*An audio recording of this written Commentary maybe found on our website using the following link:
Rob: Thanks, everyone, for joining. We have a live audience and we have a virtual live audience, which is wonderful. We’re going to talk about what’s going on in the world with the virus, the economy and the markets. Let’s start with a global top down view and move to the specific, starting with a summary.
Most of you probably know about the outlines of the epidemiology and statistics and population percentages regarding COVID-19. We’re all very familiar with the distancing, the need for testing and the successes and failures in different countries of trying to deal with this virus. I think at this point it is pretty well acknowledged that most everyone on the planet will eventually be exposed to it. It’s a question of at what rate and how much strain it will put on various countries’ medical systems. That is, of course, very important and we all want to acknowledge the human suffering and figure out how to potentially alleviate some of that suffering by our personal activities, such as not going out to eat even though that hurts the restaurants.
The cost of successful social distancing is a longer economic slowdown. This is likely to go on much longer than people are saying, because the incubation, illness, and recovery periods, are all supposed to be highly contagious. That means it may be a full 8 week period for any individual to be contagious. We haven’t come close to seeing the maximum number of cases yet in this country, and without widespread and accurate testing we may never know. There is a potential reemergence of the contagion in countries that have done all of the right things, all of the testing, all of the social distancing, and who have adequate medical facilities. Americans are essentially law-abiding people so I believe social distancing will be somewhat successful in flattening the illness curve which means business activity will be curtailed for an indefinite time.
Let’s go back to the tradeoff between a “successful” shut down of parts of the economy and a flattening of the infection curve. This will save lives and alleviate some suffering, allowing the production and dispersion of equipment. There are some countries that are not trying to track or report on the virus, like Russia, Mexico, most of South America, and India. India is considered to be a place where things could get very bad, very quickly because of the density of the population, the lack of infrastructure to do reporting, and the lack of access to medical facilities. I think we’re going to be in the dark phase of this situation for several months but whatever the cost, that this is not the end of the world as we know it, nor is this by any means the end of the markets. It is probably the end of the mirage of fiscal responsibility, that the U.S. debt will ever be repaid. I’m giving you my conclusion first because when they talk about dropping one or two trillion dollars a month into the economy, which is probably the right thing to do in the short run, people lose sight that whatever allocation the government’s hand out between individuals and corporations, it will materially impact our future. Let’s not make light work of considering the numbers. I saw a report this morning that by the time this is done, the long-term deficit will be $40 trillion. That’s not ever going to be repaid. We will come back to this issue later, because that is the biggest long-term effect, financially speaking of the program. Please forgive me for focusing on the financial aspect of the situation.
The Federal Reserve Bank has now cut interest rates to zero, which means that savers are screwed. Who knows how long this monetary policy insanity can go on. Europe and Japan have been in this situation for a few years and as a result, their economies are limping along at best. We are now doing a lot of things that they did in 2007, 2008 in respect to the banking system because we know what happens, for example, when people lose faith in their money market funds. Today, the U.S. Federal Reserve Bank announced that they were going to guarantee all money market funds during this period of national emergency. They are exercising, with great verve, all of the tools at their disposal to inject liquidity into the financial system. This is supposed to help companies not go bankrupt because when corporations owe money to the bank and their businesses are shut down, they cannot pay down on their corporate debt. The magnitude of company debt is the highest it’s ever been, much higher than it was in 2008! The authorities are well aware of this situation and they know how to put a Band-Aid on the wound. Who knows how it will filter down to individuals who owe rent or a mortgage payment.
Many people who have lost their job can’t make their mortgage payment, but under the new program, banks are not going to foreclose on these people. This is the second time that we have faced this kind of foreclosure issues. We don’t have to go back into history very far to see what this means which is that the U.S. government will assume the risk of the economy. The result is that savers earn practically nothing and the government takes on the long term weight of more student loans, home mortgages, corporate debt, and the costs of providing medical care. I’m not saying whether this is a good or bad thing, it is just what’s happening. Our concern is how does all this translate into market prices? How do we protect our client assets and how do we find opportunity to reposition for the long haul?
Monica: What are you doing now in terms of buying or selling stock?
Rob: We have been doing some of each in a process called rotation. Rotation is where we sell one company and on the same day, we buy another. We sold out of Baidu, the Chinese Google, and we bought Google. This is very different than trying to time the market. People are thinking,” Hey, maybe I shouldn’t have as much in stocks as I previously thought I should, so how about we reduce our overall stock position?” Our response is, this is not the time to do that because there is a saying ‘Don’t try and catch a falling knife.’ Changing directions of a canoe in the middle of the rapids often leads to bad results!
