Animal Spirits Podcast - Emergency Podcast: Preparing for a Recession

Episode Date: March 12, 2020

On today's emergency edition of Animal Spirits, we discuss the severe disruption being caused by the coronavirus, why it's ok to overreact but not panic, how to prepare for a recession and why personal finances are more important than portfolio management at a time like this. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holt's Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain position, and the securities discussed in this podcast.

Welcome to an emergency edition of animal spirits. We've never done this but felt we had to just get out there and say some stuff. Last night, to me, felt like being in the plot of a movie. Thoughts. Yeah. My sleep was interrupted, like I'm sure a lot of people's worries. I'm usually sleeping by, I don't know, 10.30. By 1145, I picked up my phone, looked at the futures, looked at Twitter.

I stayed up late last night, too. so let's run through what happened Tom Hanks one is the biggest one for me Tom Hanks and Rita Wilson when I read that I thought ha ha very funny because the day before someone said the Harry Potter guy Daniel Ratcliffe had contracted a coronavirus

Tom Hanks actually did contract it in Australia sounds like they're going to be okay as of now the NBA canceled and or postponed their season March Madness said they're going to play the games without fans I would be shocked if that still goes on. I'm guessing that's a complete cancel. The Masters, I'm sure, is going to do something similar or just not have fans. You know what last night was like? You know that scene in Jaws where they

zoom in on the guy at the beach? And I say the guy, I'm drawing a blank out of his name, the main character. And everything behind him like fades in, sort of. Yeah. And it's just his face and he realizes the gravity of the situation. Yeah. That's what last night felt like to me. And it was definitely a night that we will probably all remember exactly with clarity forever. I think it's one of those situations where there have been plenty of people who have been warning that this is going to get worse. But I think when it's happening in another country, people just assume it'll be fine and it'll blow over there and it won't come here. And last night definitely had to be the wake up moment in the WTF moment for a lot of people

be like, okay, this is real. And this is going to be with us for a while, obviously. This is, it's going to be at least a few months that it's going to be here. and disrupting things. I was talking to Bobbin last night and I was like, you know, it's kind of funny because we've been saying that to one another that this is only going to get worse and the headlines are going to keep coming up and even anticipating it getting bad was nowhere near what it felt like when it actually did get bad. So this is unfortunately going to continue.

Obviously, celebrities are not immune from this. So the shocking names, it's going to happen all over the place. So in terms of how it's disrupting just everybody's. life. So I am canceling my trip at this point. I feel like it's wildly irresponsible. I just feel like it's irresponsible not to. Obviously, people are going to have different opinions. But for me, I am canceling the trip. I feel like it would be hard to have a vacation at this point, almost. Yeah. Like, God forbid, all travelers shut down, international travel. I mean, we can't be in a different country right now. Right. Even traveled in the U.S., I guess. So I just posted a piece

And I'm moving into not panic mode, but I think it's probably not a bad time to at least set an overreaction plan into, I think it's time to get into that mode. So I was telling you before, I think it's only a matter of time before the majority of schools and daycares are closing. I think that's. So my daughter has, her spring break starts the last week of March, first week of April. I'm guessing we don't make it that far to school. I would imagine kind of like they did in Japan, they'll do something. some sort of close maybe the week before and the week after to try to get ahead of this or even before. Do you think that's a distinct possibility? Schools are going to close en masse. Oh, absolutely. My brother's college, he goes to Penn was the kids were told not to come back. They're on break right now. And that sucks for, I mean, it's not good for everybody.

But that's tough. Imagine being a senior at home and, you know, like that's it. Your college experience, your college career is over. No going back to friends with friends to like celebrate at the end. That one's tough. Yeah, so I think that schools are going to close. Is the stock market going to close? I put a pin in that for a second. The school's closing. So I'm, again, I'm planning on it.

