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Coronavirus: The Black Swan of 2020
Here is a note that we sent to Sequoia founders and CEOs today to provide guidance on how to ensure the health of their business while dealing with potential business consequences of the spreading effects of the coronavirus.
Dear Founders & CEOs,
Coronavirus is the black swan of 2020. Some of you (and some of us) have already been personally impacted by the virus. We know the stress you are under and are here to help. With lives at risk, we hope that conditions improve as quickly as possible. In the interim, we should brace ourselves for turbulence and have a prepared mindset for the scenarios that may play out.
All of you have been inundated by suggestions for precautions to take around COVID-19 to protect the health and welfare of you, your employees, and your families. Like many, we have studied the available information and would be happy to share our point of view — please let us know if that is of interest. This note is about something else: ensuring the health of your business while dealing with potential business consequences of the spreading effects of the virus.
Unfortunately, because of Sequoia’s presence in many regions around the world, we are gaining first-hand knowledge of coronavirus’ effects on global business. As with all crises, there are some businesses that stand to benefit. However, many companies in frontline countries are facing challenges as a result of the virus outbreak, including:It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained. It will take even longer for the global economy to recover its footing. Some of you may experience softening demand; some of you may face supply challenges. While The Fed and other central banks can cut interest rates, monetary policy may prove a blunt tool in alleviating the economic ramifications of a global health crisis.
- Drop in business activity. Some companies have seen their growth rates drop sharply between December and February. Several companies that were on track are now at risk of missing their Q1–2020 plans as the effects of the virus ripple wider.
- Supply chain disruptions. The unprecedented lockdown in China is directly impacting global supply chains. Hardware, direct-to-consumer, and retailing companies may need to find alternative suppliers. Pure software companies are less exposed to supply chain disruptions, but remain at risk due to cascading economic effects.
- Curtailment of travel and canceled meetings. Many companies have banned all “non-essential” travel and some have banned all international travel. While travel companies are directly impacted, all companies that depend on in-person meetings to conduct sales, business development, or partnership discussions are being affected.
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Key Points:...
- Ray Dalio, the founder of Bridgewater Associates, estimated the U.S. corporate losses will amount to $4 trillion due to the coronavirus pandemic.
- Globally, the outbreak will cost corporations $12 trillion, he added.
- "What's happening has not happened in our lifetime before. ... What we have is a crisis," Dalio said.
- "There will also be individuals who have very big losses."
- Dalio added the fiscal stimulus package should be at least $1.5 trillion to $2 trillion.
As investors rush to cash during these very uncertain times, Bridgewater Associates' Ray Dalio reminded everyone during his Reddit Ask Me Anything event Tuesday that cash is still “trash” relative to assets like gold.
One of the more popular questions the founder of Bridgewater Associates was asked Tuesday was this one — “A few months ago you said cash is trash. But now cash is king. What gives?”
Dalio was very happy to clarify his answer, noting that his opinion has not changed even after the COVID-19 outbreak hit the financial markets hard all across the board.
“When the virus hit and it had its negative impact on earnings and balance sheets, asset values plummeted which made cash look comparatively attractive. However, what did the central banks do? They created a ton more cash,” he said.
“When you think about what assets are safe to own, and you think of cash, please remember that while it doesn't move around in value as much as other assets, there is a costly negative return to it in relation to goods and services and other financial assets that amounts to about a couple of percent a year, which adds up,” he continued.
Dalio sees value in assets like gold and stocks: “I still think that cash is trash relative to other alternatives, particularly those that will retain their value or increase their value during reflationary periods (e.g., some gold and some stocks),” he said.
The U.S. dollar is regarded as the world’s reserve currency, which is why the U.S. government is able to provide money and credit, Dalio explained when answering a question about the current market environment.
