Unchartered Waters

Things are looking grim. As economies across the globe are setting record after record on rescue-efforts for companies and individuals alike, more people get infected and are dying by the hour. Here where I live in South East Asia, things look currently like this:3580795

But, this is not a medical blog, it’s about personal finance. So let’s talk briefly about the spread of the virus as shown above, and what it means for our personal finances.

Unemployment is on the rise

Two weeks ago, I had one of the most difficult moments of my entire career. I sat down with 25 team members, explained to them what is happening with the tourism industry, and then told them that I have no choice but to let them go. They were not full-time employees with my hotel. They worked for an outsourced supplier on a temporary contract. I worked with them since the hotel opening last year and they proved to be a dedicated and hard-working team that would always do their best.

And yet I had no choice. With the operational losses mounting up day by day, a full hotel closure became a realistic expectation, which would put all of my 60 employees on the street. No matter how many tears I would shed, there was simply nothing else left where I could cut costs to keep the ship afloat.

It was hard. But I also know, I am not the only one. In my area here in Pattaya almost 20 hotels already closed their doors. 20 hotels that I know of. On top of that, bars, restaurants, coffee shops, massage parlors. Empty. Thousands of people are now either unemployed, on leave without pay, or on leave with reduced salaries.

In the USA, last week alone more than 3,2 million people filed for unemployment – within a week! Just imagine that. A country that just celebrated being once again the strongest economy in the world, had a sudden jump in unemployment by the millions.

The same is happening all across the globe. And my industry is being hit the hardest. Hotels, restaurants, and bars employ 1 out of 10 people worldwide. We are the single largest employment industry across the globe. And we are being hit the hardest by people staying at home.

No Money, No Spending, No Income, No Taxes, No Profits

Don’t get me wrong. We need people to stay at home. Because we also can’t afford to get sick. Most of us work on minimum wage. Many of us have limited or no insurance. And many of us have no savings. No financial security to speak about.

This means that once people are sick and unemployed on a large scale, they obviously stop spending money. This leads to other businesses losing income, scaling down and ultimately profits across all industries start to dwindle. If this lasts for as little as even only a few weeks, chances are high that this turns into the beginning of a recession.

No money means no Spending. No spending for some means no income for others. This will result obviously in no taxes paid and cripple public budgets. It also cripples private businesses cash-flows and profits. Investors will therefore start observing a lot of companies losing value. Stocks start to slide and portfolios turn red. Except in China, where the colors for positive and negative are reversed.

Unchartered Waters

We had recessions before and so far, we always found a way out of it. After every recession there was a bull market that would usually rise higher and beyond expectations.

History is a great advisor, but there are no guarantees. There are just so many things that we don’t know. We don’t know how long this pandemic will endure. We don’t know, how a shut-down of the economy on such a large scale will affect our economy in the long-run. We also can’t reliably estimate which sectors will be dragged down together with the most obvious losers.

But there are reasons to be optimistic. Every recession is like a clean-up. Bad and mismanaged companies get quickly in trouble and are either bailed out or forced out of the market. Great companies adapt, adjust, and come out stronger than before. The clean up also creates ample space for new players and new competitors. This is why markets usually come back stronger and better after every crisis.

So let’s stay positive, observe, and get ready to continue investing. Preferably, when some stability comes back to the daily news, and when expectations from all market participants start to become a little less speculative, and more solid instead.

Black Swan Events

The world of finance has its own set of terms to describe whatever is happening in the market. And given the current situation, just talking about “Bulls” and “Bears” is not enough. Let me introduce to you another term. The Black Swan.

Black Swan events happen every now and then. Like now. Since this is a rare event, let me also do something rare. Let me add a visualization from my favorite visualization website, www.visualcapitalist.com to this post:

mm_black_swan_events_main-2

I love this website and I can only recommend anyone interested in understanding how the world works to be a frequent reader and/or to subscribe to their free newsletter. It’s awesome. And no, I am not getting any commission or compensation for writing this.

Having said all that, there is some great information on this graph. Let me point out one negative, and one positive.

First of all, on a slightly negative note, while the markets crashed heavily in recent weeks, there is still room to fall. It may be hard to imagine, but share prices might still not have reached the bottom. We certainly have not reached the same proportional drop as back in 2007/2008 during the financial crisis. In the long-term chart most investors who are more than 10 years in the market, are still very much in the greens.

Secondly, on a more positive note, we can learn here that every crash is followed by a recovery. Investors do well to keep their shares, not to panic, and instead to look out for opportunities to continue investing even as the crisis keeps evolving.

Is a recession coming?

This is a complicated question and there are many factors involved. But the chances are, in my humble opinion, pretty high. The current crisis is forcing major industries to shut down operations. Hotels, airlines, restaurants, bars, events… we are talking about millions of jobs worldwide. All the lost income, disappearing pay-checks, lost taxes, depleted savings accounts. We will feel the effects of this crisis far beyond the time when the Covid-19 Virus will take its place in history books.

Our entire world economy is based on consumption. People need to spend money to help us generate cash flows, profits, and to pay wages and taxes to keep this machine running. This won’t stop, but it will definitely slow down over the next couple of months. Therefore, it might very well be that we will have a couple of rough weeks or even months ahead of us.