There may be buying opportunities over the next several months in other asset classes along with stocks. What we always consider for individuals is how much cash do you need, when you need it, and do we have enough on hand to meet those cash needs for over what period of time? Generally, people know how much cash they spend and if we know we can securely turn things into liquid funds, there is no need to change strategy. Do we need cash for six months, a year, two years, five years? Somewhere in between….certainly one year’s worth of spending cash. By and large, that’s how all of our portfolios are structured. We have never believed in selling stocks to meet monthly cash flow needs. That’s just not how we manage portfolios. Bottom line is no one is under pressure to sell in times like this. There is certainly an emotional impetus to want out, to be “free” of anxiety about the future.
Over the last 10, 15, really 20 years, we have become accustomed to being bailed out by the Federal Reserve. Every time there’s been an external shock event, September 11 or the financial meltdown, the Fed has come in and essentially shoved a bunch of money into the stock and bond markets. That soothed investors’ fears and it worked, by and large. If we end up experiencing this shutdown for three months, and It might go on longer, the bill will be astronomical, unfathomable, unpayable. Americans are well equipped to be nice to each other, and we don’t really need the government to tell us to behave civilly. We are voluntarily going to do what needs to be done but the shape of the recession remains unknown. The shape of this recession, how long it goes on, and whether it turns into a depression depends on the breadth of the disease’s spread and the cost of dealing with it.
I was looking at a chart which shows the re-emergence of illness in countries that have done all the right things. In China, they’re not recording any new cases, which is crazy. Truly, it’s unbelievable and I think it’s false. The Chinese made the decision to undo their brand of social isolation, because they realized that their economy was going down the tubes. If China is going to have several quarters, or years, of negative growth in industrial production, they will have serious existential political problems with a restless and hungry population. The Chinese have little to no social safety net and they’re not each going to get a check in the mail for a thousand dollars. They rely on themselves, their families, their army and their leaders, so I don’t think the Chinese had any choice but to tell everyone go back to work because when and if they get sick again, they just don’t have to report it. There’s no one watching them, no one to say they have to report new cases. So, I don’t think we can use China as any kind of benchmark. Italy is the next country where you can understand that they have an older population, high rate of male smokers, so their mortality rate is going to be higher. They have a good medical system, people are well trained, but they have very few beds per thousand people because they don’t have a lot of money to spend on pandemic medicine. This is also true of England with their national health care system. In England, they were going to let the disease run its course, not test and not ask people to stay home. They figured that the money to take those proactive steps would be better spent elsewhere. England then got in line with the rest of the world that’s reporting the disease and mandated social restrictions to minimize transmission. Mexico and Brazil are not reporting and it’s impossible to know what is happening there. Stock markets everywhere are looking forward at future earnings, which look dismal. There is uncertainty about most things except that economic activity is declining and there’s no immediate end in sight.
Eric: If I may ask a question. Apparently, in 1918 the Spanish Flu was really devastating. Did we learn anything, are there any programs, defensive postures to take when things fall apart? Have you made any big strategic transitions with our accounts? The other question is, if things stabilize in the spring, or it lasts into the summer, is there an opportunity to be more defensive assuming that the virus could return again and get much worse in the winter?
Kyle: We did make moves last year as the market moved up a lot. We did a rotation into more defensive industries. Historically, what has been considered defensive is consumer staples and utilities. When we think of defensive, we also think of companies such as Procter and Gamble and Johnson and Johnson. People are always going to buy staples, whether it be toilet paper, paper towels or gasoline.
Rob: Our portfolios have been defensively established for many years. We have had very few financials and oils and that’s a fortunate place to have been. It’s not that we anticipated this kind of event, but our investors are essentially interested in protecting capital and then earning income and then maximizing growth, in that order.
Kyle: There’s a part of being defensive that comes through choosing which companies to buy. In general, our portfolios are defensive through diversification strategies. By owning stocks, bonds, and also real estate, and having some alternatives such as gold in the portfolio, we’ve set ourselves up defensively through an allocation strategy, not necessarily through picking and choosing each company at a specific time.
Rob: The main determination of a portfolios’ return is based on its diversification. One question that was raised is the impact of this situation on real estate. We have a decent percent of client assets in private investments, particularly real estate, both lending and direct ownership of real property. What does this downturn hold for real estate values? Real estate prices tend to lag the stock market. When the stock market goes up for a long time, people feel affluent, and they’re willing to spend more on a new home, upgrade their current home or change houses. I was on the phone this morning with some people who run a very aggressive development company. They work with big national home builders whose names you would recognize and they remain in full gear. This midsized business has borrowed a lot of money and they have to complete their projects in process. Time works against people who have borrowed money, but we are lenders so time generally works for us. Sometimes people who borrow don’t pay their interest on time or they don’t pay back when the loan is due. There will likely be some of this as an outcome of the economic slowdown. There are also people who can’t make their personal mortgage payments and companies that can’t make their commercial loan payments. That is going to happen soon and it is why the Federal Reserve is going to put two trillion dollars into the economy per month. It is well known that one outcome of an economic slowdown is that people who have real estate assets, who are thinking about selling should think again. There is going to be a hiatus on buyers coming in so there are going to be more sellers than buyers. Buyers and sellers both want to wait and see and get clarification on the status of the market. The price of real estate, at least as it’s quoted by market makers, will likely decline. I don’t think it will decline as much as the stock market, but it will decline some. Just like we say our strategy in a bear market for stocks is, if you don’t need to sell, don’t sell it. If you are a buyer of real estate, you have an advantage, particularly if you have cash.
