Is Ignoring the Coronavirus An Irrational Thing To Do?
I’ve been trying to understand why people are behaving in what appears to me to be an irrational manner with regards to the coronavirus. For me to say this, though, it means that I have to believe that Covid-19 is a dangerous virus; with no vaccine and no cure currently; and that many people are at risk of serious illness or death as a result of getting the virus. I believe that is indeed the case. And when I say that they appear to be acting in an irrational manner, I mean that many people are ignoring the social distancing and other government-imposed restrictions and guidelines designed to protect people from the virus and to prevent the further spread of the virus. Because I believe that the first statement is true – that it is a dangerous virus with no vaccine and no cure and poses the risk of serious illness and death. And because I observe on a daily basis people ignoring the guidelines and restrictions put into place to protect us, I have to ask the question: “Why are people behaving in what appears to me to be an irrational manner”?
My hunch is that this behavior is similar to the behavior exhibited by many people in forest fire evacuations who refuse orders to evacuate, a phenomenon which has been studied much more extensively than pandemics due to the greater number of occurrences of forest fires over pandemics. Looking at why some people refuse to evacuate during forest fires, with many of them perishing in the fires, may give some insights as to why many people in the coronavirus pandemic are reacting with indifference to the pandemic.
Forestry departments and other agencies tasked with fighting forest fires study the phenomena of why people don’t evacuate forest fires when ordered to do so. There are many reasons they have found why people don’t evacuate – here are a few of them. First, many people just don’t believe it could happen to them. Other people get killed in forest fires, but it won’t happen to them. Second, many people don’t trust government and other authority figures and believe that the government is just trying to control them. By the way, I agree with this conclusion in many situations – but not when it comes to forest fires; severe weather warnings; and pandemics that have reputable health officials giving the warnings. Third, and related to the just discussed second reason, many people believe that the authorities are overreacting as they have done in so many prior circumstances. A fourth reason is that people may simply misjudge the actual danger of a situation. As human beings, we are generally poor processors of information. Misjudgment is, unfortunately, a very common human condition. A fifth, though less common, reason is that some people who suffer from clinical depression might consider this an option to solve their problems. A sixth reason is that many people make decisions at an emotional level that is separate from reality and rationality. And finally, this is probably, at least in part, a manifestation of herd mentality.
So, I have given a half-dozen possible reasons why people might be reacting to the coronavirus pandemic in the indifferent way they are. But whatever their reasons, it’s worth keeping in mind why firefighters take the names of people who refuse to evacuate forest fires. It’s not to penalize them – it’s to notify their next of kin!
Economic and Investment Highlights
Last Week
Neiman Marcus and J.C. Crew have filed for bankruptcy.
United Airlines expects to shrink its management and administrative workforce by 30 percent. GE is cutting 13,000 jobs in its jet engine business. Airbnb is cutting a fourth of its workforce. Uber plans to cut about 14% of its workforce; Lyft cut 17% last week.
The federal government expects to borrow a record $4.5 trillion dollars this fiscal year.
Many economists expect this to be the worst economic downturn since the Great Depression.
California become the first state to borrow from the federal government in order to pay for jobless-benefits claims.
The U.S. trade deficit widened in March.
EU officials predicted the Eurozone economy will suffer a recession of historic proportions this year.
The U.S. Treasury plans to issue longer-dated bonds, including a new 20-year bond. The Treasury has raised large amounts in T-Bills since March.
CVS warned of a possible significant increase in health problems unrelated to the coronavirus due to people putting off routine health care.
Unemployment has grown by another 3.2 million in the past week to a total of 33.5 million since the advent of the shutdowns due to the coronavirus. Unemployment reached 14.7% in April.
The Dow, the S&P 500, and the Nasdaq all rose for the week. The Dow was up 2.6%; the S&P 500 was up 3.50%; and the Nasdaq was up 6.0%. The 10-year treasury yield ended the week at 0.679%. Gold closed at $1,709.90 for the week. Oil closed at $24.74 for the week.
The Week Ahead
This link takes you to Econoday’s Economic Calendar and Economic Events and Analysis which shows the upcoming economic reporting events scheduled in the week and months ahead.
Summary
Note: The models below may not capture the impact of COVID-19 beyond their impact on GDP source data and relevant economic reports that have already been released. They may not anticipate the impact of COVID-19 on forthcoming economic reports beyond the standard internal dynamics of the models.
Note: The comments that follow are derived from the economic indicators referenced in the Resources section of this newsletter and other sources in this report.
The Aruoba-Diebold-Scotti Business Conditions Index (ALS) had been trending up for several weeks from having dipped in 2019. Recently with the advent of the economic collapse, the index crashed. This is an extremely negative indicator for the economy on a short-term basis.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2020 is -42.8 percent. This reading continues to support the ALS model assessment of a deteriorating short-term economic environment.
The New York Fed Staff Nowcast stands at -31.1% for 2020:Q2.
The Chicago Fed National Activity Index (CFNAI) showed a decrease in economic activity in March. The Chicago Fed National Activity Index (CFNAI) was -4.19 in March, down from +0.06 in February.