“While the U.S. accounts for about 20% of the world economy, the U.S. dollar accounts for about 70% of the world's buying, selling, borrowing, and lending … I believe that increasingly there will be questions by bondholders who are receiving negative real and nominal interest rates while there is a lot of printing of money about whether the debt assets they are holding are good storeholds of wealth. I believe that cash, which is non-interest-bearing money, will not be the safest asset to hold,” he said.
The COVID-19 crisis has been boosting the U.S. dollar as “the world desperately needs dollars,” Dalio added, noting that this renewed greenback strength will not last.
“Having the world's printing press to produce the world's currency is the equivalent of having the world's most important asset, especially in times when so many people need the world's money. So, we are now having a short squeeze on the dollar,” he said. “Eventually, that will end because either that shortage of dollars will be satisfied by enough creation of dollars or it won't be satisfied in which case there will be debt defaults and restructurings that will reduce the need for dollars. When that happens, the dollar will weaken. It will also weaken when those who are holding dollar-denominated debt no longer want to hold that debt because interest rates are inadequate and so much dollar-denominated debt and money is being created that its value is undermined.”
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The pandemic sweeping the world will turn global economic growth “sharply negative” in 2020, triggering the worst fallout since the 1930s Great Depression, with only a partial recovery seen in 2021, the head of the International Monetary Fund said.
IMF Managing Director Kristalina Georgieva painted a far bleaker picture of the social and economic impact of the new coronavirus than even a few weeks ago, noting governments had already undertaken fiscal stimulus measures of $8 trillion, but more would likely be needed.
She said the crisis would hit emerging markets and developing countries hardest of all, which would then need hundreds of billions of dollars in foreign aid.
“Just three months ago, we expected positive per capita income growth in over 160 of our member countries in 2020,” she said on Thursday in remarks prepared for delivery ahead of next week’s IMF and World Bank Spring Meetings.
“Today, that number has been turned on its head: we now project that over 170 countries will experience negative per capita income growth this year.”
If the pandemic faded in the second half of the year, the IMF expected a partial recovery in 2021, Georgieva said, but she warned the situation could also get worse.
“I stress there is tremendous uncertainty about the outlook: it could get worse depending on many variable factors, including the duration of the pandemic,” she said.
The IMF, which has 189 member countries, will release its detailed World Economic Outlook forecasts on Tuesday.
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Investing legend Stan Druckenmiller unleashed a firehose of cold water on market bulls today during an interview with the Economic Club of NY (the same venue that will interview Jerome Powell tomorrow on the topic of negative interest rates), when he said the "The risk-reward for equity is maybe as bad as I've seen it in my career," (although "the wild card here is the Fed can always step up their purchases"), that the government stimulus programs won’t be enough to overcome the economic problems, that it makes no sense for the market to jump so much when optimism emerges around certain drugs like remdesivir ("I don't see why anybody would change their behavior because there's a viral drug out there") and, most concerning, that "there's a good chance that we just cracked the credit bubble that's the result of free money."
"The consensus out there seems to be: 'Don’t worry, the Fed has your back'," Druckenmiller said during Tuesday's webcast before adding "there’s only one problem with that: our analysis says it’s not true."
Furthermore, while traders think there is "massive" liquidity and that the stimulus programs are big enough to solve the problems facing the U.S., resulting in stratospheric P/E multiples, the economic effects of the coronavirus are likely to be long lasting and will lead to a "slew" of bankruptcies, Druck said, agreeing with our observations from last week that the underlying problems are shifting from illiquidity to insolvency, as a "biblical" wave of defaults is coming:
"I pray I’m wrong on this, but I just think that the V-out is a fantasy," the trading legend said, crushing hopes for a V-shaped recovery, assuming anyone still harbored those, and added that the recent increase in unemployment in the U.S. stunning. The official U.S. unemployment rate is at 14.7%, the highest level since the Great Depression.
