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Here is a graphic of an ordinary market cycle. We have all seen several of these.
https://advisor.visualcapitalist.com/psychological-pitfalls-...

The old-fashioned market cycle (based on manufacturing) was usually caused by overproduction compared with orders. As inventories rose, the company would slacken production, laying off workers. The laid-off workers couldn't spend as much so orders slacked further. (On a macroeconomic scale.) The reduction in consumer spending was seen by a decline in the Velocity of M1 money stock during and after the start of recessions.

https://fred.stlouisfed.org/series/M1V

The mild recession of 2001 was caused by the 2000 dot-com bubble burst. I think this really does fit the graphic since the euphoria ("irrational exuberance") was clear.

The 2008 financial crisis was clearly fitted to the graphic. Real estate prices never go down so the derivatives based on them never go down. Also, Peak Oil. Uh-oh.

Our current crisis doesn't really fit the classic model. Yes, the stock market was very overvalued. But the Covid-19 epidemic (a Black Swan if ever there was one) was not an endogenous imbalance like the earlier recessions.

Will the descent be a long ride into the capitulation like the others? Or will this exceptionally volatile, rapid crash bounce back rapidly as soon as the epidemic is brought under control?

Wendy
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Many people have lost much of their retirement savings and their time horizon as investors is too short for recovery.
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"...Will the descent be a long ride into the capitulation like the others? Or will this exceptionally volatile, rapid crash bounce back rapidly as soon as the epidemic is brought under control?..."---WendyBG

Dear Wendy:

First, I just quickly looked at and read over the graphic and article. It's a Minsky journey. The market is beginning to differentiate itself from the pandemic. Not meaning to be insensitive, the longer the economy remains shut down, the more it differentiates itself from the pandemic. As time goes by, the cause and rapidity of the crash become irrelevant. After a month or so, it doesn't matter if it was caused by an exotic derivative market crash, overproduction, interest rate hikes, whatever. The pandemic was the cause. The crash was like a theme park parachute drop. The end result is the same. A devastated economy.

The aftermath now will be the same as any other.

Again, as weird as this sounds, IMHO a stock market crash is a good thing. That is because it is a necessary thing. It's a normal Minsky cycle. Markets had become overconfident. Now I refer to Nassim Taleb. It was a highly improbable event, a black swan, that cut the Minsky journey short. But this market collapse was inevitable. It was hastened by the realization of a tail risk.

Again, I understand the suffering this is causing, but to remain with this topic, as far as markets go, this is an opportunity. The volatility will continue. But the trend will be down until two critical factors are in place. First is a vaccine. Second is earnings.

The bull market and the pre-pandemic economy are as dead and gone as the Pharaohs!

So to answer the question, markets will not rocket back/ They will normalize as if a Minsky cycle had completed and begin the bon voyage cycle anew. Then a new economy will evolve.

As it stands right now, the die has been cast. The old way is gone forever.

Your forward-looking Fool,
FM
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Will the descent be a long ride into the capitulation like the others? Or will this exceptionally volatile, rapid crash bounce back rapidly as soon as the epidemic is brought under control?

Can't say--yet.

The market was WAY over-valued, but that was caused by artificially maintained ultra-low interest rates by the Fed and other central banks around the world. Thus, investors were forced into the stock market because there was no other real alternative investments with reasonable returns.

With QE-to-infinity, the stock market will be the only place to park investment cash with any chance of getting a practical return. The market will be whipped ever higher until the bubble is *really* popped. The return of reasonable interest rates will kill the stock market because the money will have another place to be parked, which means the Fed would have to kill QE for the interest rates to rise. I don't see that happening in the foreseeable future. Perhaps in 2021-22?
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Now I refer to Nassim Taleb. It was a highly improbable event, a black swan

An event that is virtually certain to occur, but at an unknown time, is described in Taleb's book as a white swan.

This pandemic is not a highly improbable event, it's an event of a sort that is certain to occur... eventually.
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Now I refer to Nassim Taleb. It was a highly improbable event, a black swan, that cut the Minsky journey short.

I'll refer to Nassim Taleb too. His words on this exact topic in fact:

'Furthermore, some people claim that the pandemic is a “Black Swan”, hence something unexpected so not planning for it is excusable. The book they commonly cite is The Black Swan (by one of us). Had they read that book, they would have known that such a global pandemic is explicitly presented there as a white swan: something that would eventually take place with great certainty.'

(emphasis original)

https://medium.com/incerto/corporate-socialism-the-governmen...

The whole article is well worth reading by the way. I posted it here before, but quoted a different section I thought was more applicable to the board.

Many people seem to think a black swan is some sort of destroying angel. It can be, but it is only a black swan if it is a destroying angel you can't predict. In the book, Taleb recounts an anecdote where the publisher proposed a pair of dice for the cover art. Taleb, as he tells it, was enraged because the entire point of the book was that you can calculate the probability for any roll of the dice. You can't calculate the probability of a black swan because you don't know it is out there.

In that book Taleb specifically used the example of a future global epidemic as something that is almost inevitable and therefore NOT a black swan. Preview in Google Books here:

https://www.google.com/books/edition/_/gWW4SkJjM08C?hl=en&am...

Money shot: "I see risks of a very strange acute virus spreading throughout the planet." Risks you know about are not black swans. You can mitigate risks you know about. Black swan risks are much harder. That's the point of the book.

