10 Million Unemployed Is Nobody’s Fault

Here are some things I’m thinking about now.

WORLD / CULTURE

Do masks prevent sickness? A coronavirus guide on what to do (and not do) to stay healthy: https://www.nbcnews.com/think/opinion/do-masks-prevent-sickness-coronavirus-guide-what-do-not-do-ncna1154641

“…every public health official and organization has been saying there is no need to wear a mask if you’re a healthy, uninfected person.

It’s much more likely that you would get the disease through your hands. You shake the hand of someone infected or touch something that person has contaminated with the virus, then you touch your eyes, mouth or nose, and voilà, you can become infected. That explains why, along with telling you not to bother with the masks, the same public health officials and agencies are shouting at you to wash your hands and stop touching your face.

What are masks good for, then? First, they are crucial for people who have the disease. Remember those drops of saliva? Wearing a mask if you’re sick can help catch a large number of them, greatly reducing the amount of virus that gets into the environment or onto other people.”  

I find any recommendation not to wear masks as the default during this crisis, dubious. I have been wearing surgical masks and latex gloves whenever I have gone out to the grocery store or gas station and discard them before I return to my car. These items are remnants of a time we will come to know as BQ – Before Quarantine. When you have a preschooler in the house, they’re bound to bring home all kinds of cooties. We have made regular use of these items to protect each other from passing illnesses back and forth. I’ve also made regular use of hand sanitizer and wash my hands frequently.

Experts have repeatedly said that the incubation period for COVID-19 can be as long as 14 days (https://www.ncbi.nlm.nih.gov/pubmed/32150748) and many will be asymptomatic during most of that period. Doesn’t it make sense then that as a precaution, we all assume we are infected, and we wear a mask not to protect ourselves, but to protect others potentially? The “expert” opinion here seems to have some holes in it.

Oh, wait a minute, there might an expert that agrees with me…

Should We All Be Wearing Masks In Public? Health Experts Revisit The Question: https://www.npr.org/sections/health-shots/2020/03/31/824560471/should-we-all-be-wearing-masks-in-public-health-experts-revisit-the-question

“Wearing a mask is ‘an additional layer of protection for those who have to go out,’ former FDA Commissioner Scott Gottlieb told NPR in an interview… ‘Face masks will be most effective at slowing the spread of SARS-CoV-2 if they are widely used, because they may help prevent people who are asymptomatically infected from transmitting the disease unknowingly,’ Gottlieb wrote. Gottlieb points to South Korea and Hong Kong — two places that were shown to manage their outbreaks successfully and where face masks are used widely.”

All this business about whether to wear a mask or not underscores how difficult it is for people, even experts in a particular discipline, to asses risk.

Why the Human Brain Is a Poor Judge of Risk: https://www.wired.com/2007/03/security-matters0322/

It seems we are bad at analyzing risk because our brain is at war with itself.

“So here’s the first fundamental problem: We have two systems for reacting to risk – a primitive intuitive system and a more advanced analytic system – and they’re operating in parallel.”

The fight or flight parts of our brains are both activated in times when we need to make decisions, sometimes life and death decisions. The more rational and reasoned part of our brains – the neocortex – are newer evolutionarily, and often loses the battle with the older, more emotional, and reactionary part of our brains – the amygdala. Here’s a good paragraph from the article,

“People are not computers. We don’t evaluate security trade-offs mathematically, by examining the relative probabilities of different events. Instead, we have shortcuts, rules of thumb, stereotypes and biases – generally known as ‘heuristics.’ These heuristics affect how we think about risks, how we evaluate the probability of future events, how we consider costs, and how we make trade-offs. We have ways of generating close-to-optimal answers quickly with limited cognitive capabilities.”

Could it be that a good investor will have a more developed neocortex or a less invasive amygdala than most of us? Perhaps this allows her to navigate potential heuristics to her advantage, the same ones we lean on but are often wrong. Rules of thumb have their place though. They can allow us to make decisions faster. Heuristics might also help with the low-consequence decisions we all need to make every day, which even if wrong, aren’t worth deep time-consuming analysis we would give other more consequential decisions.