At a certain point, uncertainty regarding the contagion situation will go away via the knowledge that, in countries where the reporting is ostensibly accurate or honest, the curve of new cases has started to decline. That is when the markets will start back up in earnest. No one knows yet how bad it’s going to get and as the stock market is an indicator of confidence in future earnings, it will anticipate a recovery. The real estate market, while there is some utilitarian definition of value based on net rental income, will also issue a vote of confidence in the future. Real estate markets lag the stock market and its fluctuations are less severe both in terms of the downturn and how quickly they recover. We don’t have a crystal ball but looking back at history, it could be much further off. When we look at the beginnings of this long bull market, it was the election of Ronald Reagan that unleashed the bull market we have ridden the last 40 years. The 1960’s and 1970’s were terrible for stocks. Reagan deregulated, changed the tax code, allowed investment banks and commercial banks to combine and that was the start of this bull market. It’s been a long ride that has returned about 8.2 percent a year. In 2019, the market was up 30 percent. There is no rational justification for that kind of increase so a pullback is to be expected. The greater the decline, the more long term health returns to expectations. When people ask us “how far down could stocks go,” we don’t know the answer. Goldman Sachs feels that another 15% decline is in the cards and that makes sense if stocks deserve an 8% return over time. From our perspective, we think that percentage return is too high. The reasonable rate of return for putting your money in stocks should be closer to 6% than 8%. If the long term trend is 8%, then the market should come back quickly to where it was the first week of March 2020, but we are not counting on it!
George: How far down will the market go?
Rob: When the market goes down long term, it regresses to the statistical mean. This indicates it could go down 50-60% from its high and that would still not be an end of the world event. It would be normal that often the market goes up too much (2019), and when it goes down (2020), that it might go down too much. Our strong belief is that the world will adjust and after the suffering is over, people will adjust and the markets valuations will adjust. If one is investing for the long term, there’s no need to change your asset allocation. It’s totally understandable that emotionally investors would want to change when it gets so scary that you can’t see the end of the way. The financial industry has had decades of success telling people to “just hang in there”. In this situation, we feel that is the right advice. If your strategic allocation needs to change, there will be a better time to make that change then now. There will be some periods of price, recovery and if there’s a good reason to make an allocation adjustment, then it can be done. Now that interest rates are zero and corporate bonds are paying 1-2%, what’s the point of changing? Maybe avoiding a corporate default and owning cash? Cash has been the despised asset for a long time now, but it’s where many people are going. Look at the recent price of gold as it has not gone up to any great extent. It is pretty close to where it started at the beginning of the year. That is another solid sign that this environment is not part of a systematic meltdown of the economy or the markets.
George: That happened in 2008, too, right? Gold didn’t go up when the market really crashed out.
Kyle: There was a temporary depression in the price of gold in 2008 as people put their cash back immediately in the stock market.
Tama: Do you think that companies and corporations are going to cut their dividends?
Kyle: We have seen large companies like Chevron do that already. Just before Saudi Arabia and Russia started their oil war, Chevon announced a big increase in dividends and now, this dividend growth program for a stock whose price has been cut in half doesn’t make sense. There is no reason for any public company to pay a 12% dividend. It’s likely that we will see any company whose stock price has come down in half to cut their dividend. Dividend income may be high as a percentage of the stock price, perhaps in the 5% -6% range, but corporations can only maintain a dividend that they can produce from operating cash flow.
Rob: Companies also will not be buying back their own stock, which was one of the big great underpinnings of the bull market just ended. Stock prices are supported when companies are acquiring their own stock on the open market. Some companies bought their stock back when it was expensive and now that the prices are down, they don’t want to buy it back. It’s a little backwards but everyone is conserving cash for whatever is yet to come.
We started talking a bit about real estate lending and how this economic downturn, whose length is uncertain, will affect values of different kinds of properties. We look at properties based on cash flow which is based on earnings potential divided by the cost basis. What one pays for a piece of real estate determines how much you can make in terms of rental income. Owners can improve the quality of real estate, they can have it in the right place at the right time and so luck does play a role. One of our main current strategies in these tumultuous times is to continue with the real estate projects that are currently under way. These hopefully will be ones that can produce cash flow even when buffeted by external forces. There are a certain number of people in the country who can afford to rent an apartment for $10,000 a month, albeit very few! There are more people in the country who can pay $3,000 a month, perhaps because they don’t have money for a down payment on their own home. There are many people who can spend $1,500 a month on rent. Our real estate strategy is to focus on income producing properties that rent to people with decent but not necessarily high paying jobs. It’s called workforce housing, and along with housing there is office space, trade space, studio space. Developers are looking for places where young tech-savvy workers are gathering in order to provide long term rentals. In this economic downturn where companies are closing shop, the entertainment industry and the sports facilities are closing, and overall food, transportation and hospitality activity are diminished. There remains however, a long term desire for people to live in attractive, convenient places with decent education, parks, cultural resources and access to the outdoors. I was talking to someone in Brooklyn the other day where landlords raised their prices dramatically over the last five years. That kind of pricing power likely will go away in this new world. If you have cash and the guts to deploy it, in times of uncertainty is when the best buys are made.
