The Undiscovered Horizon {Trucks}

I ran a running series of posts starting at the end of the Great Recession titled "Things are Getting Better" from time to time chronicled how things were improving as the economy and society began their long recovery from that economic depression.  This is new series  in a similar vein as that older grouping.  This is a new series and to differentiate it from the older postings I'll call this "The Undiscovered Horizon".  The title is in recognition that many things will be different on the other side of this pandemic and we need to try and recognize some of the ways that may occur and hopefully identify some of the key themes.  

Today I'm giving an anecdotal piece of evidence that maybe things are trying to get moving again.  A dirty secret I have is that I've been playing golf for the last month or so at a course over in Indiana about 90 minutes from my house....I know the whole thing about sheltering in place, but some courses are open in Indiana, everybody stays six feet away and we all had our own carts.  It is easy to social distance at golf.

At any rate the highways have been empty since mid-March owing to the stay at home orders in both Illinois and Indiana.  Yesterday there was definitely more traffic on the way over to the course.  What I noticed was the pick-up in truck traffic which indicates to me that things are starting to move about again.  Maybe businesses aren't open yet but maybe everybody is stocking up in anticipation to things beginning to loosen up a bit in the coming weeks.  

It may be a thin reed and time will tell if I'm right.  I just know what I saw.  Took longer to get to the course because of all the trucks.  That's my tell.

Back Thursday or Friday. 

Wearing The Jacket

There's a term unique I think to Chicago politics called "wearing the jacket".  It is linked to the very well known political observation that the worst scandals or political issues for elected officials are the ones the public can easily grasp.   The public may not understand the complexities of TIF financing {a method used by municipal governments to stimulate economic development in targeted geographic areas}.  However, they do understand when a local elected official is arrested in connection with a bribe related to where that TIF money goes.  Likewise the public doesn't really get involved in the environmental impact of garbage collection until the trash in their alleys isn't getting collected.

Raising taxes on the middle class, taking hard votes on issues likely to be unpopular, and being connected to some problem or issue that boils over into the political realm are the things politicians hate the most.  It's easy saying you're only going to raise taxes on the rich but their aren't enough of them to do the job so inevitably, in one form or the other, the tax burden falls on the middle class because that's where the numbers are.  Politicians also hate hard binary votes where they have to declare to be on one side or the other unless they've staked their careers in some manner to that vote or they can hide with the herd.  "Wearing the jacket" is when a politician is connected to something or some issue that impacts the lives of people who vote for him or her.  These things come up all the time on matters big or small.  The political class is well versed on finger pointing when these things occur.  For example a meeting of Aldermen in Chicago during a garbage strike will lead to a round of furious blaming.  Again, everybody understands the garbage piling up in the alley.  An alderman here might then say to the Mayor, "Hey get your act together on dis here garbage problem!  I got my guys in da forth ward complainin on da trash and da rats and I'm tired of wearing the jacket on this!"

The great lockdown we're experiencing as a result of Covid is the greatest example of an issue negatively impacting people this nation has seen in maybe two generations.  After the fear is going to come anger and somebody is going to be fitted with the jacket.  Maybe more than one person.  On a national level you're going to see the political Democratic class at all levels point their fingers at the President. The uglier they can make that jacket the better for them.   I think the President's only chance of getting re-elected will hinge on whether he can fit that Covid jacket on somebody else given all the news stories out there about the lack of preparedness of the Administration for this.  You can see it in some of his press briefings where he is trying to blame local mayors in large cities, governors {mostly Democratic ones} and China.  So far I don't think it's working.  Public opinion of his handling of this is low.