One rule of thumb that seems pretty solid is, don’t own lions and tigers as pets…

Netflix’s Tiger King Is the Only Show Crazier Than the World Outside Right Now: https://slate.com/culture/2020/03/netflix-tiger-king-review-joe-exotic-documentary.html

The story of Joe Exotic is, to put it mildly, wild (no pun intended). SPOILER ALERT. Joe Exotic was the P.T. Barnum of big cats and other dangerous animals on a roadside zoo in Oklahoma. I am only half into the second episode. The entire time watching that episode-and-a-half I felt a little pang of anxiety, feeling that any moment, someone was going to lose an arm or worse. I didn’t have to wait long. Joe and the workers at his zoo have proven to be bad at risk assessment. Definitely worth your “Netflix & Quarantine” time.

ECONOMY

U.S. Weekly Jobless Claims Soar to Record 3.28 Million: https://www.reuters.com/article/us-health-coronavirus-usa-unemployment/u-s-weekly-jobless-claims-surge-to-record-3-28-million-idUSKBN21D1WJ

“Initial claims for unemployment benefits rose 3.00 million to a seasonally adjusted 3.28 million in the week ending March 21, eclipsing the previous record of 695,000 set in 1982, the Labor Department said. That also dwarfed the peak of 665,000 in applications during the 2007-2009 recession, during which 8.7 million jobs were lost.”

[UPDATE APRIL 2] A Widening Toll on Jobs: ‘This Thing Is Going to Come for Us All’: https://www.nytimes.com/2020/04/02/business/economy/coronavirus-unemployment-claims.html

“More than 6.6 million people filed new claims for unemployment benefits last week, the Labor Department said Thursday, setting a grim record for the second straight week.

The latest claims brought the two-week total to nearly 10 million.”

Criticism has been levied at the Trump administration for its role in the tsunami of layoffs associated with COVID-19. It’s initial denial that a problem existed in the first place and it’s slow and tepid response hence, may have exacerbated these unemployment numbers, critics say (https://www.washingtonpost.com/opinions/2020/03/27/just-how-relevant-are-3-million-unemployment-claims/).

Trump has said the staggering number of jobless claims is “nobody’s fault”. (https://www.youtube.com/watch?v=u4IqW1ehn-E ) He also said the impeachment distracted him from fighting the coronavirus (https://www.usatoday.com/story/news/politics/2020/03/31/coronavirus-trump-says-impeachment-distracted-him-coronavirus/5100694002/). Yet, in May 2018, Rear Adm. Timothy Ziemer abruptly departed from his post leading the global health security team on the National Security Council amid a reorganization of the council by then-National Security Advisor John Bolton. And a timeline of events relating to what the administration knew and when it knew it suggests it had ample time to form a response short of a nationwide shut down of businesses and schools (https://www.nbcnews.com/politics/donald-trump/timeline-trump-administration-s-response-coronavirus-n1162206).

In an interview with CBS Sunday Morning, Bill Gates reluctant to criticize the administration directly (Bill realizes certain criticism at this point isn’t really useful), said that a coordinated and timely response, specifically with testing and having kept the aforementioned health team intact, would have all but eliminated the need for the massive social distancing we have now. He cites Taiwan’s response as an exemplar.  (https://www.cbsnews.com/news/coronavirus-microsoft-founder-bill-gates-federal-order-social-isolation-combat-pandemic/)

All this is only interesting in terms of how the administration will respond to pressure and criticism going forward. Will there be more relief packages down the line? Or is the $2 trillion CARES bill a one and done. It interesting to see the difference in this administration’s response to this pandemic versus a previous administration’s response to the financial crisis. The Bush administration at first seemed very adamant to stick to laissez-faire principles and was very reluctant to provide direct monetary assistance to individuals. The Trump administration seems more fluid in its loyalty to a specific economic principle. Laissez-faire conservatives when things are going well but democratic socialists when its time to save the economy and help people. This fluidity is probably good for investors though. The administration seems to prioritize the stock market’s approval, and the stock market, as ironic as it may be, seems to favor a Bernie-Bro-like approach in a time of crisis.

