What_The_Doomer_Bears_Got_Wrong_And_Whats_Next
00:00:00.000 | Hello everybody it's Sam from Financial Samurai and in this episode I want to
00:00:03.840 | talk about what the Doomer Bears got wrong. So if you've been paying attention
00:00:09.960 | to the markets they're up about 25 plus percent since the bottom hit in March
00:00:16.600 | and during the March time period when the hysteria was at its height very
00:00:22.840 | experienced investors were talking about the S&P falling to like 1500 the Dow
00:00:29.680 | Jones Industrial Average falling to 15,000 and instead the markets rebounded
00:00:35.800 | quite vigorously. So I wanted to just check out and have a discussion on what
00:00:41.280 | happened because nobody has a crystal ball. Look when the hysteria was at its
00:00:45.160 | height people were just freaking out nobody really felt very confident at all
00:00:49.680 | especially if you turn on the news and you check social media and so forth. If
00:00:54.040 | you read the post "How to predict a stock market bottom like Nostradamus" it was
00:00:58.680 | published on March 18th. It was my attempt to call the market bottom and
00:01:04.800 | predict the market bottom using some rational thought in terms of earnings
00:01:09.640 | and valuations. Go through the post if you haven't already. The whole idea of
00:01:14.400 | the post was to encourage people to think rationally about earnings
00:01:19.320 | valuations and the future. It wasn't so much okay this is exactly how you're
00:01:24.880 | going to do the analysis but really it's to help people think through things
00:01:29.720 | during the height of hysteria. So the post was published on March 18th. I
00:01:34.160 | talked about the stock market bottom being between 2200 and 2400 and the very
00:01:40.160 | next day the market went down to 2300 and then the very next day it did
00:01:44.400 | bottom at 2237. Now is that luck or is that skill? I think it's a combination of
00:01:50.320 | both. Let's say it's 50% luck and that's fine because that was my framework
00:01:54.760 | to put money to work in the stock market and to make myself feel better that the
00:02:00.040 | world wasn't coming to an end. So now we're at around 2830 as of April 21st so
00:02:07.560 | that's about a 27% rebound so any money you put in below 2400 you know you're up
00:02:13.000 | 20 to 27% and that's really good money and that's technically a bull market. So
00:02:18.760 | let's dig deeper into why the Doomer Bears got the market direction wrong. Why
00:02:23.720 | we didn't fall off the cliff and why we have rebounded so ferociously since the
00:02:29.360 | bottom. Now I think there's four main parts. The first is the Bears
00:02:34.040 | underestimated the power of the Fed. There's an old saying "don't fight the Fed"
00:02:38.280 | and in this case you definitely did not want to fight the Fed because they did
00:02:42.760 | so much to prop up the markets and maybe the economy. So for example March 3rd
00:02:49.840 | they had an emergency 50 bps rate cut and then on March 15th another rate cut
00:02:56.800 | by one percentage point down to 0% and then on March 17 there was a slew of
00:03:02.480 | measures aimed at keeping credit flowing through the financial system. The Fed
00:03:06.080 | said it would start buying commercial paper or the short-term unsecured debt
00:03:10.120 | that businesses rely on for operational cash. On the 18th there was another
00:03:14.760 | facility providing credit to keep money markets functioning properly. On the 19th
00:03:19.640 | there's a new operation focused on currency swaps. On the 20th the operation
00:03:25.240 | headed by the Boston Fed announced they were buying municipal debt which was
00:03:28.760 | huge because muni bonds were just getting crushed just like the stock
00:03:32.760 | market which was a big big surprise for me at least. What else? On March 23rd
00:03:37.880 | there was an expansion of the Fed's original announced asset purchases which
00:03:42.520 | were supposed to max out at 700 billion. They expanded that and now it's
00:03:46.640 | basically unlimited. On March 23rd there's additional next leg of
00:03:51.280 | quantitative easing. The Fed also announced a 300 billion credit program
00:03:55.360 | for businesses and consumers. On April 6th they announced they'll provide
00:04:00.800 | support to the Treasury's payment protection program and on April 9th
00:04:06.160 | talked about supporting the 2.3 trillion lending program that will
00:04:11.640 | extend credit to banks that issue PPP loans. So the Fed was all in and then the
00:04:17.000 | federal government was also all in. Think about all the programs that we are
00:04:22.000 | receiving right now. We've got $600 extra in unemployment benefits. We've got
00:04:27.600 | stimulus checks of up to $1,200 per person and $500 per child for those who
00:04:34.040 | make under $75,000 each or $150,000 total for a household. And then we've got the
00:04:40.560 | paycheck protection program which I've said is amazing if you can get it