Nobody is going make an announcement or ring a bell at the bottom. We cannot know when to buy, but with discipline, we can set good price targets and wait. This brings us back to the discussion about the state of our government’s finances. From an economic perspective, when COVID-19 has run its course, and we know that it is receding, the financial cost to be reckoned, may have a $30 trillion dollar deficit. The government can borrow and will, so long as the rest of the world will lend to us, based on confidence in the U.S. Investors worldwide respect the sanctity of money and feel protected in the U.S. almost more than anywhere else. The diversification that people obtain by bringing their assets to the US is real and so we are the benefactors of what for now is essentially “free money”. The U.S. government can borrow for free. It’s a dream come true for compulsive spenders. One can borrow endlessly and pay no interest, and probably not principle either. The government can borrow under these circumstances and the new spending acts of Congress so it makes almost no difference what our national deficit becomes. This is frightening to me. Our fiscal situation is untenable, absurd. No one knows where this is going to end up. What is clear is that as individual investors, if we can invest in things that are going to produce real income, while they may not grow at 8% like the stock market of late, but at a cash flow of 4% or 5% we can then budget our families accordingly. That’s a reasonable approach to a secure financial future.
On one hand, we have a government that can borrow as much as it wants, with no intention of ever paying back the principle. We are headed to a time when U.S. Treasuries will not be liquid, something that has not happened ever before. The mechanisms are more complicated than that, but basically, there is no way to resolve how much government debt there is and who owns the debt. China has already been selling U.S debt for a while now. The upshot is that some dire situation, more than COVID-19, could push the government to reset its monetary system to give the government more central control over private transactions. U.S. government bonds have a triple-A rating but I don’t know why that is. If you look at the receipts of the government versus its disbursements, it’s crazy. Maybe a partial answer to this craziness is that the federal government sells assets, like beachfront property or part of the national forests. That seems unthinkable but if people learned basic accounting principles, it is a logical place to go. The basis on which to look at any overdue debtors financial situation is to liquidate assets.
Keren: Can you speak about the New York Stock Exchange and the fact that a trader has tested positive for the virus and they are going to go fully electronic?
Rob: There are not many traders left on the floor of the stock exchanges, but since one of them was just diagnosed with the COVID-19 infection, they are going to go totally electronic. What does that mean? If you watch the market recently, you can see that it’s been hitting these automatic circuit breakers on the downside where they exist to protect against freefalls. In the old days, traders used to run around and set prices and they got paid well for “making a market” in stocks especially during turmoil. Now there is no responsible party that is supposed to ensure smooth up and down movement of prices. There are large swings and part of the reason is because the trading is now done electronically. Last week, I had a call from a childhood friend who couldn’t get into his account to make a trade. He wanted to know if I could do it for him (I could not). Individuals are at a big disadvantage in terms of placing trades in volatile markets.
Jane: Why is the market going up and down so much?
Rob: When you invest in the stock market, you expect to see highs and lows. Some years, you make money and some years, you lose. That’s part and parcel of being in stocks. The stock market is still functioning because there are willing buyers and sellers. I don’t believe they will close the stock market. They might reduce the hours, they might run it totally electronically, but people need to know that they have access to their money that is in the markets or there would be a loss of confidence that would be intolerable. Bonds are more esoteric than stocks, but way more important as that’s what finances our deficit. It’s very boring to people because most individual investors don’t make or lose a lot of money in bonds on any one particular day. Confidence in the U.S. government’s finances is measured by how difficult or easy it is to sell their new bills or Treasury notes. When Trump finally jawboned Federal Chairman Powell into reducing interest rates to zero and injecting $800 billion dollars by essentially electronically printing money, the die was cast.
Sally: What do we have to look forward to?
Rob: Bond yields, corporate interest rates went up in contradiction to the government’s desires. In the marketplace, investors weren’t buying U.S. treasuries so the market pushed interest rates up against the government’s desires to push them down. If this gets out of hand, doubts about liquidity could unravel markets, like what’s happened in 2008, only worse. When the markets froze up in 2007-2008, home mortgages were valued at 50 cents on the dollar and then banks were in danger of failing. Then people thought, “Oh, I’m going to go downtown and get my money out of the bank and also take my money out of stocks”. We should be praying that people around the world will continue to buy U.S. Treasury Bonds. It is by far the most important market on the planet and if things really get stressed, that market will push interest rates up again and again.
