Joel Ross

Friday, February 28, 2020 9:58 AM

Subject: Ross Rant Feb 28

This is the ultimate black swan event. It has suddenly taken on a life of its own. I cannot recall anything like this since 9-11. It is clear now that the EU is going to be in recession very soon. What happens in the US is unclear, but I believe we will not go into recession and by April things will calm down if not sooner. We are in peak irrational fear mode now.

However, the administration is going all out before this becomes a major US problem. We are well ahead of the curve this time. Supply chains seem to be getting adjusted, and Apple has reopened plants in China, and Starbucks has reopened stores. That is a very helpful sign. What is the huge unknown now is how will US consumers react. Clearly there will be big hits to travel and malls, but online shopping might make up a lot of the deficit in retail sales.

My concern is the more there is talk of recession, the more consumers pull back and save, and not spend. That can become a cascading effect. The psychology really shifted in the past couple of days since the CDC made its announcement that there will be virus spread in the US and they scared everyone. Maybe they had to in order to get attention and action, but it is having a bad psychological impact. Until they announce minimal cases here and nil new ones, and a vaccine and effective treatment protocol, there will continue to be fear.

I even have some very sophisticated friends who have no problem taking risks, who are considering not flying domestically even for business. I am happy to be here on Longboat Key -a small island with mainly US and Canadian visitors. There are no Chinese, Iranian nor Italians coming here now. While there are numerous workers coming on and off, they are all local people.

Keep in mind that almost nobody dies of this if properly treated. The quarantined people are now starting to be released to go home. Deaths from flu are much higher, although as a percentage of people infected, it is lower. It seems that deaths mainly hit people who are already at risk from other things and are old.

Keep your head when all about you are losing theirs. Good advice in the current panic. In my view, the panic in financial markets is now overdone. It is just feeding on itself. Likely the selling has been greatly accelerated by the algo programs that react instantly to news, and then as the market drops the computers pile on automatically with no human intervention to say, wait a minute, let’s think first.

There was also a lot of over leverage by PE funds and others who borrow then make short term loans at big spreads. It is my understanding that many of these players had to unwind positions as the market dropped and as treasuries moved rapidly. We once had a uptick rule which was designed to slow short selling in panic markets such as this. It was eliminated in 2007, which now allows the algo funds to run wild and drive stock prices far lower than they might otherwise be.

Maybe the SEC will consider reimposing some sort of rule to get better control. I have no idea. The other problem is there are now technical triggers built into the system that force funds to sell when certain technical hurdles are hit, regardless of whether it makes sense. They sell, the algos then get triggered and sell more.

At some point soon major companies will step up stock buybacks at these prices, and the aggressive traders will step in and start to buy in large numbers. Once there is news that the virus is not spreading in the US in any material way, that a vaccine and treatment protocol have been developed, and the infection is receding, as it is in China now, things will calm down.

At some point, depending on how long this goes on and how impactful it is, the markets will move upward again, and at that point it could move up quite a bit. The big question is will there be a recession as a result of this, and nobody really knows yet. I think not. Now is the time to be going in, not out.

As a long term investor I am sitting still and just waiting it out. This too will pass and at some point the market will recover. Once the market starts to move up with strength, it may move up very fast as traders and others jump in to grab the low stock prices. We could possibly see a V rally. That is why I am staying invested.

Central banks and the bond market are acting to offset the panic reaction. The Fed will lower rates in two weeks, but only to avoid a lot of negative abuse. It will have no economic impact, but it will make markets feel better. With the ten year around 1.1% -1.2%, lower Fed rates do not impact anything much.

The US economy continues OK. Now there is total uncertainty on the demand side, but for the moment business continues to move along. There will be some disruptions to supply chains, but most of China is not impacted directly by the virus. Factories are slowly getting back to work in areas outside Wuhan. Apple has reopened all its factories and is ramping back up. Not all Chinese products are stopped. The government is working to get factories reopened as fast as possible.

Many US companies dependent on Chinese supply chains have enough inventory on hand, or already on the water to get by for a while due to preparing for the usual Chinese New Year shut down, so it is not as though US companies are already shutting down for lack of inventory. Likely some production in the US will be impacted for a while, but most US producers do not depend on China, and a lot had already moved out some, or all, of their China production due to tariffs and the higher cost of production in China vs other SE Asia locations.

You need to keep things in perspective. We don’t yet know how much disruption there will be, but it is not likely to be as big as some are now projecting.  Even if it is more, it will not be permanent, and will get made up as supply chains are moved and as Chinese factories go on overtime to refill the pipeline. The ones who will hurt most are hotels, airlines and restaurants. Shopping will just go more online. Streaming will increase.

The economic impact is impossible to predict right now, until we see if the US is really having virus breakouts.

Things will return to normal in the US pretty quickly once the CDC can announce there are not a rash of new cases, and that they have things well under control. The major impact will remain on travel, and that will be for much of the year.

I am probably typical. I was planning two major trips to Europe this year. For now I am on hold, not booking until I know where and when it is safe to go. Tourism in Paris is already down 40% or more. The airlines and hotels are going to get crushed this year.

The CDC in my view over stated the potential problem for the US, but that is their job to get everyone to really pay attention and do the things that will prevent spread of the problem. I think they could have issued the same alerts for preparedness without the same dire warnings which have scared the hell out of everyone.

Trump did the right thing with the news conference, and the Dems need to cooperate and not politicize with stupid press releases. The US healthcare system is very well prepared and on very high alert. Anyone with anything like virus symptoms will be dealt with immediately. Reality is there are only sixteen cases in the whole US, 15 of which were from returnees from China who were immediately quarantined, including two of those were because of a spouse returning from Wuhan and were dealt with instantly .