00:04:46.000 | because it covers two and a half times monthly payroll and 75% of the funds can
00:04:52.400 | be used for salary and the other 25% for rent, retirement benefits and so forth. So
00:04:59.120 | the true amount by the way for how much you can get per employee, the maximum
00:05:04.240 | amount for under the PPP program is about $27,000 per employee if you're
00:05:11.040 | paying them $100,000 and if you're giving them good retirement benefits and so
00:05:14.600 | forth. So a lot of people were confused too. They only thought it was based off
00:05:18.360 | $100,000 salary or $8,333 a month times two and a half and that is wrong. You can
00:05:25.580 | get that plus the bump. Now let's compare the stimulus program of 2020 to 2008 and
00:05:33.720 | 2009 and I was working on the trading desk and I remember things very clearly
00:05:38.560 | and the biggest gripe was that all this stimulus money and bailout money all
00:05:44.720 | went to the banks and to other big corporations and none of it really got
00:05:49.080 | to the hands of the people. Now there was the 99-week unemployment benefits and
00:05:54.240 | that was amazing for those who were able to take you know take advantage and just
00:05:59.400 | change things up but there wasn't this huge $600 extra a week and there wasn't
00:06:05.040 | this direct PPP loan that basically supports over 1.6 million small
00:06:11.960 | businesses which account for 99% of all businesses which employ about half the
00:06:16.400 | working population. So of course everything is kind of slow going in
00:06:21.120 | terms of the money funding these businesses but it's coming folks. I know
00:06:25.840 | more and more people were telling me every single day they got the PPP loan
00:06:30.040 | and more money is on the way. So with so much financial support by the government
00:06:35.360 | it sure feels like we can last for two months of a quarantine, a lockdown or
00:06:41.640 | whatever you want to call it before the economy slowly starts opening up. If you
00:06:46.400 | look at my post on the states with the best unemployment benefits you know
00:06:51.160 | there's some states now that are paying over $5,000 a month per person thanks to
00:06:55.320 | the CARES Act, additional $600 of unemployment a week. $5,000 a month per
00:07:00.840 | person is enough I would think to provide for a regularly decent
00:07:06.660 | comfortable lifestyle to pay your rent, food and whatnot and if you have two
00:07:09.980 | people unemployed you get double the amount and so forth. Now the unemployment
00:07:14.360 | benefits run out July 31st 2020, that enhanced benefit of $600 a week but who
00:07:21.440 | knows it might be extended and the base case unemployment gets extended to
00:07:26.560 | December 31st 2020. So that's pretty good. Alright the second area where the
00:07:31.680 | Doomer Bears got wrong was basically overestimating the deadliness of the
00:07:37.840 | virus. Look before the pandemic hit I think most of us were like well it's not
00:07:44.040 | that bad but then obviously once it started hitting, a lockdown started
00:07:48.240 | occurring in mid-march, people got more serious and then you heard politicians
00:07:53.160 | say you know maybe a million people could die in America and then they
00:07:57.240 | ratcheted down to a hundred thousand to two hundred forty thousand. So these are
00:08:02.200 | pretty scary numbers and if you are bearish you're gonna take those to heart
00:08:07.320 | and say wow if that many people die you know the economy is really gonna get
00:08:12.640 | frozen and really gonna get crushed so you better sell sell sell. Well
00:08:17.800 | instead of a hundred thousand to a million people dying so far it's about
00:08:23.160 | 43,000 and that's terrible but everything is relative and it's not as
00:08:27.800 | bad as what our politicians modeled. Here in California our governor Newsom said
00:08:34.520 | that 25 and a half million Californians would get the coronavirus by mid-may and
00:08:41.240 | supposedly as of April 20th there's only about 29,000 reported. So is it because
00:08:49.000 | of the lockdowns in effect? Definitely for sure but I am sure and everybody
00:08:55.000 | else is sure and at least from the investors point of view that that 25 and
00:08:59.480 | a half million was a supreme overestimation. I think this situation
00:09:04.720 | should really make us realize how much we should not, should not depend on the
00:09:11.100 | government for everything. Their models were way off, they were late to act, the
00:09:18.120 | communication was kind of fuzzy. Look they're trying their best I guess but
00:09:23.600 | their best isn't good enough. So if their best is not good enough it's up to us to
00:09:30.180 | really think things through to prepare more than the government can tell us to
00:09:35.080 | prepare. I mean the US Surgeon General tweeted out and announced that we
00:09:40.480 | shouldn't wear masks. Masks are ineffective, they will get us sick more.