Add to that the massive unemployment and a death toll now approaching 50,000.  Throw in a problematic electoral college map even before this event and you have a situation where an incumbent is looking at unprecedented challenges in gaining another term.  I don't do politics on this blog and whether this analysis makes you happy or sad is up to the reader.  I'm laying it out as I see it.  Those facts may change in the coming weeks.  One thing that might help the President is that Biden has been invisible for nearly a month.  I think if the election was held today Joe Biden would get 290-300 electoral votes.  You need 270 to win the Presidency.  We'll see and I'll come back to this observation several times in the coming months to update my thoughts.  I'll be interested to see how close I'm going to be when looking at the electoral map.

Back early next week.

The Undiscovered Horizon {Flattening The Curve}

I ran a running series of posts starting at the end of the Great Recession titled "Things are Getting Better".  Those posts from time to time chronicled how things were improving as the economy and society began their long recovery from that economic depression.  I'm going to start a new series  in a similar vein as that older grouping but I'm changing the name.  I'll call this "The Undiscovered Horizon".  The title is in recognition that many things will be different on the other side of this pandemic and we need to try and recognize some of the ways that may occur and hopefully identify some of the key themes.  

Today we'll look at one key piece of news which is that across the globe we seem to be flattening the curve regarding the virus.  See as an illustration this chart below from the Financial Times.

If our experience runs close to China's then it seems like we might be able to start getting things up and running in the next 30 days or so, at least on a limited basis. 

One other note about the economy.  I think we'll see business return in phases and it will look different on many parts of the country.  What I think is likely to be underestimated is the coming pent up demand for all sorts of different goods and services.  For one thing most of America needs a hair cut!  There is a lot of emphasis placed on those who are now out of work, as it should be.  What's lost in that is there's still somewhere between 100 and 125 million people working or at least currently getting a paycheck.  I've seen estimates that 19 million Americans receive a pension check.  61 million Americans receive a social security check each month.  That's an immense amount of money accumulating in American's bank accounts that has the potential to be recycled back into the economy once folks feel secure about their job prospects and feel safe to venture out again.  

I will try to post again Friday.

Chart Link:  Financial Times, "Coronavirus Tracked: The Latest Figures As The Pandemic Spreads."

Post & Comment {04.18.20}

This is a section of posts where I respond in brief comments to something I've seen in the news or online.  I've highlighted the headline note or post.

On opening the economy.

At some point the hard calculus will need to be made on risk of infection vs risk to the economy.  I have medical friends and clients that insist there are ways to do this as long as everybody practices social distancing, stays home if they have symptoms of Covid-19 and repeatedly washes their hands.  I think we're going to be able to open in stages.  First open up in places that haven't had large amounts of cases and are able to medically monitor and contact trace if the disease reoccurs.   In other parts of the country you open stores and businesses in order of safety.  Open for example a hardware store by having people either wear gloves or sanitize their hands before they come in, require masks and limit the amount of people in the store.  Open restaurants at half capacity etc.  No events with large crowds at least initially.  Testing and tracing are going to be key.

On the stock market.

The market likely overshot to the downside in March and there is a high probability that we're a bit extended at this point.  Nobody knows what happens next because nobody has been through a pandemic like this in living memory.

On who's to blame for the disease.

People want to beat up on the Chinese for Covid.  I think there will be plenty of time to try and figure out what happened when this is all over.  Maybe they could have had a different and better initial response, but then folks could argue that we could have handled this better in the beginning as well.  For me, I think our energies are better focused on getting the best of the virus.

On the President's reelection chances.

I talk to many who are convinced President Trump will win again come November.  I think if he does it will buck nearly every historical precedent in American politics.  Generally the party in power doesn't fare well if the public perceives they've mishandled an economic shock.  I think losing 20+ million jobs qualifies as an economic shock, not to mention the 50-100,000 likely dead from the disease.  I think when looking at the electoral college his numbers were going to be tough even before this calamity.  I believe his only shot will be if he can tell a story of leading the nation through adversity similar to a war by November.  For that to work he's going to need the economy up and running by then.  The national press hates him with a passion last seen towards Nixon so they'll use every trick up their sleeves to blame him for the national response.  Much will also depend on how Biden fares as a candidate and who he picks as his vice-presidential nominee.  Not taking sides here just laying down the facts as I see them.