As Bloomberg summarizes, "Druckenmiller’s remarks are among the strongest comments yet by a Wall Street heavyweight on the bleak outlook facing the U.S." Druck's apocalyptic outlooks also sharply contrasts to the optimism that has pushed the S&P 500 Index to rally 30% since its March low even as the pandemic has brought the economy to a standstill, seized up credit markets and ended the longest bull market in history, all thanks to the now ubiquitous Fed backstop and moral hazard.
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Kyle Bass said:...
While Bass is hopeful that the current crisis will focus American policy makers on reforming the U.S. relationship with China, he remains fearful of declining social cohesion here at home.
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“The debate going into [the November] election will be Wall Street getting bailed out and Main Street having done poorly,” he warned. “The price of assets are going to go up. Every rich person that owns those assets, they’re going to get richer, and the middle class that either has to rent or buy those assets, this becomes more unattainable.”
Wondered Bass: “What happens if we get to November and stock markets are at all-time highs, and we’re at 15% unemployment, and the food [banks] don’t have food? Imagine this world. ...
Matt Tiabbi said:...
Assuming the Fed bazooka keeps firing, however, a large portion of the investor class is already on a road leading back to champagne and confetti. And that, as Robert Frost would say, has made all the difference.
On the road more traveled, on the real side of the coronavirus economy, the pain has been historic. As of this writing, 30 million people have filed jobless claims during the COVID-19 crisis, and millions have lost their employer-based insurance.
At least one in three can’t make their rent, millions more can’t afford groceries, and workers in supermarkets, medical clinics, warehouses, and other professions are now in a macabre race to see if they’ll turn blue and die before corporate employers decide to slash their salaries or retirement benefits — which has already happened to front-line caregivers in some cities.
There are no projections of record earnings in the futures of such people. The best case is survival, and the grim reality of diminished economic horizons. Yet for the tiny sliver of people whose fortunes depend not on salaries, tips, and commissions, but upon the prices of financial products like stocks and bonds, the coronavirus response heralds a brave new world.
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Stephen Roach - faculty member at Yale University and former chairman of Morgan Stanley Asia said:The era of the U.S. dollar’s “exorbitant privilege” as the world’s primary reserve currency is coming to an end. Then French Finance Minister Valery Giscard d’Estaing coined that phrase in the 1960s largely out of frustration, bemoaning a U.S. that drew freely on the rest of the world to support its over-extended standard of living. For almost 60 years, the world complained but did nothing about it. Those days are over.
Already stressed by the impact of the Covid-19 pandemic, U.S. living standards are about to be squeezed as never before. At the same time, the world is having serious doubts about the once widely accepted presumption of American exceptionalism. Currencies set the equilibrium between these two forces — domestic economic fundamentals and foreign perceptions of a nation’s strength or weakness. The balance is shifting, and a crash in the dollar could well be in the offing.
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The coming collapse in the dollar will have three key implications: It will be inflationary — a welcome short-term buffer against deflation but, in conjunction with what is likely to be a weak post-Covid economic recovery, yet another reason to worry about an onset of stagflation — the tough combination of weak economic growth and rising inflation that wreaks havoc on financial markets.
Moreover, to the extent a weaker dollar is symptomatic of an exploding current-account deficit, look for a sharp widening of America’s trade deficit. Protectionist pressures on the largest piece of the country’s multilateral shortfall with 102 nations – namely the Chinese bilateral imbalance — will backfire and divert trade to other, higher-cost, producers, effectively taxing beleaguered U.S. consumers.
Finally, in the face of Washington’s poorly timed wish for financial decoupling from China, who will fund the saving deficit of a nation that has finally lost its exorbitant privilege? And what terms — namely interest rates — will that funding now require?
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... The world is going to change in the next five years in shocking ways in relation to the three big issues we have been talking about.
First, there’s a debt-money cycle — what is the value of money? What will happen to the debt? Will the dollar retain its value? The finances of this — who is going to pay for it? How? What will work? That’s number one.