00:09:44.880 | This is around a month and a half ago and it's just absurd given all the other
00:09:50.520 | countries who got the coronavirus first were using masks and it sure seemed like
00:09:56.160 | it helped flatten the curve and hey a mask protects the other person and it
00:10:01.200 | protects yourself. I didn't get that and I think the American public is waking up
00:10:05.840 | and realizing you know what that's just crazy too and so now obviously the
00:10:09.600 | politicians and the Surgeon General is reversing their recommendation and
00:10:14.280 | recommending everyone wear masks. It's just such simple logic that you
00:10:19.280 | really got to take whatever the government says with a grain of salt and
00:10:23.680 | think for yourself. So you can't really blame the doom and bears too much
00:10:29.000 | because they were probably listening to the government, listening to the numbers,
00:10:33.640 | excrapolating the numbers and believing the government and what they were saying
00:10:37.680 | and you know what as a result they missed out or they lost money because
00:10:43.680 | they shorted the market and imagine just imagine selling when the S&P 500 was down
00:10:49.480 | 32% and then shorting and then seeing the market rally another 30 plus percent. I
00:10:56.640 | mean you're losing on the way down and you're losing on the way up. That is an
00:10:59.960 | absolute disaster folks. Alright the third reason why the doom and bears got
00:11:05.880 | the market wrong is fear and hysteria. It really feeds on itself if you're always
00:11:12.880 | glued to the news and to social media. The bears have been waiting since the
00:11:17.800 | end of 2018 to say the world is coming to an end and the super bears have been
00:11:22.840 | waiting since 2008-2009 to pounce and say look everything is gonna come
00:11:27.680 | crashing down. So this was their time to scream the loudest and they screamed and
00:11:34.440 | screamed and screamed and if you were stuck to the TV or to Twitter you were
00:11:39.400 | just getting a face full of their bearishness every single day. Now I
00:11:45.080 | understand the need and the desire to shout fire, run away, be careful, the world
00:11:52.320 | is coming to an end if you've been bearish for that long and you've missed
00:11:55.680 | out. Missing out, the fear of missing out is one of the most powerful emotions
00:12:01.400 | many many people felt during the bull run. So when the markets start correcting
00:12:07.120 | it's just natural you just want vindication. It's just human nature and
00:12:11.400 | so it just gets really dangerous because the fear and the hysteria and the doom
00:12:16.120 | just feeds on itself. It just grows like a like a fireball that just becomes
00:12:22.600 | massive and you just can't get out of its way and at the end of the day you
00:12:27.480 | might be so scared that you're just forced to sell and to believe how bad
00:12:32.240 | things really really are. I mean I've got to say despite the unemployment figures,
00:12:37.520 | despite the violence of the correction, it still does not feel as bad as what
00:12:43.480 | went on in 2008 and 2009 because 2008 and 2009 was a financial crisis due to
00:12:49.440 | over leverage. I mean you had to unwind those positions and it took a long time
00:12:54.720 | and once you foreclosed on a property or you know you went bankrupt, your credit
00:13:00.160 | was screwed for six seven years and just things took forever to unwind. Whereas in
00:13:06.840 | 2020 this is largely a self-inflicted recession. We did this to ourselves which
00:13:13.320 | means we have a better chance of undoing the pain once the curve flattens. So
00:13:18.640 | logically there should be a quicker rebound in the third quarter if you can
00:13:23.840 | get through two to three months of pain. Now let's be honest the v-shaped recovery,
00:13:29.080 | the right side of the V is probably not going to match the left side of the V.
00:13:32.600 | However it's going to rebound. It's going to rebound as the economy opens and with
00:13:39.000 | the Fed and the government really supporting us, it just makes logical
00:13:43.080 | sense that things will recover quicker this time around than back during the
00:13:47.440 | last financial crisis. But the doomers are saying look this is this is like the
00:13:52.000 | financial crisis plus the dot-com bubble plus every single other historical
00:13:56.400 | recession all into one. This is what we're experiencing now. Yeah we could be
00:14:00.160 | experiencing it for a couple months but don't expect things to be like that for
00:14:05.800 | years like it was during the last financial crisis. We all know that misery
00:14:10.720 | and fear loves company. So when that is all you see and all you read every
00:14:16.000 | single day, it's just going to grow and grow and grow. Just imagine if you just
00:14:20.240 | turned off the TV, turned off your computer and your phone for three weeks
00:14:24.600 | you definitely would not have been as afraid and as bearish. I don't think so
00:14:31.080 | because every time I shut off my devices I feel great. I feel great just spending
00:14:35.760 | time with my family and doing something healthy like going for a walk or a hike
00:14:39.920 | or whatnot. Alright the fourth and final reason why the Doomer Bears got the
00:14:45.480 | direction wrong is because I think they fail to see the benefits of this crisis.
00:14:50.800 | There's always a silver lining, there's always a positive angle. For example
00:14:55.720 | given the lockdowns the overall number of deaths is down. That's pretty good
00:15:01.840 | right? I'll take it. What else? Less pollution. That's pretty good. What else?