On posting.

Events have been such that posting has been tough.  There are only so many hours in the day and the markets have required more time and energy these past six weeks.  Posting has taken a back seat.  Hopefully I can get back to a more regular schedule soon.

The End Of The Beginning (Lick ’Em Tomorrow, Though)

By Christopher R. English, President of Lumen Capital Management, LLC

I’ve promised to keep you updated as we move through this crisis, so here is what you need to know about our current coronavirus situation and how it’s impacting our economy. Since I last wrote to you on March 22, 2020, we’ve seen grim tidings out of places like Italy, Spain, New York City, and Louisiana. However, our mitigation strategies appear to be working and, as we indicated in our last report, the Federal checkbook is wide open. Also, the Federal Reserve has pumped trillions of dollars into the economy. 

While our global ordeal with the coronavirus is far from over, it’s starting to look like we’ve survived the initial onslaught and maybe even turned a corner. It’s going to be a long time before we return to something that looks like normal, but, to borrow a phrase from Winston Churchill, we’ve perhaps made it to “the end of the beginning.” (1) That means it’s time to start thinking about what comes next. Before we do that, though, let’s start by discussing the present situation.

Current Happenings

First, I think the next two months are going to be critical in terms of how much damage is being done to the economy. Besides the human cost of the virus, the current economic news is grim.  Estimates of 2nd quarter annualized GDP losses of 30% are showing up from the economic crowd (2) and nearly 17 million people have filed for unemployment. (3) My guess is you’ll see an additional 3-5 million filings next week, and perhaps the same amount the week after.   

So far, Americans have seemed willing to tolerate the economic pain and the shelter-in-place rules. However, weather in much of the country is turning warmer, and it remains to be seen what happens as that occurs. My guess is the political pressure to begin opening certain parts of the economy and areas of the country less affected by the disease will intensify in April, particularly if we start to see a significant decline in both new cases and deaths from the coronavirus. If things open up a bit and if we don’t see a pick-up in new coronavirus cases, then it’s likely investors can start to price in the disease’s impact and we can also get a better read on future economic growth. If so, there is a higher probability we’ve seen the worst of it for equities. Conversely, if social distancing guidelines continue for a longer period, there is the possibility of deeper and more lasting economic pain.

Some Perspective On Spending

We are rightly focusing on the sick and those suffering enormous economic hardship right now. As a society, it says much of us that so many are stepping up and trying to do their share. But what isn’t being talked about much is all the people who still have a job and are still receiving a paycheck. We’re also not focusing on the millions that are still getting Social Security checks or other economic payments like a pension. This is hundreds of billions of dollars sitting on the sideline that at some point will get put back into the economy on things besides groceries and medical supplies. Once people regain some confidence in their own financial situation and stop worrying about close contact with other people, there is a higher probability that the demand side of the economy will pick up substantially and perhaps quicker than many expect. Now, I don’t have any expectation that things will return to where they were overnight, but I do think it’s reasonable to think that sometime this summer we will start to see economic growth. If it looks like we’re getting a handle on the disease, growth could accelerate as confidence returns.

And Now, A Market Note

Markets have found some footing these past few weeks, although volatility has been historic in many cases. Price swings of 4-5% have become common as investors grapple with good and bad news. Stocks bottomed toward the end of March and have now moved significantly higher, although still quite a bit below their February highs. Absolutely nobody knows if we’ve seen the final bottom in price. Many in the investment community think we need to retest those March lows before we see the final low in the markets. I have no idea if that’s correct, but I still believe value is being created for longer-term investors; I also think it’s going to take time for this process to play out. I’ll warn you now that there is also a high probability that stocks won’t go up in a straight line. We’ve seen a substantial move higher from the March stock price lows, so it is reasonable to expect some profit-taking along the way. I think we still expect more wild market swings and we’re not done hearing bad news regarding the virus.  

