A review of how the pandemic, financial markets, and government policy evolved in 2020 to make for an unforgettable year.
Topics covered include:
- Why the Covid-19 pandemic ranks as the second worst in modern history
- What is the difference between risk and uncertainty and how our investing should be different when dealing with uncertainty
- What portfolio changes did David make in 2020 and how should he have invested if he had perfect foresight
- Why speculative assets such as gold and cryptocurrencies have performed so well in 2020
- Why high savings rate and pent up demand provides a tailwind for the economy
- How to invest and live when the future is unknowable
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Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today’s episode, 324. It’s titled “2020, the year we will never forget.”
Yesterday, LaPriel and I went to the dentist for the first time in a year. We were a little apprehensive. My dentist, Tony, is a close friend from high school. We booked an appointment at 7 AM on Monday morning, the first appointment after the office had sat empty the entire weekend. This was the closest that LaPriel and I had physically been to anyone since mid-March. It shows how strange this year has been. Tony made fun of my hair. I’ve not cut my hair since February. It’s the longest it’s been, really since high school.
Covid-19: The Second Worst Pandemic of the Modern Era
We’re wrapping up 2020. It’s December. I looked back at the 42 episodes that I have recorded and produced, of the regular podcast. The first episode that I did with regards to the pandemic was episode 286. I released it on February 5th, 2020. It was titled “Coronavirus and the financial impact of pandemics.” I pointed out that the economy had been in a slowing pattern for over a year, but it had not fallen off a cliff. The recession risk had not spiked. There was a risk out there, but it wasn’t imminent, and the economy seemed like it was bottoming. Now, that might have been delayed because of the Coronavirus pandemic, I said, but I wasn’t overly concerned.
I mentioned the Federal Reserve had never cut interest rates in response to a pandemic, so things would have to get much, much worse for them to do it this time. And did they ever.? A month later they cut interest rates to zero.
Then I went over the pattern of pandemics. Typically, there’s an initial hit to the economy, because people are not shopping as they usually do. They’re afraid to go out. They don’t travel like they typically do. Production slows down.
But then about a year later, generally speaking, the economy rebounds back to trend, so it doesn’t have a permanent impact if the virus can be contained. At the time, we didn’t know how severe the pandemic would be. The worst pandemic in the modern era was the 1918 influenza pandemic. 500 million people or one-third of the world’s population was infected with that virus. 50 million deaths worldwide. About 675,000 deaths in the U.S.
In that episode, I shared other incidences of pandemics, such as the 1968 influenza pandemic, where a million people died worldwide, and 100,000 in the U.S. Who would have thought that the Covid-19 pandemic would be the second-worst pandemic in the modern era? As of today, there have been 67.8 million confirmed Covid-19 cases. 1.5 million deaths. 15 million cases in the U.S, and 284,000 deaths. Worse than the 1968 influenza pandemic, and worse than the 2009 swine flu pandemic, which had 130,000 deaths worldwide and 12,000 in the U.S. Worse than SARS, MERS, Ebola, the Zika virus.
No one that I’m aware of accurately predicted that things would get this severe, at least not back in January or early February, when I released that episode. My mother passed away a couple of weeks after that episode. I happened to be flying back to Cincinnati at the time and arrived at her house less than an hour after she passed away.
We chose to delay the funeral until March 15th, so family members could gather together. It was a Saturday. It was a beautiful service. It was great to visit with friends and family, to sit around the table with my cousins, who I hadn’t seen in several years. But after that, that same day, finally the pandemic hit.
This is not normal, what we’re seeing. And we started sheltering in place right then. We didn’t even see family members the next day. We flew back to Arizona; our daughter left university to start studying at home with us. Our son and daughter-in-law moved in, because she wasn’t able to attend her classes, and took them online. And that’s been the experience of many of us. For many, it has been worse, because they’ve gotten sick, or a loved one passed away. And clearly, for the 2020 will be unforgettable.
Risk versus Uncertainty
March 23rd I did an episode, episode 291, “How to survive the Covid-19 shutdown“, and I said “What do we do to survive? We avoid ruin and help others avoid ruin”, ruin being dying, having our businesses destroyed, going bankrupt, not making it through the next 3, 6 or 9 months. And it’s been 9 months. I said, “We don’t know how long it’ll be, but we have to follow the precautionary principle, which is to take preventive action in the face of uncertainty.” We had no idea.
We have laughed repeatedly, thinking back to the Saturday Night Live skit, where the characters are going to a fortune teller, and it’s late 2019, and they’re all excited about their 2020 plans, and the fortune-teller says it’s not going to be anything like that. She won’t say it’s a pandemic, but she’d just give glimpses of what life is like. And mentions they’ll be washing their potato chip bags and complaining that they’re not using enough soap to get the bag clean. And that’s where we were in March, wiping down our groceries. We were afraid to look anyone in the eye, for fear we would get infected by Covid-19.
We took preventive action, in the face of uncertainty. Something is uncertain if we don’t know what could happen, or we don’t know the odds of what will happen. We can’t put probabilities to it.
Something is risky if there’s a narrow range of outcomes, with odds that can be estimated. With Covid-19, it’s uncertain. It was uncertain. Something that is risky can be insured against. We can buy insurance because there are known probabilities that could be estimated. But not with uncertainties. There, we can just take preventive action so that we’re not ruined. And from an investing standpoint, many of us did. On Money For the Rest of Us Plus, we reduced stock exposure by 10% on March 2nd, 2020. And by March 16th we also reduced credit risk, as well as reduced stock exposure even more.
I reduced risk in my portfolio on March 7th, 11th, 18th, and 19th, incrementally. I did buy an individual Treasury inflation protection security on March 19th, because yields popped for about three days there. What I should have done is sold the puts that I had bought, which benefitted from the drop in a bank loan ETF. It was up about nine times what I paid for it, but I got greedy and didn’t sell for months. I did sell at a profit, but one of the things that I learned from an investment standpoint is with hedges like that, once fear spikes take profits. Because in this modern era of central banking, central banks will step up and do what they can.
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