ActiveAllocator portfolios are designed to be resilient to maximum draw downs- and that’s exactly how it played out for us in March. Examining markets performance in hindsight does not reveal too much for one arbitrarily selects a period to measure – random entry and exit points in an hour, day, week, month or years. Since none of us can time markets ex ante, I calculated the maximum peak to trough decline in all equity markets across the world, and in all sectors, across different time horizons. In other words the maximum amount an investor could have lost.
Anyone who had exercised a put option, or shorted these sectors with perfect foresight, would be laughing all the way to the bank today! I present the maximum sector draw down in a visual.
Russia so far has been spared rising Coronavirus infections, but that seems to be changing today with 1,836 cases reported and nine deaths. Which begs the question why have Russia and other Eastern European countries not announced plans for economic stimulus to the imminent fallout? One reason may be that sanctions have insulated Russia from global markets, unlike in 2008 where its banks were deeply entangled with the Western banking system. At that time Russia and Eastern Europe made decisive proactive interventions. This led to banking systems recovery providing the strength to fulfill their role in the economy: that of providing funding to individuals and business.
While recognizing that this crisis is nothing similar, I still think it useful to calibrate the government response at that time to provide a sense of scale – captured in this visual.
Now that the $2 trillion coronavirus relief package has passed 96-0 in the United States Senate I am confident it will soon get through the House. The proposal includes $500 billion in loans for larger industries. I did read somewhere that one out of every five companies now is a zombie company – the walking dead, that earns just enough money to continue operating and service debt, but is unable to pay off their debt. The planned $500 billion Treasury Department fund would be subject to scrutiny via public reporting of transactions, as well as a new dedicated watchdog and accountability committee. The package won’t likely help them and I expect a rise in bankruptcies.
Here are Ten Commandments that responsible CEO/ CFOs and corporate boards may benefit from.
I am of the view that LPs prevail on their GPs to stop throwing good money after bad in their risky early stage series A/B investments, especially within FinTech. They now need start writing down investments, close down follow-on funding and institute layoffs and firm closures. The U.S. economy is expected to languish over the next two years as policy stabilization efforts are unlikely to provide a boost to financial conditions in the short term. My recession scenarios capture the potential for more crippling damage to financial inter-mediation and slower economic growth beyond the cyclical horizon. Things are going to be rough and risky early stage FinTech firms will be worst affected.
The biggest issue is GPs will disregard this advice for they have a vested interest in keeping investments going and perpetuating management fees. I had written a proprietary game ( game theory) to arrive at Nash Equilibrium in the LP-GP relationship some years ago. Some of my findings are expressed in a dated research piece, that I think is very relevant in 2020.
Here is a synthesis of what folks seem to be talking about on Coronavirus, economy etc.. Not all of these are my own thoughts, but rather is a summary of a general consensus emerging, that hopefully provides added perspective
Pandemic Emergency Purchase Program will have an overall envelope of €750 billion and will buy government and corporate bonds. Complements big bank stimulus package. Eases collateral standards and removes self imposed restrictions on purchases. Details awaited. Measures surpass 2008 crisis response as described below.
Chancellor Rishi Sunak in the #UK is soon going to reveal additional details on a massive corona economic stimulus package – around £350 bn. It will include £330 bn of business loan guarantees. Includes aid to cover a business rates holiday and grants for retailers and pubs. Help for airlines is being considered. Provides increased access to government-backed loan or credit on attractive terms. Mortgage lenders will offer a three-month mortgage holiday. This is taking shape right now (3/18/2020, 10 AM EST). I visited the actions UK government took in 2008 and find those to be very comparable in size and boldness. Here is a visual of actions taken in 2008 by way of quick contrast.
“Private labs start testing for corona virus, prompting concerns about cost and insurance co-pays” screams a news headline. Here, in this visual, is how I interpret this – follow the money!
The role of the state has been enhanced by recent events – only governments can provide leadership across multiple stakeholders, and strength of central banks balance sheet to ensure stability. In this crude visual I remind you that this crisis is very different from the one in 2007. Here is how ( I think )the previous crisis came about – spread from financial crisis to the real economy. This time it is the other way around. “History doesn’t repeat itself but it often rhymes”.