Hello everybody it's Sam from Financial Samurai and in this episode I want to talk about what the Doomer Bears got wrong. So if you've been paying attention to the markets they're up about 25 plus percent since the bottom hit in March and during the March time period when the hysteria was at its height very experienced investors were talking about the S&P falling to like 1500 the Dow Jones Industrial Average falling to 15,000 and instead the markets rebounded quite vigorously.

So I wanted to just check out and have a discussion on what happened because nobody has a crystal ball. Look when the hysteria was at its height people were just freaking out nobody really felt very confident at all especially if you turn on the news and you check social media and so forth.

If you read the post "How to predict a stock market bottom like Nostradamus" it was published on March 18th. It was my attempt to call the market bottom and predict the market bottom using some rational thought in terms of earnings and valuations. Go through the post if you haven't already.

The whole idea of the post was to encourage people to think rationally about earnings valuations and the future. It wasn't so much okay this is exactly how you're going to do the analysis but really it's to help people think through things during the height of hysteria. So the post was published on March 18th.

I talked about the stock market bottom being between 2200 and 2400 and the very next day the market went down to 2300 and then the very next day it did bottom at 2237. Now is that luck or is that skill? I think it's a combination of both. Let's say it's 50% luck and that's fine because that was my framework to put money to work in the stock market and to make myself feel better that the world wasn't coming to an end.

So now we're at around 2830 as of April 21st so that's about a 27% rebound so any money you put in below 2400 you know you're up 20 to 27% and that's really good money and that's technically a bull market. So let's dig deeper into why the Doomer Bears got the market direction wrong.

Why we didn't fall off the cliff and why we have rebounded so ferociously since the bottom. Now I think there's four main parts. The first is the Bears underestimated the power of the Fed. There's an old saying "don't fight the Fed" and in this case you definitely did not want to fight the Fed because they did so much to prop up the markets and maybe the economy.

So for example March 3rd they had an emergency 50 bps rate cut and then on March 15th another rate cut by one percentage point down to 0% and then on March 17 there was a slew of measures aimed at keeping credit flowing through the financial system. The Fed said it would start buying commercial paper or the short-term unsecured debt that businesses rely on for operational cash.

On the 18th there was another facility providing credit to keep money markets functioning properly. On the 19th there's a new operation focused on currency swaps. On the 20th the operation headed by the Boston Fed announced they were buying municipal debt which was huge because muni bonds were just getting crushed just like the stock market which was a big big surprise for me at least.

What else? On March 23rd there was an expansion of the Fed's original announced asset purchases which were supposed to max out at 700 billion. They expanded that and now it's basically unlimited. On March 23rd there's additional next leg of quantitative easing. The Fed also announced a 300 billion credit program for businesses and consumers.

On April 6th they announced they'll provide support to the Treasury's payment protection program and on April 9th talked about supporting the 2.3 trillion lending program that will extend credit to banks that issue PPP loans. So the Fed was all in and then the federal government was also all in.

Think about all the programs that we are receiving right now. We've got $600 extra in unemployment benefits. We've got stimulus checks of up to $1,200 per person and $500 per child for those who make under $75,000 each or $150,000 total for a household. And then we've got the paycheck protection program which I've said is amazing if you can get it because it covers two and a half times monthly payroll and 75% of the funds can be used for salary and the other 25% for rent, retirement benefits and so forth.

So the true amount by the way for how much you can get per employee, the maximum amount for under the PPP program is about $27,000 per employee if you're paying them $100,000 and if you're giving them good retirement benefits and so forth. So a lot of people were confused too.

They only thought it was based off $100,000 salary or $8,333 a month times two and a half and that is wrong. You can get that plus the bump. Now let's compare the stimulus program of 2020 to 2008 and 2009 and I was working on the trading desk and I remember things very clearly and the biggest gripe was that all this stimulus money and bailout money all went to the banks and to other big corporations and none of it really got to the hands of the people.

Now there was the 99-week unemployment benefits and that was amazing for those who were able to take you know take advantage and just change things up but there wasn't this huge $600 extra a week and there wasn't this direct PPP loan that basically supports over 1.6 million small businesses which account for 99% of all businesses which employ about half the working population.

So of course everything is kind of slow going in terms of the money funding these businesses but it's coming folks. I know more and more people were telling me every single day they got the PPP loan and more money is on the way. So with so much financial support by the government it sure feels like we can last for two months of a quarantine, a lockdown or whatever you want to call it before the economy slowly starts opening up.

