Juggling Dynamite

As shown below, the 23% rebound in equity prices since March 23 has returned the S&P 500 to a short-list of the least attractive valuations in history at 19x forward earnings estimates, and equal to the market top on February 19.  Canadian equity valuations have followed along for the ride.  In short, from present levels, investment prospectives remain among the bleakest in a century.

This is especially true since we are entering the deepest global recession since the 1930s with record job losses, business failures, loan defaults and lost earnings all in the mix. The chart below shows the 100% probability of a U.S. recession now underway in 2020, as in 2001 and 2008.
Recessions do not clear quickly, no matter how aggressive policy interventions may be.  As shown in the table below from Hedgeye, recessions historically come with median bear markets of -42% over 18 months.

The three previous times when we headed into a recession with stock market valuations (CAPE) in the 90th+ percentile, as in February 2020, the drawdowns have been 49 to 86% over 21 to 34 months, followed by years trying to grow back losses. Financial decisions and capital allocations should be managed within this context.

Wuhan was the epicentre of the COVID-19 shock and it offers the rest of us a glimpse of the ongoing psychological and economic challenges that persist after the initial outbreak.

China ended the 76-day lockdown on Wuhan with a light show as many people stepped outside for the first time in weeks. WSJ’s Jonathan Cheng discusses the challenges ahead as ground zero of the pandemic tries to return to normal.  Here is a direct video link.

Deutsche Bank has long been a criminal franchise.  But it is also emblematic of a financial sector that has generally run amuck, globally.  Allowing our financial infrastructure to be ruled and directed by lawless greed has undermined stability and our sustainability worldwide. We must not repeat the mistake of 2008, and miss the opportunity in the present financial crisis to affect the necessary reforms and prosecutions needed.  A better future requires us to admit, repent and reform in order to recover.  The discussion in this clip is a good summary.

Part of every financial scandal, bubble, and crash is the presence of misaligned incentive structures. The precarious position of the banking system has many investors and firms scrambling for safety – even some of the largest financial institutions in the world like Deutsche Bank. David Enrich, business investigation editor for the New York Times, joins Real Vision’s Ed Harrison to discuss his new book, “Dark Towers: Deutsche Bank, Donald Trump, and an Epic Trail of Destruction.” He traces the growth and evolution of the German bank from its founding to today. Enrich outlines the system of misaligned incentives bank executives created, examines Deutsche’s relationship with President Donald Trump, and details the unreasonable risks the bank has taken on since the 2008 financial crisis. Here is a direct video link.