Stress stress stress

I have been following the news and it has been stressing me out. There is full fledged market panic now.

The corona virus situation has escalated far beyond anyone’s imagination. Nobody could have predicted it would spark off a crisis worse than the Great Financial Crisis of 2008. The media is making things worse, and people are panicking, and for increasingly good reason. 1 out 5 of Americans are going to be in lock down, and its going to increase. The hysteria there will probably last till at least end Apr 2020. Initially most people were predicting that by May, the virus will have died down. But the economic fallout looks increasingly like it will last quite a bit longer than that.

I wonder how much more the markets can tank. Many high-yield investments such as REITs and bonds have dropped 30%-50%. Can the system handle another such drop? I think another 20% will cause mass panic and layoffs, and credit markets to freeze up even more.

There is also the human stress on the ground.

While dropping off cheques at my brokerage, I couldn’t help but over-hear a very stressed auntie screaming at her husband, about losing money. They were calling their relationship manager, likely to give him/her a tongue-lashing. But really, like everyone else, the RM could not have seen it coming. The smart money didn’t see it either. Not Warren Buffet, not Ray Dalio. What chance did we have.

Another time, I saw a family asking how fast their cheque would clear. They couldn’t seem to be able to wait the 2 days. I don’t think many more people can withstand even a 20% drop.

Origins of Crisis

The problem was that many people were leveraged up just before this crash. Believe it or not, things looked very calm in the months before. Stock markets were at records highs. It was not easy to put money to work, and most people were forced into higher risk investments to earn a decent yield. These yields weren’t speculative either, around 5%-7% for moderate investments.

The drop has been much faster and dramatic than anyone could have anticipated too. Most people were assured that 10% drop in their mutual funds and bonds was close to impossible. What has actually been seen is at least double or triple of that, in a fraction of the time it took it in 2008. Taken together with leverage, this means most people’s losses on paper are at least 50%, with investors in the high-yield space losing the entirety of their capital.

Defiance

So far, I have been refusing to sell, even though I want to deleverage. There aren’t even any serious buyers anyway. Bidders are asking 20% lower than what sellers are asking e.g. $90 asking price (what sellers are willing to sell) and $75 bidding price (what buyers are willing to pay). This is worse than Carousell low ballers. But its a very precarious situation, and another round of bad news would tip us over.

What the fark.

I’m going to try to stay off the news for a while. I don’t want to sell anything during this period, and reading all this stuff just makes me more anxious. So no WSJ, no Bloomberg, nothing. Just family and rest. Maybe play the new Doom game.

I wonder if I’m going to be the next husband to be yelled at by my wife.

6 comments

    1. Thanks for the comment Kyith. 5%-7% was the yield for investment grade bonds a few weeks ago, which are considered to be of moderate risk. Examples are like the perpetual bonds issued by HSBC, Credit Suisse and other big European banks. They were generally considered liquid and of moderate risk, till the current situation.

      Love your blog by the way. It’s a real resource in Singapore

      1. Hi FI35, thanks! I think I made that comment thinking it is the bonds of UBS, HSBC those types. A few years ago, I have acquaintances who are used to leveraging them.

        Still, in a world where bonds such as the Temasek ones are yielding 3%, I still feel that there is some risk to them (not even considering this period, before this)

  1. Hi, just my 2 cents, the market won’t be at its bottom within the next few weeks, and it probably takes 2-3 years to recover.
    While I am deploying my war chest bit by bit, I for sure will not even think about leveraging my account, and won’t encourage anyone to do it either. This crisis could very likely be much worse than 2008, it affects not only banking but airline, tourism, restaurant, education, and many other industries. I am ready to forgo my bonus next year although my industry is machinery and shouldn’t be affected too much by this crisis, but business outlook is very poor now.

    1. Hey thanks for your thoughts. Its very valid to say that it will take 2-3 years to recover, though I’m hoping it will be much sooner. It really depends on how long the virus situation will last, which no one would know

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