Online/Phone Reviews Available
We have been conducting several online or phone reviews for many of you over the past two weeks. We have been working remotely from our homes this week, and likely will be remote next week as well. We are fully operational and able to conduct business as usual just as if we were in our office each day. In fact, with all our systems and services operating from our homes, we find ourselves working very efficiently and extra hours needed during these ever-changing times. Please don’t hesitate to call or email to schedule a personal review, or if you have any questions or concerns. We are available for you and will keep you informed.
We Are Personally Invested
We think it’s important to make a quick disclosure that we have not recently reiterated to all of our clients in times like these. At F.I.G. Financial, we are all a part of a 401(k) program. All of the accounts in this plan are invested in the same models used by clients based on risk. We are not managing our personal 401(k)s any differently than we are client accounts. We are personally experiencing this volatility with our F.I.G. clients. With that said, please know we are not only committed to this for you and your families, but it directly affects our own accounts. We are on your side through all this, working diligently to keep current in an ever-changing environment. Our hope is to maneuver through this current situation to the best of our ability in order to try to benefit investment portfolios for the long-term.
Current Headlines-What to Believe?
With the recent steep decline of the financial markets, the news stories are flooded with comparisons and depictions of past crises. Financial headlines continue to show how fast the current financial markets have declined, recording the fastest 30% decline on record. The Great Depression of 1929 is now being compared to our current conditions as well as the current overall stock market performance to 1931. Many people fear and predict this is the direction the US is headed with many media stories displaying images of citizens standing in soup lines waiting their turn to receive a meal. However, we strongly disagree with these views and would like to explain our perspective.
We Believe This Is Not the Great Depression
Leading up to 1929, the stock markets had actually soared to new highs. Unemployment was 3%, and America looked good. The Fed began increasing interest rates during the run-up of stocks. Fast forward to the end of 1932, GDP (the economy) had fallen roughly 15% and unemployment had risen above 20% almost worldwide. In the first half of the above description, you could have been describing 2019. In the latter part, you might see these numbers from some of the recent reports released for what is anticipated to occur. We do agree and believe the current situation will likely create short-term fluctuations and not long-term systemic issues. It obviously could get worse before it gets better, but we do not agree with the comparisons to the Great Depression. To better explain, let’s look at some major differences in both the actions of the Fed as well as the banking system.
At the time of the Great Depression, the US dollar was still backed by gold. During the panic, this caused problems as many were trying to swap their dollars for gold. In an attempt to stave off the collapsing dollar, the Fed continued hiking interest rates through the market collapse and into the recession, exacerbating the need for liquidity. In a speech given in 2002 by Ben Bernanke, he apologized to America for what he agreed was poor Fed policy that accelerated the problems of the Great Depression, “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” A run on the banks quickly followed the stock market collapse of 1929, hemorrhaging deposits. Most assets were withdrawn via paper cash, leaving none in the banking system. This led to a surge in banking closures with many depositors losing everything. At that time, the FDIC did not exist.
Today, the FDIC protects deposits of savers up to certain limits. As a result of this, most individuals keep their deposits in the banking system allowing them to serve the economy rather than holding printed paper dollars stuffed under their mattresses. That wasn’t an irrational move for the times, but it was indeed a panic. Banks do not hold this amount of liquidity to provide on such short demand, nor should they. George Bailey does a fairly good job explaining this in It’s a Wonderful Life. Banks lend the deposits to communities to help spur investment and earn a return.
In the instance of today, we are concerned of the long-term impacts of the actions of governments and central banks, however it is the exact opposite to the actions of the Great Depression. We are concerned for the long-term value of the dollar. In 1929, the Fed shared this view of ours and was concerned with the value of the dollar. Their actions were focused on trying to prop up its value rather than providing for the severe liquidity needed to provide confidence to consumers during a time where the demand for cash surged. This year, we will see more liquidity pumped into the financial system than any other time in history. The pace at which the liquidity will have to continue to be delivered will be unprecedented. The Fed has now been buying $125 billion in securities per day. Again, we believe they do not have much choice in the short-term. The amount of liquidity needed will only escalate in the coming weeks as more companies and individuals are forced to close while maintaining funding, creating a severe demand for cash (to be clear: bank deposits, not paper). Once doors re-open, most of this liquidity will remain in the system. Many argue this liquidity can be removed. We believe some of it can, however the Fed tried to wind down its balance sheet in 2018 and had to abruptly change course. Again, we must stress that this gives us concern for the dollar, not investments. It should benefit investments such as stocks, but to the detriment of buying power for cash savers.
