Originally posted 01/07/2021
Where does one start when looking back on 2020? It seemed the year was off to a poor start when Kobe Bryant and his 13 year old daughter were tragically killed in a helicopter crash. The year continued to go downhill from there.
By the end of March we were all told to stay home two weeks to bend the curve, people were brawling over toilet paper, and COVID was spreading like wildfire in major U.S. cities. And of course, the US Stock Market fell about 34% in a matter of 5 weeks.
Throughout the year we all learned lessons about virology, what businesses are considered essential, and everything we previously took for granted.
I should remember 2020 quite well, it just ended about a week ago. Today, it seems we get a month’s worth a news every single day so it is hard to track every alarming story that comes out.
On February 29th, I was at a basketball game with 20,000 other people. Now it is a bit hard to imagine those types of events ever coming back. A few weeks later I was in a grocery store early on a Sunday morning and it seemed like half the shelves were empty. I saw a customer there wearing a mask, and was a bit alarmed at the site. Now, it’s rare to see anyone in public without one.
In late February I remember reading that Chinese car sales were down over 90% due to their economic lockdowns. Never in my life had I seen a number in the same universe as that, and the economic numbers that followed in America were consistent with the economic carnage experienced in China.
The United States went from 3.5% unemployment in late February to nearly 15% in April. Forget a recession, this was a Depression scenario. We had a week with nearly 7 million unemployment claims. Even during the Great Financial Crisis of 2008/2009, the unemployment rate only cracked 10% briefly, and we never saw a million claims in a week. Risk comes at your fast.
The world seemed to be falling apart, and the media feasted off the public’s fears. Famed Imperial College epidemiologist, Neil Ferguson, suggested 2.2 million Americans could die of COVID-19 and up to 510,000 Brits, if no restrictions were put into place. Familiar with Neil Ferguson’s prior work, I was surprised anyone was still listening to him. In 2005, he suggested up to 200 million people would die from the Bird Flu. The actual number ended up being 282. There will be more on his predictions in another post (he was permitted to resign from his job in 2020 after violating social distancing protocols to hook up with a married woman).
Suddenly we were all experiencing how fragile our system really is. Most of us have had an experience where life changes in the blink of an eye, but until COVID, not many of us have seen the entire world change so quickly.
Although the world seemed to be falling apart, I was hopeful that the much talked about “V-shaped” recovery would come to fruition and that many of those lost jobs were only temporarily lost.
Local, state, and federal tax receipts were all expected to be down quite sharply from the economic impact of the shutdowns. Yet, the government had to take action or else we would see a pretty bleak reality play out. Even though the two parties appear to hate one another quite a bit, the CARES act was passed with a Senate vote of 96-0 on March 25th.
Speaking technically, the phrase “helicopter money” is a monetary policy where the central bank makes direct payments to citizens. The United States did not engage in this type of activity, as stimulus checks came from the Treasury. BUT, it is well known that the treasury issues bonds that are purchased by the Federal Reserve Bank rather quickly, thus helping finance the direct payments to citizens.
The U.S. Government had to take action to help out their citizens. While I am no fan of bailing out companies that act irresponsibly and do not plan for bad times, when the government forcibly closes the doors to your business for an extended period, then stimulus is justified.
A short list of quick fiscal actions taken during the 2020 CARES ACT included:
There were plenty of other details in the 300 page bill, but these measures did assist in the financial situations of millions of Americans. The question everyone wants the answer to is, when will the bill come due?
Many of our leaders have shifted towards a modern monetary theory approach in the belief that budget deficits do not matter, and the national debt does not matter. They aren’t completely wrong, the nearly $28 trillion of outstanding debt never has to be paid off. The government can continue to borrow as long as there is demand for treasuries and inflation doesn’t spiral out of control. While the debt to GDP ratio is near an all-time high, the interest expense to GDP ratio is much lower today than the late 1980s (due to the substantial decline in interest rates).
The bill for the CARES Act and other programs/deficits may not come in the form of higher taxes, but in the form of inflation and your dollars being worth less. That is not a prediction, but a possible outcome. When more dollars are created, it makes existing dollars worth less. The cryptocurrency crowd seems to have a strong conviction in the devaluation of fiat currency.
People sometimes grow frustrated from my advice in regards to avoiding market timing. That’s how I know it’s good advice. If I always told people what they wanted to hear, they’d never be frustrated and I’d be doing a pretty poor job. You don’t hire a financial advisor to confirms all your existing fears and beliefs, but to bring objective stability and soundness to your long-term financial plan (End of commercial).
If one does feel compelled to make that dreadful sin of market timing, then I suggest a systematic strategy to do so or knowing your next moves in advance. “I have a gut feeling” is a horrible, and I mean horrible, approach to investing decisions. My advice to avoid market timing has served client’s well. As we saw last March, the Federal Reserve Bank and the Treasury now intervene quite quickly during a liquidity/economic crisis.
It is not my place nor my wish to make political commentary. What I think people found interesting though is that yesterday (January 6th) we saw a group of people invade the Capitol building, and the Dow Jones Index increased over 400 points on the day. This tweet below from author, Nassim Nicholas Taleb, sums it up well….
If someone had told you on 01/01/2020 everything that would play out from an economic and public health perspective during the year, I am convinced the actions you would have taken would have cost you a lot of missed returns. News doesn’t matter.
Creating an efficient portfolio does not have to involve any guesswork. Diversifying across unique sources of return that don’t all move in the same direction is a good way to do it. The way you know you have a well diversified portfolio is you always have an asset that you regret owning so much of, and one you wish you owned more of.
I suspect we’ll see some level of tax increases later this year on those making over $400k annually. There is a corporate tax increase on the table as well, but it would not shock me if that gets pushed aside for a few years.
Capitalism is the worst economic system, besides all of the others. Moderna had completed the development of the COVID-19 vaccine in two days, on 01/13/2020. This was a full week before the first confirmed US COVID case, and about a month before the first death. Moderna created a vaccine quicker than I can finalize a grocery list.
With the vaccine rolling out, we all hope life becomes more normal soon.
I was quite lucky in 2020. No one in my family became seriously ill during the year, my business was deemed essential, and I work with an incredible group of clients who didn’t run for the hills during the market chaos. For 2021, I hope to see more of you in person once again.
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