Kathy: Many people are hoarding cash. If everyone is just avoiding anything that could be perceived as risk, what will happen?
Rob: Stay tuned. Call us. We will be here!
Sam: What happens to triple net leases from franchises like Red Lobster, who have most people not coming in because they’re not allowing sit down dining?
Rob: That’s what the government is trying to address in providing their SBA loan forgiveness program. Do tenants pay their rents with government money….we hope that’s one of their first bills that they will pay. There are plenty of requests out there for rent abatement, temporary free rides. I’ve heard of this happening in the restaurant industry. Other borrowers may not make their interest payments on our loans during the second quarter. That’s certainly possible. It doesn’t mean that Red Lobster or Walgreens are going out of business or that they are bad tenants. It means that they are trying to adjust to unknown future cash flows and they will need to make a pledge to pay their back rent later. This may happen across the board because when there’s little to no economic activity, everyone has to adjust together and special considerations need to be made. But the underlying value of the real estate asset is still there. The economy is going to come back and people are going to start to eat out again, etc. I think there will be a huge disruption, but not destruction.
Jeff: I’m curious, I know that they are pledging $500 million in bail out money, paying $1,000 per person and that the airlines are earmarked to get a huge chunk. Are you seeing a path where the bureaucrats make decisions on their own to choose winners and losers in industries like the airlines?
Rob: Will airlines be winners and automobile companies be losers? Or will everybody be a winner? For individuals, we know now that this promise of immediate relief, a check for a thousand dollars soon and the next one a little later will be means tested. That is, if you make over a certain amount of money, you won’t get it and it will depend on the size of your family. The larger your family, the more money you’ll get. If this allows out of work people to pay their rent or their cell phone, that is good. The government will take the airlines, which is considered essential, and maybe they’ll get paid back later, like they were paid back by the banks for their 2007-2008 loans. The government actually made some money on the banking loans because they supported the banks for a number of years. They have a plan for airlines and they know how to execute these kinds of things. However, if the contagion is death and transmission goes on for a year, and people who don’t die but are permanently disabled is remarkable we don’t know how society will deal with those costs. Right now, the pledge is to give everyone who needs it money. That’s the pledge, because the government’s goal is to prevent people from freaking out. If everyone gets bailed out, there will be some winners and some less than winners. I think that the government is trying to find an expedient way of not alienating people and giving them hope. By saying, “Hey, look. You’re not going to have to suffer through this without help” is something that, we as a culture, are not really used to. Old school would say “Life is not fair, there is no guarantee of a safety net that will save all of us and look, we have to face things on our own and go forward”. We are headed down the take care of everyone path. I believe that the country will come out of this psychologically intact but also with a humongous deficit that is essentially unpayable. The math doesn’t work. Our challenge here at the Rikoon Group is to figure out what to do in a totally new scenario. This is not the real financial crisis. This is a definable, an unknown, but eventually definable event that will have a certain cost. I’m not minimizing the human suffering aspect of it, but the thing that we have to protect against is what happens when the Treasury can’t sell its debt. To me, that is the real challenge. We will make tactical moves which are important, to reallocate portfolios, to rotate between industries, to look and see if we have enough cash and if not, how to get it. These are the basic moves but now we have to live with debt that was going to take 20 years to build up but now will only take two years instead.
Barbara: If we get to the point where we can no longer sell our debts, what does that mean in regards to the statement you made earlier about China not buying our debt anymore?
Kyle: China has slowed down buying our Treasury debt and they often are sellers of our debt at this point now. One of the reasons is that China became such a large holder of U.S. Treasuries that they had to start selling it. They have an incentive to sell only slowly so as to not unload our debt because it would disrupt the market and devalue what they still are owed. If we fail to sell our debt at auction, it’s an indicator of a loss of confidence in the US government’s ability to repay its debts. Rob and I talk about this quite a bit. A failed auction would have devastating effects on the economy because once you have a loss of confidence in the government, why would anyone risk owning corporations or using the banking system?
Rob: The banking system is the underpinnings of corporate borrowing, which is what fuels economic expansion and consumer spending. These are the biggest parts of the economy.
Sven: If and when the time comes that the US can’t finance its deficit, does that converge with the restructuring of the financial system?