If you look at my post on the states with the best unemployment benefits you know there's some states now that are paying over $5,000 a month per person thanks to the CARES Act, additional $600 of unemployment a week. $5,000 a month per person is enough I would think to provide for a regularly decent comfortable lifestyle to pay your rent, food and whatnot and if you have two people unemployed you get double the amount and so forth.

Now the unemployment benefits run out July 31st 2020, that enhanced benefit of $600 a week but who knows it might be extended and the base case unemployment gets extended to December 31st 2020. So that's pretty good. Alright the second area where the Doomer Bears got wrong was basically overestimating the deadliness of the virus.

Look before the pandemic hit I think most of us were like well it's not that bad but then obviously once it started hitting, a lockdown started occurring in mid-march, people got more serious and then you heard politicians say you know maybe a million people could die in America and then they ratcheted down to a hundred thousand to two hundred forty thousand.

So these are pretty scary numbers and if you are bearish you're gonna take those to heart and say wow if that many people die you know the economy is really gonna get frozen and really gonna get crushed so you better sell sell sell. Well instead of a hundred thousand to a million people dying so far it's about 43,000 and that's terrible but everything is relative and it's not as bad as what our politicians modeled.

Here in California our governor Newsom said that 25 and a half million Californians would get the coronavirus by mid-may and supposedly as of April 20th there's only about 29,000 reported. So is it because of the lockdowns in effect? Definitely for sure but I am sure and everybody else is sure and at least from the investors point of view that that 25 and a half million was a supreme overestimation.

I think this situation should really make us realize how much we should not, should not depend on the government for everything. Their models were way off, they were late to act, the communication was kind of fuzzy. Look they're trying their best I guess but their best isn't good enough.

So if their best is not good enough it's up to us to really think things through to prepare more than the government can tell us to prepare. I mean the US Surgeon General tweeted out and announced that we shouldn't wear masks. Masks are ineffective, they will get us sick more.

This is around a month and a half ago and it's just absurd given all the other countries who got the coronavirus first were using masks and it sure seemed like it helped flatten the curve and hey a mask protects the other person and it protects yourself. I didn't get that and I think the American public is waking up and realizing you know what that's just crazy too and so now obviously the politicians and the Surgeon General is reversing their recommendation and recommending everyone wear masks.

It's just such simple logic that you really got to take whatever the government says with a grain of salt and think for yourself. So you can't really blame the doom and bears too much because they were probably listening to the government, listening to the numbers, excrapolating the numbers and believing the government and what they were saying and you know what as a result they missed out or they lost money because they shorted the market and imagine just imagine selling when the S&P 500 was down 32% and then shorting and then seeing the market rally another 30 plus percent.

I mean you're losing on the way down and you're losing on the way up. That is an absolute disaster folks. Alright the third reason why the doom and bears got the market wrong is fear and hysteria. It really feeds on itself if you're always glued to the news and to social media.

The bears have been waiting since the end of 2018 to say the world is coming to an end and the super bears have been waiting since 2008-2009 to pounce and say look everything is gonna come crashing down. So this was their time to scream the loudest and they screamed and screamed and screamed and if you were stuck to the TV or to Twitter you were just getting a face full of their bearishness every single day.

Now I understand the need and the desire to shout fire, run away, be careful, the world is coming to an end if you've been bearish for that long and you've missed out. Missing out, the fear of missing out is one of the most powerful emotions many many people felt during the bull run.

So when the markets start correcting it's just natural you just want vindication. It's just human nature and so it just gets really dangerous because the fear and the hysteria and the doom just feeds on itself. It just grows like a like a fireball that just becomes massive and you just can't get out of its way and at the end of the day you might be so scared that you're just forced to sell and to believe how bad things really really are.

I mean I've got to say despite the unemployment figures, despite the violence of the correction, it still does not feel as bad as what went on in 2008 and 2009 because 2008 and 2009 was a financial crisis due to over leverage. I mean you had to unwind those positions and it took a long time and once you foreclosed on a property or you know you went bankrupt, your credit was screwed for six seven years and just things took forever to unwind.

Whereas in 2020 this is largely a self-inflicted recession. We did this to ourselves which means we have a better chance of undoing the pain once the curve flattens. So logically there should be a quicker rebound in the third quarter if you can get through two to three months of pain.

