Beyond The Headlines

Bring out the towels

March 18, 2020 | François Sicart
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Warren Buffett has famously quipped that we only find out who has been swimming naked when the tide goes out. During the spectacular bull market since 2009, many “professionals” and people relying on their advice have insisted that we at Sicart were holding too much cash in our accounts. Our guess is that many naked swimmers who followed their advice are now beginning to sell shares indiscriminately, prompted either by panic or lack of liquidity. Nothing new there: this is what typically happens after periods of greed, thoughtless complacency, or fear of missing out in a rising market.

In our view, the Coronavirus epidemic was not directly responsible for the recent upheaval: for a while, the stock market had been looking like a bug in search of a windshield. Following Minsky’s hypothesis, we believe that financial corrections and crashes do not need a proximate cause in order to happen: in free markets, there is a natural tendency for investors and business people to oscillate between periods of excessive optimistic risk-taking and periods of fear-driven financial timidity or retreat.

Famous Keynesian economist Paul Samuelson used to joke that the stock market had predicted nine of the past five recessions. Nevertheless, it has now become clear that the Coronavirus crisis will transform whatever financial correction we might have suffered spontaneously into an economic recession.

We have lived through a dozen-odd bear markets since the1960s. Most have caused losses equivalent to the current decline of around 25% from the stock market high in February. But a few suffered larger and/or more extended losses, notably:

36% in 1968-1970 in 18 months

50% in 1973-1974 in 21 months

28% in 1980-1982 in 21 months interrupted by an energy-related spike in 1981

34% in 1987 in only 3 months

49%% in 2000-2002 in 30 months

56% in 2007-2009 in 17 months

(Sources: Global Financial Data; research)

 As it happens, though I certainly do not accept responsibility for these setbacks, I witnessed all of them as a concerned investment professional. Except for the flash crash of 1987, all were accompanied or preceded by economic recessions. This is why I mentioned in my previous paper that bear markets associated with economic recessions tend to dig deeper and last longer than those resulting from a mere correction of asset price due to a change in the investing crowd’s psychology.

At the moment, enough damage has already been done to all industries that benefited from the world’s globalization (including labor-intensive airlines, shipping, hotels and restaurants, tourism and leisure activities, as well as products resulting from complex and far-reaching supply chains, such as electronics) to all but ensure a recessionary environment for at least the balance of 2020. GDP will slow or temporarily decline and, in all likelihood, so will profit margins and corporate earnings.

To counterbalance these considerations, it is now clear that, in a more or less coordinated manner, most major economies are in the process of devising and beginning to implement very strong measures to halt the progress of the Coronavirus and mitigate the impact of the pandemic on employment and living standards.

As usual, the sequence of events will determine the extent and shape of the damage or the success of these countervailing measures. My guess is that the progress of the virus and of the market correction will initially be faster than the benefits of any fiscal stimulus, especially where infrastructure projects are contemplated. So it is likely that we will see statistics of declining economic activity before the main benefits of the planned stimulus programs are fully visible.

Between the heightened market volatility and the sharp losses of the past couple of weeks, it is tempting for contrarian/value investors like ourselves to use the near-panic to buy more aggressively. As I mentioned last week (, we have already used the first, emotional phase of the decline to put a portion of our cash reserves to work by adding to some existing positions and starting a few new ones. The main idea was to wait for confirmation of an economic recession, assuming that (as they often have in the past) it might drive the markets lower and create even better buying opportunities.

Besides confirmation of an economic recession, the other signal I would like to see is a much bigger correction of the FANG-related indexes (Facebook, Apple, Netflix, Google and a few others). These bull market favorites, after driving the overall market higher for a few years, have participated in the most recent decline, but not to the extent that previous bull market favorites did after reaching greatly overvalued prices.

As panic spreads, however, it will probably put disproportionate pressure on stocks that account for a large proportion of major indexes: the mutual funds or exchange-traded funds that own large positions in these index stocks will have to sell them as the funds are liquidated by hard-pressed, overextended investors.

Things may have moved a little too fast for comfort, but major investment opportunities seem to be coming closer and closer.


François Sicart – March 18, 2020

The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

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