00:15:09.280 | Improved efficiencies at work. Because we're all locked down we've got to make
00:15:15.000 | do with what we have and I think companies are realizing they don't need
00:15:18.160 | as many employees to produce the same amount of output. You don't need to have
00:15:22.640 | hour-long meetings, you don't need to drive two hours to see a client for an
00:15:26.920 | hour, you don't need to get on a plane for three to five hours to see a client
00:15:31.080 | and try to develop a relationship. Things can happen over telecommuting,
00:15:35.840 | teleconferencing and so forth. The other thing is maybe less employees means
00:15:41.520 | higher profitability for the company. The companies will make the existing
00:15:46.160 | employees who are all still afraid of losing their jobs to work harder and
00:15:50.640 | when the rebound comes they're gonna work harder and do the work of one and
00:15:55.320 | a half to two employees and we've always seen this during recovery phases of a
00:16:00.760 | bear market. I did double the work, maybe triple the work for six months to a year
00:16:06.760 | and so did many of my other colleagues back in 2010 and 2011. So output
00:16:12.440 | productivity goes up with less people, that's good for earnings, good for
00:16:16.840 | profits, good for stocks. And then competition wise what happens during
00:16:21.640 | bear markets is unfortunately the weakest companies, the least capitalized
00:16:26.200 | companies go out of business first and when that happens competition goes down
00:16:32.480 | for the survivors and then it's a kind of winner-take-all mentality here. So
00:16:38.600 | just look at Amazon. Amazon is going to be around forever and they keep on
00:16:43.200 | winning. They just keep on winning right? You just can't bet against Amazon. It's a
00:16:47.720 | perfect example as bookstores and old mom-and-pop retail stores, all these guys
00:16:54.760 | with rent and high overhead costs go out of business, Amazon is going to continue
00:16:59.040 | to gain more and more market share. It's sad but it's the reality and as an
00:17:04.080 | investor you've got to understand the reality of business. So that's all I can
00:17:09.120 | think of folks. Now the question we should all have on our minds is what's
00:17:14.320 | next? I think we can agree that there is not going to be the perfect V, the
00:17:19.800 | perfect shape to V-shaped recovery. It's going to be more like a swoosh shape
00:17:23.400 | right? Things are going to open up, the economy is going to open up slowly
00:17:26.560 | hopefully in May and then more in June and then even more so in July. There's
00:17:32.200 | going to be a lot of changes to the way we interact and do business. There's
00:17:36.560 | definitely going to be winners and there's definitely going to be permanent
00:17:38.880 | losers, maybe not permanent but losers for another one or two years such as big
00:17:44.200 | event companies. And we've got to keep on our toes and pay attention to the
00:17:48.680 | markets and try to understand what it's discounting because the markets are
00:17:52.120 | always discounting three, six months, a year ahead and it's really hard to
00:17:57.520 | think about what life is going to be like in six months but I think in three
00:18:01.640 | months we can all agree that by let's say July things are going to be much
00:18:06.200 | better than they are right now. There is going to be recovery. So my perspective
00:18:11.840 | is that if the S&P 500 gets back to 3,000 I'm going to sell 100% of all the
00:18:20.000 | stock, the new stock that I bought in the first quarter of 2020. I want to get back
00:18:25.520 | down to my original weighting of 20% of my net worth in equities. And that's just
00:18:31.280 | me folks because I don't believe we're going to get to all-time highs so
00:18:36.320 | quickly. I think we're eventually going to get there maybe, I don't know, next year, two
00:18:41.520 | years but if we can get all the way back to 3,000 that is a massive 30-35%
00:18:47.800 | ramp. I plan to take that win and then just ride whatever I had exposed going
00:18:54.480 | forward and if the market goes back down to 2,400 or below I'm going to be buying
00:19:00.160 | again. And if you are suddenly deliriously bullish for some reason I
00:19:05.480 | need you to look back to the time period of March 18th to March 20th and think
00:19:11.760 | about where things were then. Be careful. Nothing goes down in a straight line and
00:19:17.360 | nothing goes up in a straight line. This is as close as it's gotten in the
00:19:21.880 | history of the stock market but you're going to expect more false starts, more
00:19:26.760 | volatility and so forth. The key is to protect your capital and make sure
00:19:32.280 | you're okay with your risk exposure. Once again for me my main goal is capital
00:19:38.560 | preservation. If I can make single-digit returns on my net worth each year I'm
00:19:43.560 | fine. You got to decide what's good for you and only you can decide. Alright
00:19:49.680 | thanks so much everyone. Nobody has a crystal ball I don't think but if you
00:19:53.480 | got one let me know what your thoughts are, what you're doing and how you plan
00:19:58.840 | to position yourself going forward. Best of luck and stay safe.