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Greetings from the Bunker

Gunther Kruger - Apr 06, 2020
Current conditions of the COVID-19 outbreak and how this is playing out.

Greetings from the Bunker



We continue to work from home as this seems to be the most rational thing to be doing. We are as ever fully functional and continue to operate on a business as usual basis. There is also a skeleton staff still being run in our physical office for any services that may be required from there.


Since our e-mail of March 26, much has continued to unfold and we thought it would be timely to share our thoughts with you as to how this is all unfolding.

Firstly with respect to Covid-19, lockdowns are continuing in Canada, the severity of which are increasing as the pandemic makes its way through society. In Canada, there are 11,746 confirmed cases of Covid-19 as I write this (April 3) and recorded deaths stand at 153 with numbers rising. The Ontario government has just released a statement that it expects deaths to rise to 1600 by the end of April. We will touch on this number later.


Secondly, with respect to the economic impact of the Covid-19 shutdown, we would like to point out that this is a shutdown, not a slowdown. Goldman Sachs is now predicting an 8% Q1 and a 35% Q2 contraction in US GDP followed by a sharp snap back in Q3. Q2 ends on June 30th. They are now predicting an overall decline in US GDP for all of 2020 @ -6.2% YOY and these forecasts are worse (and worsening?) than originally estimated. We focus on the US because it will be the US juggernaut that will be the first to respond to the anticipated victory over the Virus.


The entire global economy continues to find itself in unchartered territory. No one really knows how long it will take to “flatten the Covid-19 curve”. The much vaunted “15 day” campaign in the US is now a 45 day campaign. In Germany, where they have a surplus of ICU beds and a 1% death rate they are talking about an April 20th ease of lockdown conditions. Gunther is biased but he trusts what the Germans say and do. In Sweden anything goes and they have followed an entirely different model than their counterparts. Life is very normal in Sweden right now. To a great extent this is a learning curve for many government and health officials. It is clear to us that this is an exercise in saving lives and ensuring that existing healthcare facilities are not overrun and our hats go off to the frontline people and first responders who are valiantly risking their lives.


Some of the “news” that we see is incredulous. We read last week that the US non farm payroll numbers showed a loss of 700,000 jobs taking the US jobless rate to 4.2%. We also know that this figure is outdated and now laughable since we also know that 10MM jobless claims have been filed over the past few weeks. In Canada we have heard of 500 - 1MM EI claims in the past two weeks. Unemployment rates will likely reach 20%+ in short order. We read another article that lamented that real estate showings were down in the greater Toronto area and that they expecting a 30% slowdown in sales. Really? Who is buying and selling houses in this? We would have expected it to be 0 at this time. None of this is surprising since our economies are in shutdown mode.


At some point in the not too distant future, societies will need to make a cold calculation. And that calculation will be: does it continue to make sense to freeze economies and affect millions of peoples’ livelihoods and their futures? Ontario’s GDP for 2018 was $730B. By the end of April Ontario’s projected death toll is 1,600. Is the cure, as currently prescribed, worse than the disease? Or do we run the risk of easing restrictions and infecting millions more? Is there some middle ground? As time goes by and the wave is crested, the correct choice will need to be (hopefully) for the lesser of two or more evils, whatever that proves to be. The US Government has given it’s population and business community a 2-3 month lifeline to work through the crisis and will do more if necessary. But this cannot continue indefinitely.


Thirdly we’d like to address market realities. We are in a bear market and we are, at minimum, in a global recession. Our economist guru David Rosenberg (Dr. Doom at the best of times) has begun to call this the “Not So Great Depression”.


Bear markets are characterized by three distinct phases:

  1. The Panic Phase. A short, sharp, painful sell-off establishing an initial low. We are through the initial shock or panic phase and the Dow dropped 36% (from its high) to close at 18,591 on March 23rd. This is the current panic low.


  1. The Relief Rally. Between March 23rd and March 26th the Dow rallied 3,909 points (21% from the low) to close at 22,552. This was brought about by massive government intervention into relief and other support programs.


  1. The Frustration Phase. This is where we find ourselves and this is, after the initial shock wears off, where reality sets in. As I write this April 3, 2020, the Dow sits at 21,052 and it has given up 1,500 points from it’s March 26th high (-6.6%). Overall this market index is down 28.6% from its February high. Other world indices are behaving in similar fashion. The S&P500, a broader US Index, is down 26% from it’s February high. Trading has been manic with up days, then down days and so on. The current trend, in the absence of any really good news, seems to be down. We are fully expecting a retest of the earlier low and there can be no guarantee that this retest will hold. Past history would indicate markets have lower to go although we find ourselves in truly unique circumstances. This “frustration” phase can typically be characterized by many interim ups and downs, it typically lasts longer than anyone would like. As was outlined in our earlier Bull/Bear chart the 2001-2002 Bear lasted 25 months, the 2008-09 Bear lasted 16 months. The S&P500 shed 46% in the former and 53% in the latter. The average length of a Bear Market since 1955 is 18 months and the average return is -38%. These are the historic facts. It is also a fact that markets grind through these uncertain times, then the grind burns itself out and, at some point, when greater certainty and visability is achieved, markets resume their upward trend.


Going Forward


We are attaching a piece from CIBC’s Avery Shenfeld which is a worthwhile and quick read dealing with the economic world going forward. We have no doubt that once the apex of the Covid-19 crisis is reached and key decisions are made, that the global economy will begin it’s inevitable road to recovery. When exactly that happens and how robust the snap back will be is anyone’s guess. We also suspect that those key decisions may not necessarily be made by government.


Over the course of the next few weeks we expect an onslaught of bad news. This news will cover worsening death tolls, rising disease totals, confusing health policy statements, (masks, no masks), rising unemployment numbers, surprising bankruptcy announcements, real emergencies and disasters and a host of downright fake news and contrived teacup tempests.


Over the next few weeks we will also begin to see some earnings announcements and they won’t be pretty. Next quarter numbers will likely be far worse. But to quote Avery Shenfeld, “At least in the textbook, it’s not this year’s earnings that matter, but the discounted value of the stream ahead. The lessons of large major shocks in the past, and likely this one, is that a bear market that’s tied to a downturn doesn’t reverse in a hurry, as that’s also the case for earnings. Not only will huge haircuts and higher insolvency risks have to be priced in for 2020, but markets will also re-asses how much of that will be recouped in 2021”.


We do think it is important to keep in mind that all of this is a shutdown, not a slowdown. This is an important distinction to previous episodes. This is a classic “Black Swan” shock event. Pandemic realities and government edicts around the world have made it necessary for many business to, temporarily, suspend operations. But, at some point we will be resuming work, we will be going back to the office, going to restaurants, traveling and getting on with our lives. The attached article does a good job on touching on these subjects.


In the interim, markets will continue to stagger around as they try and determine the depth of the economic disruption occurring. Company earnings will continue to be assessed, then reassessed and individual securities will be repriced and then repriced again as markets attempt to see through the murkiness that is prevalent at this time.


People ask us “what we’re buying”. The short answer for right now is Government issued, short dated T-Bills. Since there is, for the most part, no earnings visibility at the moment, and large parts of the global economy are on hiatus there are few reasons to be getting excited about anything. Things may be cheap but could be getting cheaper. Day trading is decidedly not our thing. But, as we move through this, the overall situation will become clearer, the haze will lift, and opportunities of a lifetime will present themselves. We learned this in 1987, we learned this in 2001-2002 and again in 2008-09. This is, yet again, another of those times.