that actually have it likely means its not as bad and we can recover sooner.   Like other viruses once you have it you have an immunity to it. 

[tooqk4u22]

I disagree with the premise that markets are acting all that irrationally.  Or perhaps, any more irrationally than normal.  As regards the viral impact on the economy, take a hard look at what has happened in China and what is happening now in Italy. Parts of China have been on de facto lockdown for a couple of months. That'll impact an economy. We're also in an oil price war and dealing with the implications of a lot of build up of asset prices over time. Not to mention the corporate debt buildup.  And it's all coming to a head at once.   

On the medical side, Italy is showing what happens when a first world country has it's medical system overrun. It's not pretty.  We might talk blithely about losing "only" 4% of our population if this runs amok, but that is a hellacious impact on a country emotionally and economically. I have no doubt that doctors in Italy are making some really hard decisions right now.  Like who gets care and who gets left to die.  Someone I or you care about might get left on the wrong side of that equation here in the US if this gets out of hand.     

Yes Italy's hospitals have been overrun but Italy has a significantly older population than the US and its been reported that the average age of those that died in Italy from the coronavirus is 81.   I don't mean to be insensitive to the elderly but if the mortality rate is 4% overall but most of those are the elderly then the mortality rate is very low for the rest of the population.  In this case then wouldn't be easier to sequester and take precautions to protect the elderly instead of shutting down the whole economy?

Businesses are withdrawing their entire revolving credit lines, which amounts to a corporate bank run.

This is the second time that I've read this statement and I'm not sure that I understand it. I thought that the banks extended credit lines to businesses and it would be up to the bank to withdraw, not the business? What am I missing?

@Buffaloski Boris ; I also agree that the markets aren't at the irrational point yet. It seems like it, but this is still quick selling, not irration. Stock in cruise ship companies down by 75-80% seems completely rational to me when one of them will probably go bankrupt. (Did I read that someone sued the cruise ship that kept them in quarantine?) We don't know which one would go bankrupt, though. The rest will survive and do well and probably recapture the losses in a short amount of time. But, since you don't know which one will go bankrupt (maybe two???) why take a chance? Perhaps cruises will fall out of favor after this thing runs it's course, like fur coats or asbestos, once-thriving everyday industries that are now dead, buried and not mourned. So, the selling is extreme, yes, but irrational? Not yet.

I think what they meant to say was that the companies had drawn down their lines as in fully borrowed.  This happened during the financial crisis too and they do it to ensure they have capital available in uncertain times.  The implication is that banks run balance sheet based expected borrowings and capital requirements but don't actually have the cash on hand.  So if all the companies borrower their lines then banks have to raise capital from selling other assets (treasuries, securities) or borrowing from the fed window and all that can cause a liquidity crunch temporarily. 

[Boofinator]

Yes Italy's hospitals have been overrun but Italy has a significantly older population than the US and its been reported that the average age of those that died in Italy from the coronavirus is 81.   I don't mean to be insensitive to the elderly but if the mortality rate is 4% overall but most of those are the elderly then the mortality rate is very low for the rest of the population.  In this case then wouldn't be easier to sequester and take precautions to protect the elderly instead of shutting down the whole economy?

The whole economy isn't shutting down. Slowing down, sure, with a few sectors particularly hard hit (tourism especially).

If I were an elderly person, I'd be in all-out hermit mode until this thing sufficiently blows over. But elderly people still need to leave the house to buy groceries, they still need social interaction to some small extent, etc. So they will be exposed to other people, no matter how antisocial they try to be. And if every non-elderly person has the disease at the same time, the elderly will get it at the same time too, regardless of how well they self-isolate. So the biggest weapon we have is to increase social distancing during the tsunami.

[bwall]

Businesses are withdrawing their entire revolving credit lines, which amounts to a corporate bank run.

This is the second time that I've read this statement and I'm not sure that I understand it. I thought that the banks extended credit lines to businesses and it would be up to the bank to withdraw, not the business? What am I missing?

I think what they meant to say was that the companies had drawn down their lines as in fully borrowed.  This happened during the financial crisis too and they do it to ensure they have capital available in uncertain times.  The implication is that banks run balance sheet based expected borrowings and capital requirements but don't actually have the cash on hand.  So if all the companies borrower their lines then banks have to raise capital from selling other assets (treasuries, securities) or borrowing from the fed window and all that can cause a liquidity crunch temporarily.

Ah, ok, that makes sense. I'd thought that would have been phrased as  'a business draws down' the revolving credit and the banks 'extend the credit' and then when they no longer 'extend' credit they have 'withdrawn' it.