Rob: It’s not a given that people will forever put their trust and money with the United States Treasury. They may do so, even if there’s a $30 trillion dollar deficit, and they may be right to do so, given the lack of other places to put their money. Who’s in better shape than the U.S.? Really, no one large enough to make a difference so it’s not a given that failure is going to happen. Logically we expect it to happen. We wouldn’t want to it happen, and not make provisions of what to do if it does happen. If there’s a crisis of confidence in the U.S. government, it’s going to happen to Japan and Western Europe at the same time. Just like in 2008, it was a coordinated central bank crisis that lead to restructuring that allowed the commercial banks around the world to survive. These things have happened before in history. There are big restructurings and resettings of financial systems, like when the world went off the gold standard or when Germany defaulted on its post-World War 1 reparations debt. These are things that have vast political and real world ramifications. They’re not contained markets. We are not in the political prediction business but have to think about it some as it relates to our portfolios. We’re not trying to address issues except as they relate to government and corporate debt. Can the US afford to save the world? Probably not. The world’s power structure would change and China, which is the second largest economy can turn around and say, “We helped solve the disease problem so come back to work with us”. The United States can’t do that. China and the U.S. are competing for influence around the world in many industries. China may be better suited to provide the assistance to the third world then the U.S. These are the kinds of things that may get impacted by U.S. Treasury debt.
All we can do is diversify as we’re not smart enough to figure out what’s going to happen in the future. We can diversify by having some stocks and bonds, some cash and gold, some private debt, and private equity in the real estate area. Our solution is to be more diversified than the average bear. More than most money managers who are just in stocks and bonds and cash because that’s what worked for the last 40 years. Trump and Congress can spend two trillion dollars a month indefinitely. They can do it because the U.S. has the confidence of the markets, meaning they can sell U.S. bonds. We watch the Treasury auctions like a hawk. Some people are going to cash, to non-interest-bearing accounts that hold cash. Cash is good in times like these because it’s security against the unknown. There is going to be a time for buying and we’ll have cash to do that.
Ruth: How long will the pandemic last?
Rob: Let’s address the factors: No one knows how it’s affected by warm weather, whether it comes back in the fall, whether it will become a different virus or go away in a month. There are so many unknowns that there essentially is no answer. We don’t even know when it started, how many affected people there are. We don’t know because there is precious little good testing. I don’t know anyone who’s been tested in New Mexico or North Carolina. So we’re still at the beginning stages of finding out what’s going on. Typically, you would say 8-10 weeks if one could accurately measure but when does that 8-10 weeks start?
Kate: When should we be buying?
Rob: The sweet spot for buying into the market is when the curve starts to decline about new reported cases. Let’s assume that people are honest in this country and that the U.S. government will have accurate reporting and that it will be timely. China is not accurately reporting. South Korea, Taiwan, Singapore reported declines and now they are honest enough to report new increases. No one knows what this means. And so actually that’s the answer: if we can get accurate information, when the world wide decline actually starts is when people’s confidence should come back. When can we wrap our arms around the situation? It will be kind of easy to tell when that happens because it will be all over the news. We will wake up and the market will be up thousands of points. That’s how the market is. When there is no ability to set a price, we are at the mercy of the electronic traders.
Jonathan: Given the destruction in the Chinese supply chain, could that possibly lead to a resurgence of American manufacturing capability and robotic manufacturing?
Rob: The supply chain is absolutely critical to the U.S. from China and we have just started to feel the impact of the Chinese shutdown. In January and February, we were still using stuff that was shipped over to us in November and December. But now, in March and April, stuff’s not coming in. Will there be a demand for domestic production? I think there will be. Will the US have the required capital and knowledge and skilled workers to produce? Maybe, if a lot of it is from automated facilities. I think without a doubt people will be looking ahead to the next contagion. This is not a black swan event, this is something that people have been talking about and writing about for decades. The likelihood that there will be another unknown illness could lead us to a strong period of reinvestment in the U.S. It doesn’t necessarily lead to huge employment opportunities, and it will take years to accomplish. It is not going to happen overnight.
Does the supply chain increase dependence of the U.S. on China make China a more formidable competitor to the US in its quest to become dominant in the things that it wants to become dominant in? Areas like biotechnology and 5G communications, supercomputing, are all long term focuses of China to achieve dominance. China is like any other world power with its own power elite.
Joanna: For those of us who are in retirement who don’t have years to wait for a market recovery, what vehicles do you suggest to generate income? What about preferred stocks?
Rob: Well, it’s a tough position to be in, if you want or need to be changing your asset allocation at this time, because there will be times where there’s more relative calm than there is now. The production of income that Kyle was talking earlier about is a good avenue. Preferred stocks are very interest rate dependent and are essentially bonds that fluctuate in price. When interest rates go up, preferred stocks will lose value and any income that you’ve earned on a preferred stock will be insignificant compared with the principal loss. My general feeling about long term bond funds is that they are at risk of rising interest rates. Now, interest rates haven’t gone up in many years. How much further can they go down? I’m a firm believer that rates do eventually go up, which is the reason that I would not buy preferred stocks.
Thank you for participating and I hope you enjoyed the discussion. A parting word- We’re going to be fine. That’s the long and short of it. Our country will come through this and we will come through together!