All told, these short-term economic indicators are a negative analysis for the economy, at least on a short-term basis.
Expectations that stock prices will rise over the next six months is now at 23.3% in a recent AAII Sentiment Survey. The historical average is 38.0% for the survey. 26.1% of the investors in the survey described their short-term outlook as neutral and 50.6% were bearish. Please see the AAII Sentiment Survey for the complete results.
The latest Gross Output (GO) reading (April 6, 2020) showed that Gross Output slowed significantly in the fourth quarter of 2019.
On a longer-term basis, the forecasters in the Philadelphia Fed’s Survey of Professional Forecasters (as of February 14, 2020) predict real GDP will grow at an annual rate of 1.7 percent for the first quarter of 2020, 2.1 percent for the second quarter of 2020, 2.0 percent in the third quarter of 2020, 2.1 percent in the fourth quarter of 2020, and 2.2 percent in the first quarter of 2021. On an annual-average over annual-average basis, the forecasters predict real GDP to grow 2.0 percent in 2020, 2.0 percent in 2021, 2.0 percent in 2022 and 2.0 percent in 2023. The forecasters predict the unemployment rate will average 3.6 percent in 2020, 3.6 percent in 2021, 3.7 percent in 2022, and 3.9 percent in 2023. The next survey release date is May 15, 2020.
The National Association for Business Economics (NABE) released an Outlook Flash Survey on April 10, 2020. The NABE panel expects GDP declines in Q1 2020 and Q2 2020, and upticks in Q3 2020 and Q4 2020. The panel believes the U.S. economy is already in a recession and predicts real GDP will grow at an annual rate of -2.4 percent for the first quarter of 2020, -26.5 percent for the second quarter of 2020, 2.0 percent in the third quarter of 2020, 5.8 percent in the fourth quarter of 2020, and 6.0 percent in the first quarter of 2021. The forecasters expect unemployment to average 3.8% in Q1 2020. The median unemployment rate projection for Q2 2020 is 12.0%. The unemployment rate is expected to fall back to 9.5% at the end of 2020, and to 6.0% at year-end 2021. The panel’s forecast for the PCE price index less food and energy calls for a slowdown in the annual rate of change from 1.7% in Q1 to 0.8% in Q2 2020. The panel expects the rate to increase gradually to 1.7% in the last half of 2021.
For a more in-depth review and analysis of the economy, please see our mini-book on economic analysis and forecasting entitled: Simple and Effective Economic Forecasting.
Stock Market Valuations
Our estimates of the market valuations for two stock market indices, the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500), can be found in the file below:
Conclusion
During this time of global flux due to the coronavirus, I am leaving the Conclusion discussion below the same as was posted on March 23, 2020. The March 23, 2020 discussion still adequately reflects my thinking on the current state of affairs.
Important Note: While I don’t believe it is time to jump back into the stock market in a big way because of the market’s overvaluation, I have been advising the last couple of weeks in my weekly podcast, Intrinsic Value Wealth Report Radio, that investors can continue building their investment portfolios by selecting individual securities that offer growth and value opportunities.
Reprinted from March 23, 2020
Up until the past week, the economy had been in a stable but somewhat vulnerable state. Nonetheless, it had remained fairly strong. In fact, robust consumer spending and strong labor market conditions had given us confidence that the economy, which had been in its tenth year of expansion, could continue to grow. But we were cautious on this outlook. There were several reasons for our caution. U.S. business growth had been mixed. And global economic growth had been mixed as well. The new coronavirus was becoming a global economic threat, although it was still too early to tell how much of an effect it would ultimately have. Debt is at high levels for consumers, businesses, and government (at all levels of government). Finally, this is an election year that will likely have significant consequences either positively or negatively depending on the outcome of the elections. And of course, it is still too early to tell what the outcome of the elections will be.
In just a few days, the coronavirus’s effect on the economy and the markets went from a ripple to a tsunami. Businesses are shuttering, events are being cancelled or postponed, grocery store shelves are empty, and people are being asked or ordered to stay home. The markets are now deep in bear market territory. The effects on the economy, even given the short time that the economy has been retreating, may be with us for a long time. There is now a much greater risk of a recession, and there has even been some talk of a depression. The government, the Fed, Republicans, and Democrats, and pretty much the entire country, is trying to get the virus under control and is coming up with plans to mitigate the long-term economic effects caused by the virus. But the virus has impacted the economy – in a significant way – in just a short time. How long lasting the effects will be no one can tell right now. The economy has been largely shut down and remains so today. It takes time to restart the economy after a situation such as what is occurring at the present time.
Given these events and the rapidly deteriorating situation, as I said last week, I would caution not to panic. The economy and the markets will get better. The situation is bad – there is no doubt about that – but it will turn around. The real question is when will it turn around? No one knows that at the present time. But it will turn around.
For now, review your investment portfolios. It is highly likely that all or most of your stocks are down. You should not consider selling the bulk of your stocks – only consider selling companies that are not sound companies. But do recognize that as the economy deteriorates, even good companies will be affected.
For stock market value hunters, we believe it is still too early to jump back in. We will be closely monitoring the markets using the many tools and models that we have developed over the years to assess the economy and the markets. We will use our best judgement and thoughts to let you know when we believe things are turning around. The turnaround hasn’t happened yet.
