There are so many things happening at once and there are so many messages to share that this Perspective may bounce around a bit. With that warning out of the way, let me go to my first thought…
With yet another potentially record-breaking day of pain at hand, there is a small comfort. The end of bear markets are marked by capitulation – a sudden wash of irrational selling. Last Thursday and today appear to be just that, and this should mean we are close to the end. Of course, this situation is unique in that it has been brought about by a health crisis and not any underlying economic issue, but nonetheless, we appear to be forming a bottom.
The speed of the rebound is usually similar to the speed of the downturn. Obviously there are no guarantees when trying to predict the future, but historically that has held true, and it certainly makes sense in this case as the underlying economy was strong heading into the Covid-19 crisis.
This crisis is causing a great deal of pain in the markets, but it exists outside the market, and this led to my second thought. Over the last two weeks, I have heard many pundits talk about a lack of leadership out of Washington. As with most political talk it has been colored by the source’s political leanings. I’m not going to get into that swamp; we can all make our feelings known soon enough this November. No, there was something more that I noticed in the midst of all this talk: most of America has voluntarily taken action.
It reminded me of a story about Hendrick Kraemer, a Dutch missionary. He was in his home of Holland as World War II broke out. The Gestapo was rounding up Jews and sending them off to concentration camps. Late one night, a group from his community came to Hendrick for advice on how they should react. He told them, “I am not going to tell you what to do, but I will tell you who you are. If you know who you are, then you will know what to do.” That night, the Dutch Resistance was born.
Well, we are America, and perhaps no one has ever described us better than Alexis de Tocqueville in his work, Democracy in America. “Americans of all ages, all conditions, all minds constantly unite.” He went on to say, “Americans use associations to give fetes, to found seminaries, to build inns, to raise churches, to distribute books…in this manner they create hospitals, prisons, schools….Everywhere that, at the head of a new undertaking, you see government in France and a great lord in England, count on it you will perceive an association in the United States.”
Almost 200 years after Tocqueville wrote about the miracle that is the United States of America, the NCAA did not need “leadership” to decide to cancel their number-one source of revenue. The NBA did not have to be commanded to suspend their season, countless businesses and associations did not wait to be told to postpone or cancel their gatherings. If you know who you are then you know what to do, and we are America. While this time may be scary for numerous reasons, it is also a reflection of who we are. One of my colleagues from a board I serve on said it best last week, “We are all coming together by staying six feet apart.”
Having said that, my next thought does go to the government reaction, namely the Federal Reserve, who over the weekend lowered the Fed funds rate by a full percent and announced the beginning of a new round of quantitative easing. The market reaction was negative, to say the least. This is not leadership; this smacks of panic, and that is exactly what the market sensed.
This leads me to my final thought. Humankind always seems to make its biggest messes when we try to defy nature. This whole crisis is a reminder that it isn’t natural to live free of diseases. It begs the question: by trying to eradicate every threat, are we actually creating stronger threats? I’m not a doctor so I have no idea, but it does seem like this is true with economics. It is not natural to live without periodic recession, and it seems that by doing all in its power to avoid the inevitable, the Fed may be causing stronger downturns.
Cutting rates won’t help solve a medical crisis. All the Fed is likely to have done is plant the seeds for some unintended consequences a decade from now. I hope I’m wrong, but sometimes the best way to lead is to just get out of the way. After all, this is America, the land of the free and the home of the brave. With freedom comes responsibility, which we have seen from the private sector. We will bravely face this crisis like every crisis that came before. We know who we are, and we know what to do; at least that is my perspective.
Chuck Osborne, CFA