Wednesday, March 18, 2020

The 30% Solution

The recent downturn in the market has wiped out all of the false gains of the last couple of years.

The stock market stopped making sense to me a year ago, so I sold nearly everything.  I kept a few small funds - $10,000 I had invested in Vanguard, which was worth $25,000.  Today, the Vanguard fund is worth $22,000.   I "lost" money in the last month, but still am up over 100% on my investment.

Mark's Fidelity funds have suffered more dramatically - dropping about 30% to the point they are worth what they were when I sold out most of my stocks and mutual funds.  Most of his Fidelity funds are still worth far more than he invested in them, though.  We're now about even-Steven.  I am confident, though, that before he needs to draw from these funds, they will have bounced back to even higher levels that the artificial levels we saw in December of 2019.

I say artificial, as it is possible to goose a stock price, the stock market, or the economy in general.  And Trump made no bones about it - he was cutting taxes and corporate tax rates, as well as pushing for lower interest rates and higher deficit spending to gin-up the economy to make himself look like an economic genius.   But like his over-mortgaged casinos (or indeed, any other business his leaden hand has touched) it all falls apart over time.

Since the last Republican in the White House (George Bush -haven't heard much from him lately, have we?  I hear he makes drawings) we have had slow, but steady growth under Obama.   Growth might have been higher and the recovery faster, but for some reason, Republicans decided to become deficit hawks at exactly the wrong time.   Actually the "for some reason" was to deny Obama any kind of economic recovery and get Mitt Romney elected in 2012.

Once the economy recovered and we didn't need any stimulus - and should have attacked our deficit - the GOP went bananas with stimulus - giving the American economy a line of cocaine followed by meth.   And it took off - to artificial highs.   Today, we are seeing the fallout - not just because of the Corona Virus, but because of the fundamentals of the economy.  The Corona Virus is just a trigger - and something that is making a shaky economy collapse.

And today, when we need stimulus the most, well, that well has been pumped dry.  There are no more taxes to cut, interest rates can't go much lower, and the ballooning deficit can't balloon for much longer.   Trump has created a situation where we might be in for an awful lot more pain, down the road.

Of course, you ask, why is this?  Why would Republicans do this to the economy?   Aren't they supposed to be fiscally conservative?  Once upon a time, yes.  Today, it is all about the money grab - making as much as you can, as quickly as you can.  One sure way to do this is to manipulate markets.  The long, slow, boring climb of the DJIA during the eight years of Obama was no fun at all!  How can you rob people's 401(k) accounts without market volatility?

Like I said before, the two parties have flipped.  The GOP was once the party of anti-slavery and sound fiscal policy.  The Democrats were the "Solid South" - Southern racists and Northern labor (also largely racist).    Today, the GOP is all about right-wing social policies (and coded racism) and easy money.   The Democrats, sadly, are more fiscally responsible, even as Bernie calls for massive government spending.

Where we are today, in the stock market, is where we would have been, had the market continued to increase at the same rate as during the Obama era.

If we expand the DJIA chart and look a the slope of the curve during the Obama era, and project that forward four years (the red line shown above) you see we end up in the same damn place as before.  In other words, we are at, right now, where the market should have been all along and the "goosing" of the last four years under Trump has all evaporated overnight.

But as I noted in an earlier posting, the Corona Virus is a blessing for Trump, as he can blame the collapse of the economy on an "Act of God" (I guess he pissed-off God) and also appear to be the savior.  Sort of like one of those "killer nurses" you read about, who give patients overdoses of drugs and then "rescue" them at the last minute, to make themselves look like heroes.  Let's hope we don't lose the patient.

Anyone who was paying attention over the last year saw what was to come, though.  Not the virus, but the economy.   Make-work companies like WeWork, which had nonsensical business plans and an iconic leader who was basically looting the place, were the new norm - a scary echo of the dot-com bubble of the 1990's.   The Boeing disaster was something people chose not to talk about, even as the company sat on hundreds of undelivered planes - which may never be delivered at this point.  Will Boeing have to crush all of that aircraft aluminum sitting on the tarmacs of various airports?

The virus thing will resolve itself in a matter of weeks, not months.  Already, China is going back to work and the infection rate has dropped off.  The same will happen here, too.   But the damage to the economy is akin to the virus itself.   For a healthy economy  - or healthy person - the virus may be no more noticeable than a mild flu or cold.  But for an aging bull market with underlying structural issues - or an aged person with underlying health issues - it could be fatal.

I suspect the virus will be history in a month or so.  But the long-term recovery for the economy will take a lot longer.