I think we've been talking the crazy thing about, so us, we have two kids in daycare. If that one closes, that's tough on the workers too because they're hourly. The teachers and such, I'm guessing, will be fine and still be getting paid. The daycare people, they are hourly workers. They probably don't have the greatest benefits. And what we're thinking about, if this happens, we've talked to a few people who work there to say, would you consider us paying you to be a nanny in this downtime to help us out a little bit? Because most likely a lot of people are going to be working from home too.

And so how are you going to get work done if you're providing your own home daycare? Maybe family comes in and helps. But that's something that we're considering is not only being down and having to watch the kids, but maybe having someone else help out a little bit. I not, maybe not everyone can do that, but that's something that we're thinking about. You mentioned the stock market closing in me today. I haven't gone that far yet in my head. I mean, could that happen?

I mean, obviously last night, immediately following President Trump's speech, the market crashed. It did not like what it heard. I don't think many people like what they heard. It didn't really give much confidence that the federal government is stepping up to the plate here. The wild thing to me is, it seems like the response. is coming from the states and private sector mostly, which is unique compared to the rest of the world. So in terms of the stock market closing, the NYSC said that they're bracing for potential floor

closing so they can move to like digital and electronic, which it already is primarily. Yeah, but does that matter really? In terms of what? If the floor closes, I mean, at this point it's all digital anyway. No, that's what I'm saying. So the last time the stock market was closed, if I'm not mistaken, was after 9-11, they shut it for, was it a week? Sounds about, yeah.

And prior to that was 1914. It was closed from June to December for World War I. Obviously, much different circumstances. So if they didn't close the market during the great financial crisis and given how digital and electronic everything is today, that's not something that I'm necessarily worried about right now. I had to talk you off the ledge on that one. This, to me, for many people who maybe weren't around or too young, in terms of the fear, obviously it's a completely different. scenario is this a 9-11 type of moment for them um could it be if life is disrupted for even if it is just a couple months where stuff is just going to be different and people are going to have to be working from home and schools are closed and the one in italy is really crazy how they basically shut the entire country down except for hospitals and pharmacies more or less bars and restaurants and everything were closed schools are closed people are being quarantined

just in terms of disrupting your life even if it's for a short period of time It's only a couple weeks or maybe a month at the most. Doesn't this just seem like a time that people are going to remember for a long, long time? Yes. And I know you're used to working from home. I'm not. And I got to say, like even just after, so I've been home for, this is my third day. You know, obviously I don't require my job doesn't require me being in the city, but not particularly fun, not enjoyable being home.

It takes a while to get used to. I think it's hard. That's why I actually have my own office. I have like a shared office space because I can't, I'm not as productive at home because doesn't it feel like there's always something that you could be doing at the house? Yes. It feels like there's always, so I needed to have that space to get away. Luckily there's not very many people.

By the way, I have a much greater respect for the guy in my office who opens the door in the bathroom holding the paper towel. Yeah. You know, I have a much greater respect for that guy now. Yeah. So S&P 500 down 6.7% at the open. Obviously not a good scene. So right now, correlations have moved to one, and we spoke about this last week.

The one that surprised me the most is crypto, obviously. This honestly surprised me. It was down, what, 25% today? It's down 25% as we speak. This is stunning because I said last week, I can't imagine that people who are getting margin calls are using Bitcoin as a source of funding. I mean, this can't be a coincidence, right? This has to be the correlations move to one.

You see it in gold. Gold is down 2%. So we had a managed futures fund in my old endowment in the 2008 crisis. and they were up like 15% in 08 because they can go long, short, and then they hopped at the trends, and they were basically short and short stocks and long rates. So they did well, and a lot of mandated futures did. They should have been raking in the dough that next couple of years because their track record was so good. The problem is everyone used them as an ATM machine in 08 to fund other commitments.

They had private equity that they needed to fund, and they had other, they wanted to rebalance. And they had to, so a lot of it, they actually lost AUM, even though they were up in 2008, while the stock market was down 37%. So it's possible Bitcoin is being used as that to shore up finances elsewhere. We talked before this. I wonder how many startups are just gone now, just in the incinerator. Because so many of those have such a hard time with cash flow as it is, I know the private equity venture capital world has a lot of dry powder, they say.