Panic has never been a good adviser

The coronavirus is now officially a pandemic. A serious threat not only to human lives but also to the world economy, to our health system, and yes, even to our financial system.

As the virus spreads further, entire countries are closing borders, schools are closing doors, events get canceled, elections move online. People get scared to go for a beer to their local pub. Even the premiere of the new James Bond movie has been postponed!

So the ultimate outcome, and changes to our lives, possibly to the world, it’s all very uncertain. And nowhere is this uncertainty better reflected than in the stock market. Having crashed almost on a scale comparable to the financial crisis of 2008, we can see the negative sentiment of investors on full display.

Where do we go from here?

After three weeks of markets being basically in free-fall, the last Friday showed something of a possible turn around. After the US-President decided to declare a national emergency and at least showed something more of seriousness about the situation, confidence seemed to return to the markets and stocks recovered some of their losses.

But is this enough to start a full-scale recovery? In my humble opinion, it’s still way too early to even think about it. Not only does the response from the White House lack enough credibility to be trusted and to trigger a sustainable recovery. Even more importantly we will need to see some real numbers before the full impact of the crisis can be assessed. What numbers am I talking about?

  • Lost revenues
  • Lost jobs
  • Recovery costs
  • Updated annual forecasts (for everything)
  • Dividend payouts and dividend cuts
  • Repercussions on globalization as a system
  • Political repercussions

That’s a lot of data to digest and I don’t dare to predict how long the evaluation of it may take. And I am not alone there. Markets tend to react quickly to possible opportunities because there are plenty of speculative traders who are willing to take a risk to bet on the direction which they consider more plausible. But more than often these emotional and non-data driven speculations go wrong. It’s a 50:50 bet.

Don’t panic. Analyze. Invest.

Therefore, I wouldn’t be surprised to see some additional bad weeks ahead of us. The short spike-up which we observed on Friday could turn out to have been only a short-sighted flare of hope from some speculative investors betting on a turnaround, ahead of having done the required due-diligence and analyzing some real numbers.

For us private investors it’s a challenging time. First of all, we got to keep a cool head. Panic doesn’t help. As my personal portfolio has lost over 30% in value, I haven’t lost any sleep about it.

First of all, the loss is not real until I actually sell the shares. Until then, it’s only a loss on paper. And do I have any reason to sell my shares? I don’t think so. All the stocks in my portfolio have been bought for a reason. While the dividend payments might get cut or even fully canceled for a year, as long as the business itself doesn’t face an existential threat, I don’t worry.

Secondly, markets go up and down. That’s what they do. We had an 11-year run-up and it might be time for a turn-around. Will this turn-around last forever? Very unlikely. Bull-markets are followed by bear-markets and vice-versa. Do I, or my generation (I am from Gen X), need to worry? Very unlikely. I have still plenty of time ahead of me and will almost certainly see more recessions – and more recoveries.

Lastly, I am an optimist, and what I see is a great opportunity to continue building up my retirement portfolio. Even if we should have now entered a bear market and a possible recession. All I see is companies and businesses, learning to adapt, getting more efficient, improving their resilience and tweaking their operational proficiency, to come out even stronger once this bear market will be over.

So don’t panic. Analyze. Invest.

Is it time to get greedy?

The current situation in the markets is really something else. The world went last week into a correction mode and trillions of euros in value have been erased from existence. My own portfolios suffered immensely. My speculative portfolio lost almost all unrealized gains from this year. My dividend income portfolio was up to 16,47% in the red zone. Now it recovered slightly and is at around -12%.

So the big question is of course whether that was already it and whether it’s time to load up new shares?

Greed and patience are a tough combo

The smartest investor of our lifetime, Mr. Warren Buffett, teaches us to be greedy when others are fearful. But he also teaches us to be patient. Those two attributes are hard to combine and it’s even more difficult to give any recommendations at this point. So let me just tell you what I am doing.

I look at shares that have been beaten down to their lowest point within the last 5-10 years, but which I still expect to be around for a long time to come. And this is now mainly the travel industry.

Airlines, hotels, REITs with a focus on hospitality-related venues. These have been early identified as potential victims of the spread of the coronavirus, and thus were first to suffer the largest losses. Personally, I intend to buy today some shares of the German airline Lufthansa (DLAKF) and for my account in Thailand shares of the Hotel conglomerate Minor International (MNILF). But it will be only small purchases.

We had a correction. Not a crash.

I am not buying larger stakes of anything yet, because this last week just didn’t crash strong enough. This was a smaller correction, not a crash. Therefore, I consider these small purchases pretty speculative. There is a good chance that the worst is yet to come.

To sum it all up, personally, I think that it’s too early to get really greedy. Of course, it’s just an educated guess. The virus just started spreading across the globe, we can’t trust the numbers that we get from China, and the potential damage to supply chains, travel restrictions, etc. are yet to be revealed. All of this will have an impact on markets and worldwide cash-flows, revenues, and ultimately profits.

So even for those who do not want to lose out on potential opportunities that may have arisen during the last week and who decided to put some cash to work,┬áit’s probably the smarter move not to go all-in at this point.

Disclosure: I intend to purchase stocks of the companies mentioned in this article during the next 24 hours.