Second, the wealth, opportunity and values gaps will have to be dealt with. Are we going to be at each other’s throats in a way that is harmful or are we going to be working together even if things get worse?
Third is the rising of a great power in China to challenge the existing power of the United States. Will this be well handled?
... The last time those three things existed as they do now was the 1930 to 1945 period. That’s the last time you had zero interest rates and money printing. That’s the last time you had the wealth and political gaps as large as they are today, and it was the last time you had rising powers challenging the existing world order. This and many analogous times before it help to give us perspective.
With so much debt in the U.S., financial markets are entering a new paradigm, where we could see "shocking" tax changes that might involve prohibitions against capital movements to assets like gold, bitcoin, and other tax jurisdictions, said Bridgewater Associates founder Ray Dalio.
"Because I believe that we are in the late stage of this Big Debt Cycle … I believe cash is and will continue to be trash (i.e., have returns that are significantly negative relative to inflation) so it pays to a) borrow cash rather than to hold it as an asset and b) buy higher-returning, non-debt investment assets," Dalio wrote in a LinkedIn post.
Tax changes will play a massive role in dealing with the debt problem going forward, he elaborated. And more importantly, there might be restrictions in terms of where investors could move their capital.
"Policymakers who are short of money will raise taxes and won't like these capital movements out of debt assets and into other storehold of wealth assets and other tax domains so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.) and other locations. These tax changes could be more shocking than expected," the founder of the world's biggest hedge fund said.
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The COVID-19 pandemic and all the fiscal and monetary policy stimulus that followed created a lot of debt as well as classical signs of bubbles across many assets, Dalio added.
"These circumstances created a lot of government debt—i.e., because there wasn't enough free-market buying of this debt, central banks had to buy it and had to print a lot of money to buy it with—so much so that they drove rates down to 'artificially' low levels, which 'artificially' supported financial asset prices," he wrote. "Now, there's just so much money injected into the markets and the economy that the markets are like a casino with people playing with funny money … You have stocks that have gone up, and you have classic bubble dynamics in so many different assets."
Billionaire investor Ray Dalio, the founder of the $150 billion hedge fund Bridgewater Associates — the world’s largest — made a case that there’s a “good probability” bitcoin could be outlawed ...
So what are your personal thoughts on it? Is he off his rocker? Or is he merely pointing things out that should be readily apparent to anyone paying the least bit of attention to where this ride is taking us?Ray published a book a while back and produced a ~40min Youtube with a condensed version of the material:
So what are your personal thoughts on it? ...
... we are in a world in which money as we know it is in jeopardy, right? We are printing too much and it’s not just the United States, all the reserve currencies, the euro, what’s going on in euro and what’s going on in yen. And so in that world, the question is, what is money and how’s that going to operate? ...
Soaring U.S. government debt is reaching a point where it will begin creating larger problems, Bridgewater Associates founder Ray Dalio said Friday.
The hedge fund titan warned during a CNBC appearance that the need to borrow more and more to cover deficits will exacerbate the political and social problems the country is facing.
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I saw a Ray Dalio commercial on youtube today. It consisted of a clip out of his video.
I didn't watch the whole thing, but what I did see of it was a clip out of his video, "Changing World Order".Was the commercial promoting his book or something else?
... This is a shift from 'its all gonna fall down in about 2 years' ........
Billionaire investor Ray Dalio has had a mixed relationship with the U.S. dollar over the last few years, and it appears he is once again raising doubts about the health of the greenback.
In a commentary posted to LinkedIn on Thursday, the former Bridgewater Associates CEO said he is holding gold as a hedge against a potential debt crisis and higher inflation.
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Do you think it will?When the global financial system flips from debt to an asset based system things will get real interesting.
I think you mean "our" as in the USA? If you really mean home assets... well I think we have mentioned "The Alpha Strategy" several times over the years.Things will get interesting, as you say; but what our "assets" do will probably be the least of our concerns.
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