The Markets- Kyle Burns
As 2020 began, it appeared that the markets were looking for a repeat performance of 2019, when investors in nearly all areas of the markets were rewarded with stellar returns. Though it may feel like old news now, the coronavirus put an end to the stock market’s record-breaking run in late February when worries over the virus’ impact on global economies pushed investors to a tipping point. Fears over the virus picked up steam by the time March started, and during the 22 trading days in March, there was not a single day that the stock market traded up or down by less than one percent. These wild gyrations in the daily movement of prices included the third largest loss and also the fifth largest gain experienced in the market over the past 100 years.
When the 1st quarter ended on March 31, the impact of the economic shutdown was severe with all stock markets worldwide experiencing major declines. In the US, the S&P 500 was down -20%, and the technology heavy Nasdaq declined -14.18%.Smaller companies were impacted the most by concerns over the coronavirus, with the Russell 2000 declining by over 30% through the first three months of the year as investors questioned how well smaller companies could weather open ended shutdowns and slower economic activity. All eight sectors of the S&P 500 ended the quarter lower with Technology companies fairing best, down only 12.2% and energy companies performing the worst, down 50.1%.
The European and Japanese markets saw similar declines in their markets with the impacts from the coronavirus reaching their countries prior to the US. Many of the major EU countries had been struggling with growth prior to the spread of the pandemic. Spain and Italy, two of the hardest hit countries, saw their stock markets decline by over 27%, faring worse than the broader European market which was down 25%. The UK, who had finally figured out how to execute the much-debated BREXIT, experienced a decline of 25%.
Many of the larger emerging markets such as China, Taiwan and Singapore experienced the impact of the coronavirus prior to the rest of the world and saw their markets recover slightly after initial declines. Many of these emerging market countries have far reaching governmental powers and can quickly institute policies that help get their economies back on track, at least in appearance. China saw their market decline by only 9.8% by the end of the first quarter. Most other emerging economies did not fare as well as China but did manage some form of damage control to support their economies that are largely dependent on China and the other developed countries for exporting. Other emerging market returns were Hong Kong down -16.3%, South Korea -20.2%, and India -28.6%.
During the middle of March, at the peak of market uncertainty, investors moved into a what was considered a “risk off” scenario where they sell assets of all varieties to move into cash. This caused temporary declines in what are traditionally considered safe haven investments including gold, high rated corporate and municipal bonds, and US treasuries. After a short decline, they largely bounced back with the 10-year US Treasury market returning 10.2%, Gold 4.2%, corporate bonds -3.5% and municipal bonds -0.8%. Other market highlights included Silver down 20.9%, Natural Gas -25%, and crude oil declining 66.5% after falling end user demand and a price war broke out between Russia and Saudi Arabia.
Where was the best place to make money in the first quarter of 2020? Orange Juice was the best performing asset to start the year with a return of 23.7%! The orange juice market exploded due to consumption rapidly rising as people sought out Vitamin-c to boost their immune systems while the supply of orange juice collapsed due to sharply decreased imports, a consequence of international trade being curtailed, for how long no one knows…
Rob Rikoon: Our adjustments to the Covid -19 situation here at the Rikoon Group have seen a drastic change to my travel schedule, in that I have gone from being on the road fifty percent of the time down to none at all. At the same time, several challenging projects have presented themselves close to the office and home. These include making progress on setting up a lithography studio with the acquisition of 100-year-old press built back in the day somewhere in Berkeley, California. When traveling down to Albuquerque, I have been collecting old steel pipes and scrap metal plates for use in making model small-scale sculptures that I hope will become a slightly larger than life size memorial to civilian victims of modern warfare. A local workshop that was setup by a friend/client specifically to train nascent sculptors is a frequent destination most weekends and I hope to learn how to better use various kinds of welding equipment, plasma cutters, acetylene torches and other sundry implements of creative destruction. With the delay in starting and possible cancellation of the spring seasons of one daughter’s theatrical season and the others final semester of naturopathic medical school, we are circling the wagons here in Santa Fe!
Kyle Burns: The Rikoon Group is considered an essential business so Rob and I have been coming into the office every day, accompanied by one other team member with the rest of our group working from home. The Rikoon office is well setup for social distancing and it is good for me personally to get out of the house each day and to maintain a regular routine. On the other hand, the markets have been anything but routine! This truly gives us a purpose – assisting clients and processing the constant flow of information. With the physical school term cancelled, the boys have been splitting their weeks between homeschooling with their grandmother and their mother, Tabitha, who is still working as a primary care nurse practitioner part time. The boys are lucky to have each other during these days and their bond has grown tighter. I look forward to more care-free days and normalcy, but I remain thankful and appreciative of the lifestyle we are able to maintain during what is a difficult time for all.
Gayle Johnson: Take a deep breath; now take another one. First of all, thank you clients for your support, kind words, and patience. YOU ARE AMAZING!
Here are just some of the activities our clients have been up to since COVID-19 splashed across our lives: Checking in daily on neighbors who are alone; Delivering meals for Kitchen Angels; Sewing and distributing face masks; Helping out with grandchildren; Offering business services on-line; Pet sitting so others can perform essential tasks; Calling around to find hand sanitizer for a long term care facility that has none and; countless other untold hero actions.
