The Dam Broke. Now What?

There’s finally a feeling of despair in the air that hasn’t been felt since the 2008 – 2009 financial crisis. Earlier in the week, I was feeling fine because bonds and real estate were still holding up. But when the S&P 500 corrected by an incredible 10% on Thursday, March 12, chaos reigned supreme. Despite AA-rated municipal bonds historically having a historical 0.1% default rate, muni bond funds like MUB, the National Muni Bond ETF, also declined by ~5.5% on March 12. Even Treasury bonds dipped a couple percentage points as there was nowhere for investors to hide, except for in cash. 

To me, the relatively drastic decline in municipal bonds on Thursday was a signal that fear had reached the upper limits. I can understand equities getting pummeled with earnings set to go into free fall. However, it would take the first zombie apocalypse in history for highly-rated municipalities to default.  During the previous financial crisis, MUB declined only about 4% from August 1, 2008, to November 1, 2008, but was relatively stable throughout the 17-month recession.  Unfortunately, mortgage rates ticked up last week given all types of bonds sold off. Just as well since the demand to refinance is running 2.5-3X higher than it was last year. Even if you timed the bottom of mortgage rates perfectly, you still might not have been able to take advantage as some banks were turning business away. Over the next two months, lenders should successfully work through their big backlog of refinances and mortgage rates should settle back down again. If you’re looking to refinance, this is why it’s worth checking the latest mortgage rates every day the bond market is open because you never know when there will be a big drop. Check the latest rates online and call up your existing bank and ask what they’ve got.  

The Good News 

Back in 2008 – 2009, we had a financial crisis due to overleverage. Too much debt destroys even the greatest of fortunes. Today, we are going through a consumption and supply chain shock.  Deleveraging is a tremendously ugly process that takes a long time to get through. For example, once you’ve lost your job and can no longer pay your mortgage, you might continue living in your home for six months mortgage-free before the bank starts knocking on your door. Then it might take another six months to work out a short-sale. If not, then you may have to go through bankruptcy proceedings that will take another six months. Once you go bankrupt, your credit is screwed for 7 years and you will not be able to borrow for that amount of time.  A consumption shock is much easier to turn back on. Once you decide it’s safe to go outside and spend, you may spend more than your normal pre-pandemic spending to catch up. Meanwhile, once workers go back to work en masse, the supply chain should b able to restock within a couple months.   In other words, a V-shape recovery after the worst of this crisis is over is much more likely than during previous crises. Therefore, it’s probably not a good idea to try and time the market by getting out and then trying to get back in when you think the bottom has been reached. If you miss some of the good days, like the 9.3% rebound we saw on Friday, March 13th, you would significantly underperform over the long run.  

The Bad News 

 The bad news is that things could easily get much worse before it gets better.

Once 1Q2020 earnings are reported in April, companies might disappoint even the lowest of expectations, which would send share prices lower. Small business owners are going to experience a significant decline in business during the quarantine period as well. 

Therefore, if you would like to help your local business survive, an effective solution is to call them up and buy a gift card or have them charge your credit card for a credit that can be used at a later date.

If you’re wondering whether Financial-minimalist.com is getting more or less organic traffic during this time period, the unfortunate answer is less. It seems that when times are bad, there’s a greater tendency to shut off because the losses are too painful. Therefore, if you want to support this website at no cost, you can help spread the word and forward this article.

 I personally get motivated during downturns to try new things

Back To Some Positive Thoughts

I’m glad the U.S. government seems to finally have put partisan bickering aside and will pass legislation that will directly provide financial aid to people most negatively affected by the coronavirus. I’m impressed there is now a concerted private and public effort to get mobile testing done across America. I’m hopeful that many more people who feel unwell will self-quarantine, even without testing. I’m also expecting all the rich and famous people who tested positive for the coronavirus so far to keep the rest of us updated on how they are doing and eventually tell us they are back to feeling 100% normal.

They were the ones who helped make the coronavirus real for the majority.

I expect their recoveries to also help allay the majority’s panic.  So far, there have been around 112,000 coronavirus cases globally, 3,900 deaths, and 70,000 recoveries. The recovery count is very encouraging.  The feeling in America now is very similar to the feeling our country experienced during the 9/11 attacks. One of unity and great patriotism to defeat a common evil. My finances are getting crunched. But I plan to keep on writing, keep on corresponding, and keep on helping out where I can. Our #1 goal is to survive long enough until the inevitable upswing. I’m rooting for you! I’m rooting for us all!

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