The only odd one is the new one in CA, and we don’t yet know what that story is. The rest of those are from the cruise liner and the flights to bring out Americans, and all of those people are in quarantine. So far, except the one case, nothing has happened in the US, and the warnings have stopped travel to China and other places like Milan.

Meantime a bunch of people died from flu yesterday, but that is over looked. This too will pass, and life will return to normal. China is the place where real damage is being done, and that will be permanent as companies race to move supply chains. American companies will find ways to solve supply chain problems and they will be fine, but China will get hurt pretty badly.

In the meantime, rates are at historic lows which is great for housing and for companies supplying the renovation market. The huge shortage in lower and moderate cost housing will drive construction for the next 2-3 years, and that drives a good piece of the economy.

New home sales are skyrocketing. This will not change for well into next year or even much longer. People who buy houses also buy furniture, supplies, and all sorts of things for their new home. As jobs remain solid and wages rise, there will be more spending on these items. Even if people rent, they need all of these items to set up a household.

Note that 38% of all homeowners now are single. That is a big change from the past and will push household formations even more. Low rates are also great for companies in general as well as consumers. The after tax cost of capital for companies, and for real estate projects is now close to nil.

The aggregate reduction in borrowing costs will add billions to profits and cash flow, and partly offset any declines due to the virus. More ability to raise wages and expand. This is more fuel to keep economic growth going into next year. The stock market will rebound and over time get back to over 29,000, and 3400 on the S&P, or more. Time to be a buyer.

Now oil is below $46, and that is two sided. Great for consumers, bad for drillers and refiners. The lower the demand for travel, the less oil use, the lower the price. Some frackers are going to be in trouble and will need some modifications for their debt to get through this period. Demand is simply collapsing as jets are not flying and travel is drying up to many parts of the world. However, as production is cut, prices of oil and gas will rise again into the fifties.

Bernie, of course, claims the booming economy is only helping the top 1%.

That is absurd, and simply false, as I have pointed out several times in the Rant. In fact, the country has never been doing as well as it is now, and the lower income cohorts have never done anywhere near as well.

Just look anywhere in nature on the planet. There are bosses and dominant leaders, and others are left behind the herd. Whether it is lions, elephants, buffalo, or monkeys or humans, there is a dominant, smarter, more aggressive leader, and there are weak ones who are killed off, or left behind. That is how nature works.

Survival of the fittest. The basic rule of nature. It is no different for the workforce. Some people are smart and aggressive, and get wealthy, and some are born dumb or lazy and fall behind. Some can jump and dunk the ball, and some can’t even reach the basket. It does not mean we should buy a ladder for everyone so they can also dunk the ball. When they get off the ladder they still can’t sink the shot.

The last three years has done more to raise people out of poverty, and to get them employed, than at any time in history. Raising taxes and giving supposedly free everything just destroys economies. The left just ignores history. Some people will always struggle.

If we look at tax burdens, the US has the most fair and progressive tax schedule of any country. It is true that some, like Gates and Buffet, pay very low taxes, but that is due to their massive charitable donations. If they were to add donations to taxes, the wealthy would be paying vastly more than their fair share toward the greater good of the community of man.

In fact, in many cases, the combined annual cash outflow is greater than the annual taxable income for some, as they are giving away wealth created over many years. As I have advocated, it is a far more efficient use of capital to let the rich donate and direct the use of the funds, than to divert that same capital to taxes to be wasted by Congress.

The top 10% in the US pays 45% of all taxes vs 28% in France and only 27% in Sweden-two high tax countries. The top 1% in the US pays 219 times as much in total taxes as the bottom 20%. The top .1% pays 482 times as much in total taxes as the bottom 20%. And none of those numbers includes charitable contributions.

The Dem debates have sunk to a new low of eight year olds yelling at each other in the school yard to get in the last word. They looked ridiculous. Looks like a brat waving her hands to get called on. Bloomberg looked better but not good. The attacks on Bernie were not effective because the others are also pushing some of the same policies, and even Bloomberg seemed not able to pull together an effective blast to blow apart socialism and government run insurance.

Trump will tear him apart. Bernie loves to talk about only billionaires are doing well but Trump can site facts that put that as a lie. Voters know they have solid jobs, lower taxes and no inflation with rising wages, despite what Bernie says.

An independent analysis of Bernie’s plans shows the US economy would collapse and the people he thinks he will help would be vastly worse off and unemployed. It is a fact over history that when governments run an industry or anything, and profit is not the motivator, then costs and inefficiency climb precipitously.

Just look at the Soviet system before it collapsed or state owned companies in China today. Or state run oil companies in Mexico, Venezuela and Brazil where corruption is rampant and production fell apart. Bernie’s backers just do not want to look at facts. And economic history.

The Asian students law suit against Harvard is progressing in the appeal court. An amicus brief has been filed by DOJ stating that the procedure used by Harvard is illegal in 45% of the diversity admissions for blacks.

Another amicus brief has been filed by a prominent professor along similar lines. This case represents a potential landmark case ending race as a criteria for admission and for admitting one group at the expense of another- in this case Asians.

Clearly Harvard, and many other schools do discriminate against whites and Asians and admit blacks and Latinos who do not qualify otherwise. It is why the schools want to eliminate SAT scores which are race neutral. If there are no objective test scores then the school is free to allege they use a holistic admissions approach which is much harder to claim is discriminatory.

Keep your eye out for the appeal of the Harvard case. It will not get decided for a while then will go to the Supreme Court. By the time it reaches there for hearing could be another year or longer so it is probable Ginsberg will have been replace by the time the case gets there.

kommonsentsjane