I read it as the business have learned from the financial crisis that cash in king, better to drawn down on the very low interest revolving line of credit than wait and then have the bank cancel the credit line when you need it.

[Alternatepriorities]

It already is uncontained, there absolutely 100s of thousands if not millions more that have or have had the virus.  It's unrealistic to think that it is all over the country but only a few hundred people here or there have it.  There aren't tests available.  Even still, most people with mild to moderate symptoms are unlikely getting tested - partly bc they can't but mostly bc they are and should just treat it like a cold or flu, stay home, rest, hydrate, recover.   That could be the silver lining, the more people that actually have it likely means its not as bad and we can recover sooner.   Like other viruses once you have it you have an immunity to it.

This is probably the most frustrating thing I see about the response. By the time we (humanity, let alone Americans) started testing for it the virus could very well have already been global. Since it just looks like the flu it's not going to raise flags. I certainly wasn't being any more cautious about the flu in Jan than usual. Flew through Seattle and came down with the worst "cold" I've had in years. The Anchorage airport is a major hub for goods shipped by air from China, yet incredibly yesterday was the first "confirmed" case in Alaska. Well if you don't testing for it, you won't find it.

[Alternatepriorities]

If I were an elderly person, I'd be in all-out hermit mode until this thing sufficiently blows over. But elderly people still need to leave the house to buy groceries, they still need social interaction to some small extent, etc. So they will be exposed to other people, no matter how antisocial they try to be. And if every non-elderly person has the disease at the same time, the elderly will get it at the same time too, regardless of how well they self-isolate. So the biggest weapon we have is to increase social distancing during the tsunami.

My elderly father who has had both lung and heart issues lives about as hermit like as a healthy person can. He's hundreds of miles form the nearest city and can easily see no more than half a dozen people in a week. But he has to come to Anchorage for an appointment with the eye doctor next week or risk losing vision in his remaining eye... there goes his isolation.

[Alternatepriorities]

Or perhaps, any more irrationally than normal...   

Someone I or you care about might get left on the wrong side of that equation here in the US if this gets out of hand.   

I think that is a really fair point. It was pretty irrational for the markets to completely ignore the problems until they crashed. I suspect the market spends most of it's time irrationally exuberant or irrationally depressed.  The problem I run into is I can't seem to predict when the direction will change with enough accuracy to act.

Yeah that does worry me, especially for the one remaining elder person in my life (see above). Watching the general panic (eg runs on TP) though, I am just as worried that the fearful citizens of western democracies will "temporarily" trade freedom for safety and never get those freedoms back.

[lutorm]

the absolute worse case scenario is that everyone in the world gets the virus, everyone misses out on two weeks of work and something around 4% of us die...  While that would be awful and terrible in ways numbers can't describe it's still only an 8% drop in productivity this year

If you think 4% of the world's population dying would have zero repercussions beyond the ones not dying missing out on two weeks of work, I don't know what planet you are from.

That number seems high, but let's use it. It corresponds to 13 million dead people in the U.S. alone. Those dead people had families that lose loved ones, you don't think that affects their economic output. Children will lose parents, who now need to be supported. Every workplace has suddenly lost 4% of their workforce and the knowledge that those people had.

Moreover, if you think people, once the millions of dead start piling up in the news, are willing to go about their business and roll a 4% dice of dying without doing absolutely anything about it, I don't think you know a lot about human nature. I'm a pretty rational risk taker and there is absolutely zero chance that I would take a 15% bet of someone in my family dying (4% each for a family of 4) when there are things I can do to avoid it.

Now, the real average number is nowhere close to 4%, but on the other hand it appears to be even higher for elderly and most of us have elderly in our families that we would go to fairly great lengths to not lose.

[Leisured]

Yes Italy's hospitals have been overrun but Italy has a significantly older population than the US and its been reported that the average agassociating with infected peoplee of those that died in Italy from the coronavirus is 81.   I don't mean to be insensitive to the elderly but if the mortality rate is 4% overall but most of those are the elderly then the mortality rate is very low for the rest of the population.

Good point. I am 75, so like all older people, I am more expendable than younger people. Trump is a year younger than I am, and if he keeps on associating with infected people, and shaking hands, and gets sick, his risk of death is noticeable, even with the best US health care. His behaviour is reckless for a person in his position.

[Leisured]

I like the OP's quote from Keynes. Airlines and other travel related businesses will do badly, as will restaurants and cafes, but people still need to buy food, clothes and building materials. Oh, and also toilet paper. Most business will not be seriously affected, once the initial panic settles down, which it will. For we oldies, living off investments, our dividends will continue, even if reduced. Staying solvent only applies if you have borrowed to invest.

