I asked Tim Price to write today’s Capital & Conflict, as he’s just the man you want in your corner during a market panic like we’re witnessing now. Tim has won awards as a fund manager for his defensive investing style, and as he’ll tell you, the first thing you need to remember is to keep your head – and keep it simple.
All the best,
Boaz Shoshan
Editor, Capital & Conflict
PS And once you’ve digested Tim’s thoughts, be sure to , where James Allen will tell you how the collapse in the oil price is wreaking havoc throughout the energy sector…
The stock market is the only market where things go on sale and all the customers run out of the store…
– US fund manager Cullen Roche, August 2015
Investing is a lot like being at war. Long periods of boredom punctuated by moments of pure terror.
In his seminal book Thinking, Fast and Slow, the psychologist Daniel Kahneman writes about the psychological impact of rare but terrifying events. He visited Israel on numerous occasions during a period in which suicide bombings on buses were relatively common, though rare in absolute terms.
There were 23 bus bombings in Israel between December 2001 and September 2004. A total of 236 people were killed. The number of daily bus riders in Israel at the time was roughly 1.3 million. “For any traveller, the risks were tiny, but that was not how the public felt about it.”
Kahneman confesses that even though he rarely travelled by bus, the existence of the bombings changed his behaviour, even in his rented car. He found that he was extremely reluctant to stop next to buses at red lights; as soon as the lights changed, he would drive away more quickly than usual. As he concedes, he was more likely to be injured in a driving accident than by stopping near a bus.
His experience illustrates how terrorism, for example, works, and why it is so effective:
… it induces an availability cascade. An extremely vivid image of death and damage, constantly reinforced by media attention and frequent conversations, becomes highly accessible, especially if it is associated with a specific situation, such as the sight of a bus.. System 2 [in our brains] may “know” that the probability is low, but this knowledge does not eliminate the self-generated discomfort and the wish to avoid it. System 1 cannot be turned off.
Bear in mind those two specific words, “media attention”. If anything can amplify the psychological effects of a crisis, media attention can. Choose your media inputs with extreme care. Make time in your schedule for non-news media consumption!
So investors since the start of the year have been beset by a twin crisis: the healthcare implications of a global pandemic of a disease with as yet no cure, and the economic implications of that pandemic. The global financial crisis of 2007/8 was triggered “only” by the transmission of dodgy debt. The Wuhan virus crisis of 2020, on the other hand, could literally kill you. And seeing entire countries – in western Europe – suddenly locked down by it does nothing if not concentrate the mind about the likely medium-term economic impact.
The healthcare advice is straightforward: wash your hands frequently and carry hand sanitiser if possible; use a tissue to contain the spread of coughs and sneezes; avoid touching your face; if in doubt, self-isolate and avoid large gatherings of people.
The investment advice is not so straightforward, not least because nobody knows how long the crisis or the virus may endure. If Covid-19 is as dangerous as some scientists fear, there may never be a vaccine for it. And since quantitative easing (QE) has been revealed over the course of a decade to be less than efficacious at triggering inflation in the prices of goods and services, as opposed to the prices of financial assets, desperate (and heavily indebted) governments may now tear up the austerity playback and go directly to the implementation of MMT – Modern Monetary Theory, “helicopter money” if you will – by unleashing a huge wave of fiscal stimulus.
If we end up with MMT at an international level, that is likely to have a real inflationary impact, which may cause those nervous investors stampeding into government bonds to have second thoughts as they rush to buy those bonds at all-time highs.
The four most appropriate words of any investment counsel in the heat of the panic? “This too shall pass.” A fifth would be, simply: diversify. As the cartoonist Scott Adams and technology investment guru and “Renaissance man” Naval Ravikant discuss, quite calmly, in this recent conversation, the impact of the coronavirus is likely to accelerate the widespread adoption of cultural and business practices that were already becoming popular.
In the spirit of true Schumpeterian creative destruction, while some sectors will remain vulnerable to the chilling deflationary impact of Covid-19 for some time (retailers; airlines; oil companies all spring to mind), others stand to benefit (anybody in telephony or digital entertainment catering to those choosing to work remotely or from home; remote learning providers; certain pharmaceutical, healthcare and hygiene suppliers).
My suspicion is that governments internationally are going to leap at the chance to deploy some MMT. The uniquely “deus ex machina”, “last minute” quality of the coronavirus outbreak gives them a once-in-a-lifetime opportunity to try and reflate the economy by any means possible, and damn the torpedoes.
If that arises, that will create significant turbulence in currency and bond markets given the inflationary implications. It also suggests that for gold investors, the party has only just started. Every cloud has a gold, and silver, lining…
Editor, The Price Report
Category: Market updates