But how many of those businesses are they going to look at and say, we're not putting money with you anymore because you're not going to make it anyway? we're going to shore up these businesses we already own and make sure the ones that are more mature and make sure they make it. And a lot of the startups are probably out of luck at this point. So let's talk about that. A lot of people say that recessions are healthy because they wipe out the excess. They get rid of the fat. Companies that probably shouldn't be in existence because they're not economically viable. We'll leave and, you know, we'll come back stronger. And fine. It's okay to say that recessions are normal and maybe healthy from a business sense. I, you know,

I understand that. But people who say that are only people that will be unaffected by a recession because there are people whose lives are going to be changed for real. Obviously, hourly workers in arenas and concerts all over the place. Their lives are forever altered. People in the oil and gas industry. So my wife and I were preparing to do some modifications to the front of our home. We have like an all brick house and it's very flat and pretty unattractive. So we were planning to build like a little portico over the door. That project is probably going to be put on hold. So obviously that's going to affect the builders. And it just ripples down the line. So there are people whose lives are going to be dramatically, dramatically impacted

in a really, really scary way. If you don't know where to the next paycheck, is coming from, that's not healthy. Yeah, again, my baseline assumption now is we basically have to go into a recession, right? If we didn't go into recession now, I don't know what would cause it. And so I looked at this yesterday, going back to the post-World War II period. So this is starting in the first recession after that. The average increase in the unemployment rate is around 3%. The low is like 2%.

So from the low before the recession to the high, it increases about 3%. So call the labor force in the U.S. is roughly 160 million. That means 5 million people out of a job. And it sounds like a lot of people in the travel industry are already losing their job. So even if we don't go into this technical National Bureau of Economic Research recession, which I think it's hard to argue that we won't at this point. For a lot of people, they're going to have their own personal recession and potentially depression. Yeah, not good.

Okay, so we're officially in a bare market. The Dow closed down 20% from its previous closing high. And we had this stupid argument a million times, but why does it matter? The reason why it matters is because Dow enters bare market was on the cover of the Wall Street Journal, and that has to have an effect on an investor psychology. So is it semantics? Yes. But I think that is why, to the extent that it does matter,

matter. It does matter. Well, yeah, and it's not even an argument anymore after today. The stock's down six or seven percent, obviously. So let's talk about how this ends and maybe how the selling subsides. So obviously, we're still experienced an absolute avalanche of selling. Stocks are down seven percent. What if the Fed takes rates to zero and we announce a, I don't even know, a trillion dollar fiscal stimulus package, every working American gets a $5,000 check, whatever it is. The stocks can be up 13 percent in two days. That's possible. A lot of it obviously is going to depend on the reaction because a lot of the people are saying the experts are saying you can you can pretty much model this what's going to happen and it's going to be with us for at least two to three months. And so I think a lot of it depends on the of how do people deal with it. Is this something we eventually get used to? Because you can't have a daily shock every single day where things just get worse and worse. In that scenario, just all hell breaks. Maybe that happens. But do we get used to this? So I was talking to you yesterday in the David and Goliath book by Malcolm Gladwell. He has a whole chapter, which I thought was one of the better ones, where he says in World War II, Germany decided they were going to bomb London and try to break the will of the people more or less. And they would just continue bombing them and bombing them. And it would crash the British economy and people would stop going to work and going to school. And he talked about what happened is eventually people started just going on with their lives. And they would walk past.

these ruins basically every day to go to work and people figure out a way to deal with it, which is a really interesting way to think about the human spirit. Absolutely. People will adapt to the panic without a doubt. So that's what I think. It just depends what's the reaction or potential overreaction or underreaction going to be until we get to that point where people realize, okay, this is going to be with us. This is the normal for a while until we get through it.

