In line with our mission to keep you well-informed, we would like to address some of the many questions that we have received in the past weeks regarding the COVID-19 crisis. Nader recorded our first video from his house, as our whole team is working from home. We hope you enjoy it.
It’s been a really interesting last few weeks. We’ve had major shifts in our day-to-day habits, work habits and even our social habits. And all this in a really short period.
As a society, it’s really unbelievable how we’ve been able to adapt to this. It’s nothing less than phenomenal.
We want to share some of the questions that we’ve received over the last few weeks from our clients regarding the markets and the financial landscape.
Our first video will focus on: How this crisis is different from the last two, which occurred in 2000 and 2008. It’s different in three ways.
1. Bubbles and excesses in the system
In 2008, we were dealing with a housing bubble. There were structural issues in the economy—a lot of irresponsible behaviour by the banks, lending institutions, and consumers. Banks were undercapitalized, and there was a lot of overleveraging.
People were living way beyond their means. The housing bubble popped and impacted the entire food chain that was profiting from the unsustainable housing prices.
In 2000, we had a tech bubble. Forget about profits. Even non-revenue companies were trading at nosebleed valuations. And in 2000, everybody was a day trader. Even unprofitable, overvalued companies like Nortel represented 30% of the Canadian stock market.
Today, yes, valuations are stretched, but by no means were they in bubble territory. And that’s to be expected after an 11-year bull run. And if you take into account the low-interest-rate environment, they were somewhat justified.
We did have a few microbubbles, like in marijuana stocks and Bitcoin. But as a percentage of all asset classes, they were almost insignificant.
We are dealing with an event-driven self-imposed recession, which is very different and has very different characteristics.
However, the level of uncertainty does extend beyond just financial and health and well-being.
It’s causing an extreme amount of volatility and sometimes panic—like we see in the daily market moves of March, how we have empty shelves in stores, and things like toilet paper being sold out.
The main issue that we’re facing now is that some businesses aren’t experiencing a 30% slowdown in sales like in past recessions, but some are actually experiencing zero sales, which is not sustainable for a very long period and creates even more uncertainty.
2. Balance sheets
In 2008 in 2000, the economy was already struggling and slowing down. In 2008, people were getting their loans called in and had to declare bankruptcy. There was no way for them to get financing, and the economic system was coming to a halt.
Today we came into this with much stronger balance sheets, we were not over-leveraged, and our banks are well-capitalized, more than they’ve ever been before.
We are overall were a lot richer today than in 2008.
The unfortunate news is that there’s a lot of strain on workers, and unemployment is high. However, this is different than the other types of recessions. Companies want to hire people. People want to work. They just can’t right now.
Of course, if this continues in the long term, the cut will cause a major strain on the overall economy, individuals, and corporate balance sheets.
3. Speed and swiftness of the government policy
It’s been really impressive.
In 2008, the Central Banks waited seven months before getting involved with interest rate cuts. There is also the moral hazard of holding stimulus back. We don’t have that same constraint today.
Right now, we have a massive coordinated effort from all of the Central Banks to act almost with no handcuffs since it was not one industry’s fault or one company’s fault. It’s just a matter of circumstances.
One of the positive things that came out of 2008 is that the Government developed a playbook to deal with emergency-type crises affecting the financial system.
So we’ve been able to roll out programs at a much faster pace than in 2008. They didn’t need to reinvent the wheel. They just needed to tweak, adjust and redeploy some of the things already in place.
We’ve also seen collaboration with governments around the world—for example, Europe, who’s been traditionally more conservative.
We’re now getting a heavy dose of
- Monetary policy, which means cutting the interest rates.
- Fiscal policy, which is the government lending and support programs.
- Helicopter money, which is writing checks and giving cash to people and companies.
The magnitude of the stimulus does seem like it’s in line with the severity of the crisis, for now.
Overall, these differences lead us to be more constructive about eventual and faster recovery from the crisis than we were in 2008 and 2000—as long as it can be contained in a reasonable time.
Don’t forget that the markets will adjust and recover much faster than the economy.
This crisis has brought about a lot of different shifts in our day-to-day lives, and it’s been challenging for everybody to various degrees. Still, it has also shown us the incredible ability of resilience and adaptability that we are capable of.
This might be the first time that the whole world has agreed to put human lives in front of economic concerns, and those who are suffering could find some comfort and the enormous solidarity we’ve been witnessing.
On behalf of our entire team at the TWM Group, thank you for reading, and feel free to reach out to us.
