There is a saying on Wall Street that “even a dead cat, dropped from a great height, will bounce when it hits the ground.” The “dead cat bounce” sounds perhaps like a macabre dance that might be appropriate for the strange times in which we live. But rather, it refers to the tendency of stocks to recover a bit after sharply plummeting. To borrow a line from the pilot episode of Star Trek Enterprise (2001), “Your metaphor is crude… but accurate.” But in this case, we aren’t talking about a stock market crash. We’re talking about freezing the entire economy in place as the country faces down the COVID19 pandemic.
DETERIORATED MARKET CONDITIONS
Cries of “we weren’t prepared for this” are at odds with the irrational exuberance of every voice that, for years, touted the virtues of the Trump economy. But rather than rein in spending while increasing tax revenues, the corporate tax cuts further inflated already-rich market valuations, while a concurrent failure to decrease federal spending limited the government arsenal to address crises such as this one. After the recent downturn, we are still far closer now to the stock market valuation that preceded the 1929 crash than we were a month ago, if we measure as a matter of total market cap to gross domestic product (TMC/GDP).
This is referred to as the “Buffett Indicator” because Warren Buffett likes it. Or something. It doesn’t tell you when the stock market is going to crash, but it can help understand how far stretched the economy is– and how far it might fall.
Rewind. We were at 158.9% TMC/GDP on February 21, 2019. In 1929, the ratio was about 126%. We are now at about 107%. On March 30, 2009, that ratio bottomed out at 59%. This means that, if we follow the lead of 2009, the market is still liable to lose half of its value without factoring in COVID19. How much will COVID19 cost the economy? Trillions, invariably.
UNDERSTANDING HOW PEOPLE VIEW THE MARKET
To the uninitiated, there are two main schools of thought in how to manage investments. Fundamental analysis is concerned with looking at a stock’s balance sheet, growth potential, and valuation. Technical analysis is concerned with movement, volume, and patterns. By and large, the latter is valuable only for short-term analysis. The former is a safe long-term bet and generally the most credible approach to investing.
The economy isn’t producing things. People aren’t buying things. That means bad fundamentals. Bad fundamentals mean there’s no reason for it to move up.
Technical analysis– promulgated by a perverse number of popular financial journalists- is often akin to tea leaf reading. “We are now exiting a stick-and-hook form,” a pundit calling himself an analyst will say, self-assuredly, pointing to a chart that, I guess if you were Trump-doodling with a Sharpie, might look a bit like a, uh, is that a scythe? “This,” the pundit, clad in midnight-colored robes emblazoned with arcane runes, continues, “is indication that the stock will rise!” He concludes the primetime segment by casting some dark red powder into a flame, which turns purple.
Fundamentals, driven by well-understood business metrics, look at where a stock should be. Technicals– driven by a combination of psychology and mathematical analysis- look at where a stock appears to be headed in relation to where it was recently. The lay investor, on the other hand, only cares whether it goes up or down. Today’s bounce, which I predict is probably short-lived, given the ongoing COVID19 disaster, is not a harbinger of recovery, but rather a technical indication that may give false hope.
Why? Simply put: The economy isn’t producing things. People aren’t buying things. That means bad fundamentals. Bad fundamentals mean there’s no reason for it to move up.
WHY THE MARKET SHOULD MATTER TO NORMAL PEOPLE
This becomes a huge problem when you have a president apparently obsessed with markets. And when his own tax cuts bolstered the value of those markets. Or when those markets represent, uh, a third of the American workforce.
As the market is not only a source but also a mirror of capital, crumbling fundamentals are portents of crumbling balance sheets. Shrinking balance sheets mean layoffs. Layoffs mean unemployment, and unemployment means that things are gonna get a whole lot worse before they get a whole lot better.
One of the rhetorical devices of the Trump era is that any critiques of the administration are– or were, really- met with a dismissive rebuttal of, “well, my 401(k) is doing great!” Such wasn’t the case after yesterday, when three years of gains were wiped out. Commentary notes that many small investors– what are called “retail” investors as opposed to institutional investors, or the people who buy and sell hundreds of thousands of shares of stock every second based on complex algorithms and sorcery (that should probably be illegal, frankly)- left the market and never came back.
While apps like Robinhood or Stash have tried to cop some of the millennial and Gen Z market, the current volatility leaves many questions about whether the mom-and-pop scale of investor will ever return.
Unfortunately, the entire economy is wrapped up in the stock market. About a third of Americans work for large corporations, most of which are publicly traded. As the market is not only a source but also a mirror of capital, crumbling fundamentals are portents of crumbling balance sheets. Shrinking balance sheets mean layoffs. Layoffs mean unemployment. And unemployment means that consumption– 70% of the US economy- will slow or stop. This prevents companies from refinancing a massive debt pile, which throws them into a vicious circle of decline. That things are gonna get a whole lot worse before they get a whole lot better.
THE TAKEAWAY
This makes the case for a better stimulus package that puts workers and consumers ahead of corporations. Workers and consumers didn’t push corporate balance sheets to a breaking point– corporations did that on their own. It’s a thoroughly inefficient and inappropriate use of resources to leave the onus on the worker and the consumer and allow corporations to enjoy access to a massive pile of cash with few strings attached.
Perhaps the Danish strategy— to pay furloughed workers’ salaries while most of the country effectively freezes- will work. But a corporation with free cash does what corporations do– it rewards executives and it rewards shareholders. It is not going to reward the worker. If the worker suffers, the worker can neither produce nor consume. And that’s what has led to the current collapse.