And then, you know, what happens on the other side, that's when we can figure out what happens with the markets and such, but it just depends on how scared people get in the meantime. What's counterintuitive about how markets bottom is that they will bottom on really, really bad news. And people who might not be like, you know, daily market watchers will look and say, wait, I don't understand. How are stocks up 4% today? Did you see that headline? But that's what happens. So we will adapt and eventually we will price this in. We will overreact. Maybe we're already doing that now. And the news will eventually be less bad than the market. market was pricing in. And of course, that is the missing variable. We just can't know ahead of

time. Right. It's about expectations at this point, especially when it gets like this and no one knows what to think. So you and I did some work on recessions. I guess this must have been, we did in everything you need to know about recessions. This was last fall, just preparing for the fact, not ever thinking it would be something like this. So let's try to look through getting through this because no one wants to hear this now, but eventually we will get through It's one of those, this two show past things. It's going to be painful until we get there, and things are really disrupted. And I still, the professional and college sports thing, seeing those canceled, it was the right move.

It's just, it still is crazy to me that it happened. Yeah. I'm still having trouble wrapping my head around that. Everything else seems like sense. The fact that that happened is just wild to me. So since World War II, the average recession has lasted roughly 11 months. And by the way, it's funny. You hear a stat like that. Oh, 11 months. Yeah. And you know, you look it on paper. It doesn't sound so bad. But picture this. Imagine living through this through 11 more months. It sounds like a much longer time in real life. Yes. And the other side of this with the markets is obviously stocks don't line up perfectly with the economy. So the stock market started falling before potentially the economy did. And obviously the economy is slowing at the moment. But the question, question is, how long does it take for the stock market to make it back? And that is much different

in every case, too. And so I looked at what happened, and I'm going to probably do a piece on this, in every recessionary bear market, going back to the 20s, how long does it take from after we bottom? Because you can look at the peak to trough in terms of how long it takes to get to the actual bottom, but then how long does it take to make your money back? And, unfortunately, Fortunately, it takes a long time in some instances. Sometimes it takes three to four months. Sometimes it could take a couple of years. So when you have these really big, nasty ones in there, you know, like the Great Depression that kind of skews the average up. But even since World War II, the average time to break even from the bottom, making your money back and that includes total return and dividends included. It's like 21 months to make your money back. Now, the flip side of that is if you're an investor who can rebalance and potentially has savings coming, in, that gives you time to put money in at lower prices than you would have when markets were at the high. So that's hopefully the silver lining is that you probably have some time in a path in front of you. It's not like markets are going to snap back tomorrow and make

all these losses back immediately. That means you have time to put some money in at lower prices, which long term is a good thing. Can I say something obvious? It's like a captain obvious statement. If you're really scared, don't look at your account. It's only going to make it a lot a lot worse, especially if you're not going to do anything. If it's just going to give you anxiety and believe me, it will, if you're a young person, or even if you're 50 years old, what's the point of looking at your retirement account that you have, that you can't touch for 20 years? This is a situation to me where your personal finances matter much more than your investment portfolio right now. So you talked about cutting back on a project at your house. I looked at some other

ways that people can potentially cut back and plan for this. Obviously, every personal finance expert will tell you, well, you need six to 12 months of emergency savings to get you through something. First of all, most people can't get to that point ever. Otherwise, their life would be totally disrupted. So I'm guessing a lot of people don't have that. If you have an emergency savings account, good for you. There have to be other sort of backups for people potentially. If you do have a personal recession and you have some work slow down or the money that you make slows for a few months. So I'm thinking things like home equity lines of credit. you're probably still, if you have good credit, you're probably able to get these 12, 15 month

zero interest percent credit cards, stuff like that. I hate to see people take out of their retirement accounts, but you can take out Roth IRA contributions, penalty and tax free. So I think figuring out those sorts of backups now, so you don't have to freak out if and when you get to that point. Makes sense. I think everyone who hasn't in the past year or so should seriously think about refinancing. And if you haven't done some in the past year, you could potentially, that's cutting down your fixed costs on a monthly basis. That's a huge thing. But I think having your lifestyle inflation under control and understanding that maybe your lifestyle could change for some people potentially, I just think understanding your personal finances