I think investors should review their long-term asset allocations and risk profiles given current events. Something I wrote earlier bears repeating: You should not be investing money you will need in the markets on a short-term basis. Don’t bet next year’s tuition money on the markets right now. The better strategy, I believe, is to pick at assets with dollars you are willing to allocate to longer-term investments as they become or remain cheap. Also, you should be prepared for the possibility that any money allocated to equities may decline first before they start to advance, assuming there’s a recovery. There is no guarantee of profit, but the margin of error even after our recent advance is more favorable for long-term investors. I also believe the news cycle could remain grim, but stock prices will focus on the future and not the current headlines. Stocks will likely start their next long-term bullish phase once investors begin to sniff out a recovery. This is why I say, don’t try to time this market by selling and trying to pick the bottom.

Our Response To Market Movements

We have been scanning our investment universe to see where we should add assets and what areas may not be as attractive going forward. One of the other things we are attempting to do in taxable accounts is mine those accounts for losses. Basically, anything in equities by all investors purchased in the last two years is likely showing up in portfolios as a loss right now.  There are strategies we use in times like these to realize those losses to offset any gains already taken this year, but to also be used as carryforwards in later years. Since I’m guessing that taxes will be going up after 2020, we will be looking to have as many of those carryforwards as possible. I am happy to discuss this with you at any time.

Clients ask why I am optimistic. It’s easier to answer that with an anecdote that seems relevant to these times: a conversation that allegedly occurred between Union Generals William T. Sherman and Ulysses S. Grant during our Civil War. It happened during the Battle of Shiloh, which was fought 158 years ago on April 6-7, 1862. Up to that point in the war, Shiloh was the bloodiest battle the nation had ever seen. The details don’t matter much, so in brief, Confederate forces surprised Grant’s Union Troops in Western Tennessee on the first day of combat. His army barely held on into the night when Union reinforcements came onto the field. Both sides, exhausted by the day’s fighting, bedded down fitfully, knowing another day of hard fighting lay ahead. To add to their misery, a thunderstorm drenched the battlefield. It’s said that Sherman found Grant sometime after midnight standing under a tree out of the rain smoking a cigar. Sherman supposedly said to him, “Well, Grant, we’ve had the devil’s own day, haven’t we?” Grant is said to have replied while puffing on his cigar, “Yes. Lick ’em tomorrow, though.”  

Grant’s experience at Shiloh is just one of the events in our history where we’ve reacted to a sucker punch. Time after time we’ve been surprised and forced to get up off the ground after we’ve been knocked down. Americans have always responded in situations like this—you can see it in what folks are doing now—and it’s happened again, although this time the enemy is a virus. I’m betting on us once again. I don’t know when we’ll get the best of this virus, but I know we WILL get the best of it. We’re going to lick this disease; maybe not tomorrow, but someday soon, and it’s that tomorrow that we’ll turn to in our next report. We can perhaps now faintly start to imagine what that tomorrow is going to look like.  

Ulysses S. Grant obviously went on to bigger things after Shiloh. Three more bloody years of generalship followed for both him and Sherman. Grant learned his hard-won lesson from those days and was never surprised like that on a battlefield again.  I’m betting we won’t be surprised again in this manner by this virus or another disease.  We've taken it's measure, maybe even its best shot and we're going to beat it.

As always, I am here for you. If you have any questions or concerns, please don’t hesitate to reach out at 312.953.8825 or email us at lumencapital@hotmail.com. Stay healthy and safe.

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.

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(1) https://www.churchillbookcollector.com/pages/winston-churchill/233/the-end-of-the-beginning

(2)https://www.bloomberg.com/news/articles/2020-03-22/morgan-stanley-sees-u-s-economy-plunging-30-in-second-quarter

(3) https://www.politico.com/news/2020/04/09/coronavirus-unemployment-claims-numbers-176794