MARKET

Dow average suffers worst quarter since 1987: https://www.dailyherald.com/business/20200331/dow-average-suffers-worst-quarter-since-1987

“The blue-chip index [the Dow Jones Industrials] tumbled 23% in the three months, closing the session with a 1.8% drop. The S&P 500 fared little better, even after a furious, weeklong 17% rally that halted Tuesday. [The S&P 500 Total Return Index was down 20% in the quarter, the most since the quarter ending December 2008.] The Nasdaq 100 fell least among major indexes, as dip-buyers targeted the cash-rich tech megacaps that make up its core. The Russell 2000 plunged 31% in the quarter, the most in data going back to 1979.” (notes added)

PORTFOLIO

We just ended a very volatile quarter and I want to take the time to emphasize a point you’ve undoubtedly heard from me before: investing is a long-term process. What happens in the immediate term is both unpredictable and, in some ways, irrelevant.

Let me illustrate this using, with permission, the recent results in a client’s portfolio invested in the Core strategy. This client’s results may be slightly different from other clients’ portfolios due to many factors but not materially so. Therefore, this portfolio is a good proxy for the results of all clients invested similarly and accounts for fees typically incurred over the same period.

 YTD Period Ending March 23, 2020
Total Return
Core (net of fees)-10.0%
S&P 500 TR-19.6%
Excess Return (+/-) vs S&P9.6%
Russell 2000 TR-30.6%
Excess Return (+/-) vs Russell20.6%

The S&P 500 Total Return Index topped out at 6,886 on February 19th and in record time bottomed (albeit it could go even lower) at 4,559 on March 23rd for a peak-to-trough decline of -33.8%, an official bear market. During the first quarter of 2020, the market was up as much as 5.1%. By the end of the quarter, the S&P 500 TR had a decline of -19.6%. This represents the worst quarterly performance of the S&P since the quarter ending December 2008 amid the financial crisis. The small-cap Russell 2000 Total Return Index was even harder hit. It had its worst quarter ever with a decline for the quarter of -30.6%

Over that same time, the Core portfolio was up as much as 10.7% by February 19th, then subsequently had a peak-to-trough decline of -25.6%. It ended the quarter with a return of -10.0%. We can take small solace the Core outperformed the S&P for the quarter by +9.6%.

These results may sting and the environment in which they were delivered may be interesting, I think it more meaningful to look at the five years that ended on March 23rd.

5 Year Period Ending March 23, 2020
Total ReturnAnnualized Return$250,000 Becomes
Core (net of fees)99.9%14.9%$499,700
S&P 500 TR17.8%3.3%$294,500
Excess Return (+/-) vs S&P82.1%11.5%
Russell 2000 TR-15.0%-3.2%$212,600
Excess Return (+/-) vs Russell114.8%18.0%

In the 5-year period ending on March 23rd, the S&P 500 had a total return of 17.8%. This amounted to an annualized return of 3.3% over the period. By comparison, the iShares Barclay’s 7-10 Year Treasury Bond ETF had an annualized return of 4.1% over the same 5-year period. An investment of $250,000 in the S&P 500 would have resulted in a gain of $44,500.

The takeaway here is that although the market failed to perform at its historical average annual rate of return of about 9.5%, it still offered up a profit over the 5-year period. A profit above the rate of inflation which was about 2% per year and ahead of what an investor might have gotten in a money market fund or savings account even though this period concluded with a bear market. Meaning, even when the environment isn’t ideal, investing in stocks and sticking with it likely worth the risk.

My client’s portfolio (the Core strategy), in the same environment concluding in a bear market, did better than inch past inflation. In the 5-year period ending on March 23rd, the Core portfolio had a total return of 99.9% equaling an annualized 14.9% over the period. Thus, a $250,000 investment in the Core strategy resulted in a near doubling of the initial investment with a profit of $249,700.

I will delve into this more in my quarterly letter to clients but during that 5-year period, the Core portfolio had four peak-to-trough declines of -10% or more and three peak-to-trough declines of -20%. Had the reaction to any one of those declines been to liquidate the portfolio and go straight to cash, my client would likely not have enjoyed a doubling of his (or her) money over the period.

We may never be exactly the same after COVID-19 is long gone, but markets recover. It pays to have a long-term mindset when it comes to your investment dollars and save your short-term time, mental, and emotional energy on keeping you, your family, and your neighbors safe. Stay home and wash your hands.

Sincerely,

Ben

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