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These Trying Times…

Ah these are trying times are they not. Jobless claims hit 3 million, the highest since the great recession, and the markets just shrugged. The market entered a bear market because it was uncertain about the future of the economy. The markets rebounded 20% from the bottom on the news of Congress actually passing a $2 trillion fiscal aid package.

The markets clearly believe that the pandemic is under control, that everything will be fine and the government will step up to pass important legislation. All of these hopes for the economy miss a key fact: the pandemic is not controlled. The markets will continue to go down. The economy will continue to be shuttered. Putting the economy on hold will not be solved by a mealsy $2 trillion package. No. This recession will last significantly longer.

The number of Coronavirus cases in the United States currently stands at over 100 thousand. This number only reflects the currently detected. Considering what we know about the proportion of asymptomatic cases the true number is probably closer to 1 million. The pandemic is not under control and will probably peak in 8 – 10 weeks. For assumption sake, let’s assume 70% of the American economy is offline right now. If that continues for the next 20 weeks that will cost America somewhere in the ballpark of $4 trillion. That is probably going to be the true cost of the virus considering America’s current trajectory with total infections.

Given my prognosis for the course of the virus, what do I believe the economy will do? In the short term, the economy will suffer. It will continue to push companies into the red and probably bankrupt many small corporations unless a second fiscal package is passed to plug this massive hole. But even with a huge fiscal bailout it won’t save many small business necessary to America’s long term viability.

Nonetheless, American will eventually recover. However, I firmly believe over the next few years we will have a prolonged period of slow and perhaps negative growth. So what does this mean for equities. I believe there will be a permanent pull back in Price-to-Earnings multiples. I also believe there will be a continued flight to safety, meaning lower bond yields and higher commodity prices. The American economy cannot be shut off and on without permanent damage. It would not surprise me to see another precipitous decline in stock prices in the range of 20-30 percent.

The one thing I am relatively certain of is a rebound in oil prices. Oil in Wyoming is literally negative. They are paying people to take away oil at $.19 dollars a barrel. This collapse of demand and oil price war is artificially depressing oil prices to a level that is unsustainable. Therefore, I believe oil represents a very good investment especially in these trying times.

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