Now is the time to panic
I find a little disturbing that some financial analysts are building “buy equity stories” based on limited knowledge: Fundamental analysis (financial valuations) and technical analysis (by looking at the charts), while completely ignoring the elephant in the room #Coronavid-19. As Daniel Kahneman once wrote: “When faced with a difficult question, we often answer an easier one instead, usually without noticing the substitution.”
Yes, stocks are technically oversold, and valuations are cheaper than they were a week ago, that’s observable. But without a plausible explanation of how #Covid-19 is ultimately defeated buying equities just because they were lower than a week ago seems like a fragile investment strategy that completely ignores why the selloff started in the first place.
Most analysts seem to rely on three arguments for this:
- The virus is not such a big deal because there’s a 98% survival probability (downplaying the threat).
- Using Ebola and H5N1 scares as proxies.
- Hoping the virus will be contained (somehow).
Yet every day, I see and read evidence of none of that being true. Because a 2% mortality rate is enormous, given a sizeable infected population (definitely more than the flu) and the secondary effects of acquiring the virus are mostly unknown. Ebola and H5N1 are no longer valid proxies since they never infected so many people, and while hoping that the virus will be contained is still a viable option, the recent cases in Italy, Iran, and the USA suggest the opposite.
Wall Street has grown used to the type of conflicts that are born within finance and/or geopolitics. For those, there’s a special recipe, and that is of central banks restoring trust trough interest rates cuts and liquidity injections. And for the geopolitical type, the usual solutions are sanctions and a display of your shining guns at your enemies. None of that helps here, even if all market participants decided to buy equities, which they might, #Coronavid-19 would not go away.
Let me be clear; the virus is not conscious of the S&P500, 200 days moving average, or if the VIX (volatility index) is too high.
Whether to buy or not is a super hard question to answer because nobody can even imagine a world with 40% - 70% of the World population infected by #Coronavid-19, as suggested by Harvard’s epidemiologist Marc Lipsitch.
With these numbers, I dare anyone to say again that the flu kills more people. Even the highest estimated number of 646,000 deaths per year by the flu looks pretty small to 62.4 million if 40% of the world population were to acquire #Coronavid-19.
Only WWII had so many deaths (70–85 million). We can only imagine how the economy could function, if at all, with such disruption. And as Nassim Taleb recently pointed out is not that simple, there are other things to consider when a pandemic like this strikes:
But there’s hope
Of course, but panic is needed, politicians don’t like that and there’s a lot of people asking exactly the opposite, to remain calm.
Panic and fear are natural responses to uncertainty, and there are two types of uncertain situations those you can safely ignore like being struck by lightning, yes you can take certain precautions but it is so rare and non-multiplicative if you get struck by lightning it will most likely just mean the end of your existence. And those uncertain situations that not only target you but your entire group of homo-sapiens you call family and/or co-workers (I’m assuming you don’t want all of your co-workers dead). So even if you survive and you are proudly a part of the 98% club you are still helping the contagion chain to thrive. Again Taleb:
#Coronovid-19 is the type of uncertainty you should be worried about. And extreme measures must be implemented. China adopted seemingly extreme and laughable containment measures, we all secretly joked when China promised a new hospital in just10 days and wondered about the quality and implied overreaction by the authorities. But China is arguably the safest place to go because everyone else has been unexpectedly slow and less determined as the Chinese were to contain the virus.
“Everything we do before a pandemic will seem alarmist. Everything we do after will seem inadequate” -M. Leavitt, DHHS
Bottom line, and back to investments. While most of your investments should naturally be long term, the decision to invest now should be based on a sound understanding of a very different type of threat from the ones we are used to seeing in the market. You absolutely need to consider the possibility of a failed containment and the potential outcome for the investment markets, if and only if after such assessment you are happy with the exposure then, it might be the time to get back to the market.
- This is not financial advice,
- Full disclosure of my investment positions: short Put SPY 190 Jun 2020, long SPY, long UPWK, Cash and SHY=90% portfolio.