Now let's be honest the v-shaped recovery, the right side of the V is probably not going to match the left side of the V. However it's going to rebound. It's going to rebound as the economy opens and with the Fed and the government really supporting us, it just makes logical sense that things will recover quicker this time around than back during the last financial crisis.

But the doomers are saying look this is this is like the financial crisis plus the dot-com bubble plus every single other historical recession all into one. This is what we're experiencing now. Yeah we could be experiencing it for a couple months but don't expect things to be like that for years like it was during the last financial crisis.

We all know that misery and fear loves company. So when that is all you see and all you read every single day, it's just going to grow and grow and grow. Just imagine if you just turned off the TV, turned off your computer and your phone for three weeks you definitely would not have been as afraid and as bearish.

I don't think so because every time I shut off my devices I feel great. I feel great just spending time with my family and doing something healthy like going for a walk or a hike or whatnot. Alright the fourth and final reason why the Doomer Bears got the direction wrong is because I think they fail to see the benefits of this crisis.

There's always a silver lining, there's always a positive angle. For example given the lockdowns the overall number of deaths is down. That's pretty good right? I'll take it. What else? Less pollution. That's pretty good. What else? Improved efficiencies at work. Because we're all locked down we've got to make do with what we have and I think companies are realizing they don't need as many employees to produce the same amount of output.

You don't need to have hour-long meetings, you don't need to drive two hours to see a client for an hour, you don't need to get on a plane for three to five hours to see a client and try to develop a relationship. Things can happen over telecommuting, teleconferencing and so forth.

The other thing is maybe less employees means higher profitability for the company. The companies will make the existing employees who are all still afraid of losing their jobs to work harder and when the rebound comes they're gonna work harder and do the work of one and a half to two employees and we've always seen this during recovery phases of a bear market.

I did double the work, maybe triple the work for six months to a year and so did many of my other colleagues back in 2010 and 2011. So output productivity goes up with less people, that's good for earnings, good for profits, good for stocks. And then competition wise what happens during bear markets is unfortunately the weakest companies, the least capitalized companies go out of business first and when that happens competition goes down for the survivors and then it's a kind of winner-take-all mentality here.

So just look at Amazon. Amazon is going to be around forever and they keep on winning. They just keep on winning right? You just can't bet against Amazon. It's a perfect example as bookstores and old mom-and-pop retail stores, all these guys with rent and high overhead costs go out of business, Amazon is going to continue to gain more and more market share.

It's sad but it's the reality and as an investor you've got to understand the reality of business. So that's all I can think of folks. Now the question we should all have on our minds is what's next? I think we can agree that there is not going to be the perfect V, the perfect shape to V-shaped recovery.

It's going to be more like a swoosh shape right? Things are going to open up, the economy is going to open up slowly hopefully in May and then more in June and then even more so in July. There's going to be a lot of changes to the way we interact and do business.

There's definitely going to be winners and there's definitely going to be permanent losers, maybe not permanent but losers for another one or two years such as big event companies. And we've got to keep on our toes and pay attention to the markets and try to understand what it's discounting because the markets are always discounting three, six months, a year ahead and it's really hard to think about what life is going to be like in six months but I think in three months we can all agree that by let's say July things are going to be much better than they are right now.

There is going to be recovery. So my perspective is that if the S&P 500 gets back to 3,000 I'm going to sell 100% of all the stock, the new stock that I bought in the first quarter of 2020. I want to get back down to my original weighting of 20% of my net worth in equities.

And that's just me folks because I don't believe we're going to get to all-time highs so quickly. I think we're eventually going to get there maybe, I don't know, next year, two years but if we can get all the way back to 3,000 that is a massive 30-35% ramp.

I plan to take that win and then just ride whatever I had exposed going forward and if the market goes back down to 2,400 or below I'm going to be buying again. And if you are suddenly deliriously bullish for some reason I need you to look back to the time period of March 18th to March 20th and think about where things were then.

Be careful. Nothing goes down in a straight line and nothing goes up in a straight line. This is as close as it's gotten in the history of the stock market but you're going to expect more false starts, more volatility and so forth. The key is to protect your capital and make sure you're okay with your risk exposure.

Once again for me my main goal is capital preservation. If I can make single-digit returns on my net worth each year I'm fine. You got to decide what's good for you and only you can decide. Alright thanks so much everyone. Nobody has a crystal ball I don't think but if you got one let me know what your thoughts are, what you're doing and how you plan to position yourself going forward.

Best of luck and stay safe.