Based on these major differences, we do not believe this will be a Great Depression repeat by any measure over the next several years. We will likely see headlines of similar declines and impact to the economy, but we remain in the belief that this is short-lived. It may also be relevant to note that America was also hit by the “Dust Bowl” shortly after, which clearly did not help the situation. Further unseen events could also affect our current opinion. Presently, there are not any severe business issues other than the fact that companies are being forced to close their doors for a short period of time worldwide. If this shut down due to the virus is for a shorter period than most expect, we also believe we could see a surge back to normalcy. There will be headaches and speed bumps, but the markets focus on forecasting, always looking ahead, rather than what is happening in the present day.
So, we say all of this, accepting the short-term risks. We have no idea what direction markets take over the prevailing months. However, we do know we are able to buy stocks in businesses at levels we thought would not be possible for years. We are confident that it should bode well for clients in the next three to five years when this has passed. We adamantly believe in investing in businesses that are undervalued, accepting the risks that come with short-term price fluctuations in the equity markets. The entire globe shutting down in attempt to limit the spread of a virus is not a normal event. We cannot anticipate these types of events nor are we able to plan and invest for them. Fortunately, based on indicators we do follow on a regular basis, we were conservatively invested based on each of our risk levels, anticipating some type of market decline and ultimately recession. Even with current risks now a reality, we remain optimistic about the long-term prospects now being offered as investors. We realize the current environment is scary and stressful, but we believe in the future, this too shall end.
We were able to re-balance our portfolios Monday, March 23rd, allowing us to move back to a reasonable level of stocks moving forward. This has served us well so far, but we realize stock prices could decline again over the next few weeks. We will continue to take advantage of opportunities as they present themselves. Our overall equity/stock exposure still remains lower than we prefer as we are keeping capacity to purchase more equities for clients as opportunities arise.
Bond Update
We had previously posted the announcement that we had liquidated all our bond fund holdings on March 18th. We considered this to be an extreme and unusual measure, however it has saved our lower risk clients from suffering further declines in bond prices. We will look to begin adding back exposure to fixed income potentially this week and the weeks ahead. However, we do remain concerned with the high demand for liquidity currently presented, but this should stabilize in the months ahead as well. At the time of our liquidation, we did not believe the bond markets were pricing this risk in appropriately. We are now more comfortable with the pricing that has evolved since then. We will be looking at relatively lower grade bond issues, which may seem contrary to standard thinking, but we remain concerned that interest rates could see a sharp short-term rise, which would be detrimental to ultra-conservative bond assets. Lower grade bonds should perform better due to the massive rate spreads now being priced in. Ironically, municipal bonds are also seeing these large spreads, which is another area of interest for the first time in years rather than treasury bonds. A “spread” is simply a “premium” given to investors for certain bonds over other types of bonds for one reason or another. Typically, you are looking in terms of credit risk (chance of default). As these spreads are ballooning, this now gives a reason to invest in them as you are being compensated for the risk. Additionally, if those risks subside and concerns are alleviated, those “higher risk” bond investments will perform well even in a potentially rising interest rate environment. Also, as of this morning, the yield for U.S. 90-day T-Bills actually went negative. We haven’t seen this since 2008, however, Europe and Japan have been experiencing negative rates for some time now.
We have been speaking with many of you through this time, trying to help explain our process and outlook moving forward. If any of you have specific questions, please feel free to call us anytime. Additionally, we can be reached by e-mail and will respond as promptly as possible. We are here to serve you.
God Bless and Stay Well,
Your TEAM at F.I.G. Financial Advisory Services, Inc.
Uncertainty and Volatility