What I wouldn’t give to see my grangirlz. They are being homeschooled by their mom and dad who are working from home. The five year old is easily occupied with learning activities. The two year old? Not so much. She drug a dining room chair into the kitchen so she could reach the counter to talk to Google and request the theme song from “Frozen”!
We’ve all read and heard so many platitudes in the last month. I leave you with this “In the end, the love you take is equal to the love you make” (Beatles).
Please keep the faith, your 6-foot distance, and your hands sanitized!
Jeff Sand: We continue to make progress on various projects at our property. We recently installed a doggy door and built a fenced area for the dog, Rosita (daughter of the Rikoon Group’s office dog, Beya.) It took a little while but she eventually mastered the doggy door so she can come and go as needed. She is now 6 months old, weighs about 55 pounds and is still growing! The current big project that we are working on is a horse barn and corral. I love to reuse old materials and we were able to locate and buy a lot of old corrugated metal siding for the barn and old metal tube panels to use for the corral. The old metal siding makes the new barn look like it has been there for decades. There’s still some more welding, fabricating and finishing touches needed on the barn and corral and we hope to complete everything by the end of April. Best wishes to everyone during this unusual time.
Keren James: In this time of self-isolation, my son, Gryffen, and I have set an intention to remain positive, stay active, and identify things at the end of each day for which we are grateful. In my free time, I am reading, learning new dance steps, working out, running with my dog, cooking, practicing yoga, playing games with my son, and introducing him to new movies. Gryff began remote schooling last week, and I am so grateful for his teacher’s efforts to continue his education in less than ideal circumstances. Having just ended their most academically intensive period of the year prior to the Shelter-in-Place order, this time of year is spent on Poetry, Music, Art, Latin, Maths, History, and Science. His teacher is also assigning Community projects so that the kids can learn some life skills and contribute to their households. Last week, Gryff learned how to clean his bathroom, and I am thrilled to say he will be taking on that household task going forward. He has also studied Andy Goldsworthy, and created an outdoor sculpture using items he found in our yard that he arranged in one of the fruit trees. I spend my days working remotely from home, and rotating shifts in the office with the rest of the team. Having worked remotely for several years when my son was small, the transition has been a smooth one, and I am so grateful to be of service to our clients during this time. I am grateful for the technology that allows us to continue our work and keeps us connected with and accessible to each of you and our loved ones near and far. My son and I end each day listening to Sir Patrick Stewart, who is reading one Shakespearean sonnet a day through his Twitter feed, watching Jimmy Fallon’s latest installment of The Tonight Show at Home, and reading the beloved books of my own childhood. I wish you all good health and look forward to seeing you in person on the other side of this.
Contessa Archuleta: It is heartening to see how people have come together here in Santa Fe during this time of chaos and hardship. I am thoroughly impressed with how our state and local leadership have handled the pandemic and the hard decisions they have made to help keep New Mexicans safe. We are fortunate to live in Santa Fe as we have vast amounts of space, trails and mountains to hike through, and ever present blue skies and sunshine to lift our spirits. I would like to thank the people on the front lines who are risking their health and families’ health to aid others through this process, my children’s school administrators and teachers who are working very hard to prepare online learning instruction so that children can continue to learn and grow, and my family for working together in adjusting our routines and lives so that we can remain safe and healthy. I am looking forward to spending time again (soon we hope) with my parents, siblings, friends, and visiting face-to-face with our clients.
Anthony Penner: I hope this commentary finds you all well. As for my family and I, we are happy to report everyone is good and healthy. Like everyone else we continue to Social Distance from home, working and conducting daily schooling for our daughter. It certainly was an adjustment at first, but we now maintain a daily schedule which seems to be working. Our daughter has been a great support through it all, keeping up with her learning and helping out with the daily chores. Since this all began, our house has never been cleaner, the laundry so up to date, and we are now almost all caught up on those streaming series we always seem to have fallen behind on. We look forward to warmer weather and less winds to start cleaning up the backyard and spending more time outside. I wish everyone well and please send over any streaming recommendations you have. I look forward to seeing you all in person sometime in the near future.
Elizabeth Hook: It has been an adventure the past few months as our 16 month old daughter started walking. We seem to always be in constant motion tracking her and her 4 year old brother and never lack for exercise. Our kitchen is also in constant turnover as we try new recipes and cook meals from my grandmother’s recipe box. During the weekends, we continue to work on home projects and are finding great reward in having time at home in order to accomplish the many tasks and projects that home ownership brings. We have also been very grateful for technology and the ability to keep in touch with family and friends via video conferencing and the wealth of activities for little ones that the internet brings. I wish you all health and happiness during this time.
Please join us for our quarterly audio gathering to discuss economic and market related events on Thursday, June 18th, from 2:30 p.m. to 4:00 p.m. (MT).