now is way more important than having your investment portfolio figured out. By the way, yes, I completely agree. I just want to give a huge shout to Mark Cuban. He said, I reached out to find out what it would cost to financially support people who aren't going to be able to come to work, we've already started the process. Obviously, this is the type of leadership that we need in, in everywhere, in private companies, public companies, government, state, federal. This is, good to say. Yeah, people are going to have to band together through a lot of this stuff. And that, for a lot of people, is going to mean their employer is probably going to have to help them in some way, whether that's through hopefully paid sick time or if they have to take care of their

kids. It's just going to disrupt normal life for a lot of people, I feel like, for for some time now potentially. And obviously it's going to be different for different people. We're not even considering the health side effects here because that's not a space that we run in. But I think it just it behooves people now to prepare ahead of time for your own personal recession, whether or not the economy overall goes into recession. So let me ask you a question. Do you think that we're going to look back on this? And we will look back on this eventually. Do we think we're going to look at this chart and it will be a blip like 1987? Or is this going to be a more prolonged fair market recession like 2000, 2002 or 07.09, something like that.

The crazy thing is, this is crying over spilled milk and it doesn't matter at all. It would have been interesting to see how interesting to see how long this recovery could have gone on. Because I think it could have gone on for a number of years. The economic numbers, it's funny, they're coming in now. And obviously no one gives a crap at what the economic numbers are telling us from before, because that's in the past. That was pre-coronavirus freak out. but you're going to see some wild drops in economic data in the coming weeks and months that are just going to completely fall off a cliff and those comparisons are just going to look wild and eventually guess what we are going to get through this and it's going to subside

and even something as bad as the Spanish flu which wasn't as bad as this that lasted a little over a year and then things took off and I'm thinking about writing a piece about the roaring 20s and what we had to do to get there. So we had World War I and then the Spanish flew and then there was even a depression in the early 20s and then the roaring 20s took off. It's kind of amazing that people can just completely push that stuff aside eventually and move on with their lives. And we're going to get there someday. But the comparisons between different periods are going to be so wild from falling off a cliff to then maybe getting back to a trend. And even if we don't get to where we were, just getting better from where we are, I think the comparisons are just going to be

crazy. Yeah, you're going to see numbers down 40% sequentially, and then when we get past this, it'll be back up the other direction. So obviously, this is wild times we live in. What else, Ben? No, that's all. I wrote a piece. We'll keep putting stuff out there, but I think this is just a time to, I think, really get your personal finances in order. We'll have more to say probably in the markets on our regular schedule show next week, but I thought this is really a time to understand your personal finances. And yeah, I don't think it's ever okay to panic per se, but I think having a little bit of an overreaction is not a bad. That's a better safe than sorry situation and really having things figured out for yourself if things get disrupted in your

life because potentially for a lot of people they're going to be. Yeah, I want closing thought on the market. You know, I've said this before. I think I probably said this last week. If you're really scared, we're with you. We understand. But panicking is never the right decision. In other words, going from whatever your equity position is in your 401k to zero is not the right decision. If you're 50% and you need to go to 40 or whatever it is, if you have to downshift, that's okay. But you can't take it to zero and then think that you're going to buy back lower or even at the same prices. You're going to panic then. So over the last 100 years, this is a totally kept an obvious thing to say, but I think it's worth saying. The stock market has returned to the range of 9 or 10%

per year. Those 9 or 10% returns include wars, the Great Depression, dozens of recessions, huge bare markets, yeah, market crashes, crazy elections, Republicans, Democrats, just crazy stuff that's happened and through it all, those are baked into those numbers. And I think sometimes people want to think, I just want the good stuff and not the bad stuff. And unfortunately, in the stock market, the bad stuff is just part of it. And that's something you have to be willing to deal with if you're going to be a long-term investor. Well, sad. All right.

Thank you for listening. Animal Spiritspot at gmail.com. We have an episode with Direction, Talk Your Book on Monday, and then we will be back with our regularly scheduled episodes on Wednesday. Hope everybody, stay safe, stays healthy, and we will talk to you next time.