I lived through the Oct 1987 crash. Saw a correction coming, but like everyone else, could not predict the timing or the scale. I did nothing and rode through the crash, and inevitable recovery.

[BikeLover]

I'm with you. I don't get it.

As far as I can tell the treatment is worse than the actual flu and our "leaders" are more panicky than anyone else. Logically the absolute worse case scenario is that everyone in the world gets the virus, everyone misses out on two weeks of work and something around 4% of us die...  While that would be awful and terrible in ways numbers can't describe it's still only an 8% drop in productivity this year and then things pick back up 4% lower next year. Maybe my math is bad but it's looking like the market might decided to price in 50% less productivity for ever?

Except you aren't limited to infection one time. In the event this virus becomes uncontainable then it simply becomes a part of life moving forward every year. I imagine an annual 4% mortality rate would be quite a departure from current conditions. A vaccine would no doubt help that but it would still be significantly worse than how life is now with the flu.

Well, it is still speculation, that you can be reinfected. Unless there have been some very recent studies or new evidence I haven't seen yet.

If it were to be so, it would be a big departure from current conditions, though perhaps only for five to ten years -- after that the majority of the most susceptible would have already died, including most persons over 65. Life expectancy at birth reduced to 60 years or so.  For those in their 30s the increased risk of death according to currently available data would be only something like 20% (1.2% chance of dying in a given year rather than 1%), which is a big change all at once, but something people would get used to over time, I expect.

[tooqk4u22]

Yes Italy's hospitals have been overrun but Italy has a significantly older population than the US and its been reported that the average agassociating with infected peoplee of those that died in Italy from the coronavirus is 81.   I don't mean to be insensitive to the elderly but if the mortality rate is 4% overall but most of those are the elderly then the mortality rate is very low for the rest of the population.

Good point. I am 75, so like all older people, I am more expendable than younger people. Trump is a year younger than I am, and if he keeps on associating with infected people, and shaking hands, and gets sick, his risk of death is noticeable, even with the best US health care. His behaviour is reckless for a person in his position. 

As I said I didn't mean to be insensitive and intended to point out that Italy's population much older than the US or other parts of the world and they were late to address the issue.  By they time Italy began to address it they were already to late and when you have when the population has a higher percentage of susceptible population it stands to reason the consequences will be higher.   It was also meant to illustrate that the virus is not as great of risk to everyone.  So why not focus more energy/resources to protect the greatest at risk - you know, a rifle approach to go with the shotgun approach.

All the lockdowns and closings may be smart but the elderly and compromised should put themselves on lock down,  but then there is my grandfather who is 90 (and has normal issues for being 90) went to a casino over the weekend.   My mom was like "Do you have a death wish?"  and he is like "I am 90, every day I am here is good day and maybe the last?"

If I were you or the president or my parents, I would be greatly, if not entirely to the extent possible, staying away from everybody right now.  MY FIL who also has some other factors is going out of his mind right now bc he wants to get out and about but knows that its not a good idea.

[vand]

OP is rather naive imo.

First point - this slump is barely 1 month old. If you want to talk about the market staying irrational longer than you can stay solvent... look at some past slumps which have lasted years, and  even decades.  This is nothing, at least duration-wise, in the overall scheme of things.

Second point - there is a naive assumption that 29k Dow was the sensible, rational price, and that whatever this is now is an irrational fear-based price. Why? The market has been on an absolute tear in the last 4 years, which did not at all reflect economic reality. There is some truth in the view that there was much irrationality on the way up, and markets are now adjusted back to reality.  The S&P is still quite expensive by historical standards @ 2500. Don't be surprised if the climb back takes a good few years.

[mizzourah2006]

OP is rather naive imo.

First point - this slump is barely 1 month old. If you want to talk about the market staying irrational longer than you can stay solvent... look at some past slumps which have lasted years, and  even decades.  This is nothing, at least duration-wise, in the overall scheme of things.

Second point - there is a naive assumption that 29k Dow was the sensible, rational price, and that whatever this is now is an irrational fear-based price. Why? The market has been on an absolute tear in the last 4 years, which did not at all reflect economic reality. There is some truth in the view that there was much irrationality on the way up, and markets are now adjusted back to reality.  The S&P is still quite expensive by historical standards @ 2500. Don't be surprised if the climb back takes a good few years.

If you look at the CAGR from Jan 1, 2000 to the highs of the market with dividends reinvested we were at a CAGR of 6.17%. If you look at it today from Jan. 1, 2000 we are at a CAGR of 4.63%. While I do think the market was looking for a reason to sell off and it got it, I think looking at it from 2008 to today is short-sighted. Over the past 20 years the market has not been that great.