We believe it is important to maintain a long-term view toward investing. But for now, just sit tight. Eventually, this means that you should continue building your investment portfolio using the Cassandra Stock Selection Model to select individual securities that offer growth and value opportunities.
Chart for Review and Thought
Simple and Effective Economic Forecasting Model
Note: The table and chart below have not been updated. However, we believe that a recession is quite likely. In the chart below, the bottom green line shows what a recession could look like.
Notes (GDP Growth Chart):
- See the July 8, 2019 Commentary for an introduction to this model.
- Actual numbers 2007 through 2019; forecasted numbers thereafter.
- Normal GDP growth is typically in the 2% to 3% range.
- A recession is generally defined as two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).
Thought for the Week
Reflecting on the lead article in this week’s Commentary – Is Ignoring the Coronavirus An Irrational Thing To Do? – I am reminded of a quote I heard somewhere along the line: “You can cheat the system, but you can’t cheat death!”
Announcements
The Intrinsic Value Wealth Report has started a new YouTube channel this week called Intrinsic Value Wealth Report TV. You can view the YouTube channel at Intrinsic Value Wealth Report TV.
The Intrinsic Value Wealth Report has started a new podcast called Intrinsic Value Wealth Report Radio. You can listen to the podcast at Intrinsic Value Wealth Report Radio.
Dr. Wendee spoke at the Investment Club of America’s annual economic summit, called Econosummit, on Sunday March 1, 2020 in Las Vegas.
Dr. Wendee attended the The National Due Diligence Alliance (TNDDA) investment banking conference, which was held March 6-8, 2020 at the Four Seasons Resort in Dallas, Texas. This is a conference held several times throughout the year for investment bankers and registered investment advisers to learn about new opportunities in the Alternative Investment asset classes.
We have been researching the use of crowdsourcing for investment ideas. We will be sending a survey out in the next few weeks to get your input on the economy and the markets; and to get any investment ideas that you would like to share. We will compile this input and distribute the results to you and our other subscribers. We have been testing our crowdsourcing models with students and have been having good success and results.
Dr. Wendee has been researching and writing a new theory of economics known as, The Value Creation Theory of the Economy (also known as, Intrinsinomics). The full paper on Intrinsinomics will be published in the near future.
Finance 3350: Personal Finance-Portfolio & Risk Management– Dr. Wendee started teaching Finance 3350 – Portfolio & Risk Management at California State University, Los Angeles (CSULA) starting January 2020. Dr. Wendee teaches courses in Management and Finance at CSULA. He will be teaching Finance 3350 – Portfolio & Risk Management at California State University, Los Angeles (CSULA) during the Summer term of 2020 as well.
Business 4970:Strategic Management – Dr. Wendee started teaching Business 4970:Strategic Management at California State University, Los Angeles (CSULA) starting January 2020. Dr. Wendee teaches courses in Management and Finance at CSULA.
Business 218 – Macroeconomics – Dr. Wendee started teaching Business 218 – Macroeconomics at California Baptist University (CBU) starting January 2020. Dr. Wendee teaches courses in Finance and Economics at CBU.
Dr. Wendee presented a paper on his new theory of economics known as, The Value Creation Theory of the Economy (also known as, Intrinsinomics), at the International Leadership Association’s annual global conference which was held in Ottawa, Canada last Fall.
Dr. Wendee is working on a financial planning modeling program which will be available in the near future. The modeling program is designed to assist anyone in creating a financial plan and is customizable for each person’s unique financial planning goals. A working draft of the model is currently in beta test with students. Click this link, schematic, to go to the clickable document under the subheading Financial Planning Process (Draft) in the Intrinsic Value Wealth Report to see a draft of the schematic for the new financial planning process.
Dr. Wendee has been developing an econometric model specifically designed to monitor and forecast the global economy as this current economic crisis unfolds. This new econometric model is based on other econometric models that he has designed and have used for many years. You can find some of these earlier models in Book # 6 – Simple and Effective Economic Forecasting in the sister website to this website which is called the Intrinsic Value Wealth Report. The new econometric model has been constructed with some additional tools and methods that he has learned and some that he has developed over the last several years. He will be talking more about this new econometric model in this Commentary over the next few months. His comments and forecasts on the economy and the markets going forward will be based to a significant extent on this new model.
Intrinsic Value Wealth Creation pyramid
We always conclude our commentary with a discussion of the Intrinsic Value Wealth Creation Pyramid. The Intrinsic Value Wealth Creation Pyramid is designed to show some of the major categories for building wealth. It is the result of many years of study of the wealth building process; experience working with clients who have built considerable wealth; and my own personal experience building wealth. Newsletter subscribers should consult the Intrinsic Value Wealth Creation Pyramid as one of many useful investment tools while considering their investment plans.
The chart in this section is an expanded version of the Intrinsic Value Wealth Creation Pyramid Chart referenced in the Forbes.com article entitled, Nine Of The Best Ways To Build Wealth.
RESOURCES
See our Resources section for links to economic and other resources used in the preparation of this Commentary.