Note: There is a pandemic board here at TMF. Started by Loren Cobb in 2005. Unfortunately, that board was not particularly active back then (it is now), but if you read Loren's posts in particular, 15 years ago he predicted very clearly and accurately the events we are seeing today.

https://boards.fool.com/pandemic-fears-23139150.aspx
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This pandemic is obviously a black swan because political leadership in many countries certainly did not predict it, prepare for it, or react quickly to it.
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This pandemic is obviously a black swan because political leadership in many countries certainly did not predict it, prepare for it, or react quickly to it.

There are two kinds of people in this world:

1) People who have read "The Black Swan."

2) People have read the "The Black Swan" wiki article.
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Actually, there is a third type:

Those who have seen the movie:
https://www.imdb.com/title/tt0947798/

:-)
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>Will the descent be a long ride into the capitulation like the others? Or will this exceptionally volatile, rapid crash bounce back rapidly as soon as the epidemic is brought under control?
Wendy

IF the epidemic could be brought under control (which I define as "no need for further social distancing") by the end of April or even by the end of May, I think everything would bounce back.

It might take six months to repair the damage, but the direction would be clear.

Now what are the chances that ending social distancing by June would NOT cause a devastating second wave of Covid-19?

Perhaps 1 in a 1000.

Peter
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This pandemic is obviously a black swan because political leadership in many countries certainly did not predict it, prepare for it, or react quickly to it.

Our own government predicted it. WHO predicted it, and communicated the prediction to every government on Earth. My family talked about what we would do if such a thing happened and prepared for it waaaaay back in the 90’s, and we have 96 year old Mom safely cocooned with over a month more of food in her own home with one dear 80 year old friend.

W Bush and Obama, with bipartisan support from Congress, set up and funded Pandemic Preparedness staff, emergency supplies etc....

So, the Pandemic is White Swan all the way.

The perhaps Black Swan was the perhaps unpredictable fact that governance in the world is increasingly unable to walk, chew gum, and long term remember what its job is besides just in time performative artifice....


David fb
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The end result is the same. A devastated economy.

The aftermath now will be the same as any other.


I'm with Mike on this one in the reaction, but the recovery may be even slower than in 09. The banking "crisis" of a dozen years ago was remote to everyone whose bank continued it's normal function. It was completely transparent to me. My bank never closed, the ATM always dispensed cash when asked.

I was at the bank today, and what was the topic of conversation between the two tellers and the two customers? All of them but me knows someone who has it. Went to the grocery store next, and, for the first time, saw a significant number of customers wearing masks, including a couple with bandanas tied around their faces. Some of the cashiers, for the first time, were wearing masks. I asked one of the cashiers if the store had provided the masks (the bank had provided their tellers with masks and rubber gloves). He said, no, the employees who were wearing masks had paid out their own money for them.

This event is probably going to leave a much deeper wound in people that the event of a dozen years ago, and it will take longer to get over it. Official assurances from DC that "pent up demand" will make the economy immediately soar higher than ever, is as much a pipe dream as pews crowded with worshipers on Easter.

Steve
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The perhaps Black Swan was the perhaps unpredictable fact that governance in the world is increasingly unable to walk, chew gum, and long term remember what its job is besides just in time performative artifice....


David fb,

Not really. Pretty much all ancient wisdom literature across cultures note the cycles that societies go through.

Even The Revelation, with its depiction of the 4 horsemen is pretty much just a restatement of other ancient wisdom literature.

Cheers
Qazulight
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Hey, I've seen the movie!

And the 4th category.

People who have never heard of either black or white swans as macroeconomic events.

Peter
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>I was at the bank today, and what was the topic of conversation between the two tellers and the two customers? All of them but me knows someone who has it. Went to the grocery store next, and, for the first time, saw a significant number of customers wearing masks, including a couple with bandanas tied around their faces. Some of the cashiers, for the first time, were wearing masks.

Interesting comparison. I live in a large beach town near the capital of the Dominican Republic. Yesterday I asked three different persons (a man, a woman, and a girl of 14) if they had heard of anyone in Boca Chica with "coROWna VEERus" disease. They all said no. OTOH everyone in town is wearing a mask and there is a 5 pm to 6 am curfew.

This is good.

Peter
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The perhaps Black Swan was the perhaps unpredictable fact that governance in the world is increasingly unable to walk, chew gum, and long term remember what its job is besides just in time performative artifice....

Government on various levels botched both the response and preparation for hurricane Katrina. The botched response was disappointing but not surprising. No one knew when the next hurricane was coming, but it was pretty clear one was one the way, eventually.

https://en.wikipedia.org/wiki/Hurricane_(cocktail)
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I think a long nasty recession depression unless we get not just one more cocaine adrenaline hootchie kootchie dancing stimulus, but a long term, big, 21st Century infrastructural tax reform safety net stimulus.

Without that I expect the market to chop up and down and cry for more crack for a long time, and a generation to be burned with the experience. I believe that if markets sense a real probability of a deep infrastructural stimulus we could see early ignition of the markets. It would not be a good time to be in long bonds.


David fb
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but a long term, big, 21st Century infrastructural tax reform safety net stimulus.

We saw what happened to the attempt at stimulative "shovel ready" infrastructure projects a dozen years ago.

In the end, however, only $98.3 billion of the $800 billion stimulus was dedicated to transportation and infrastructure. Of that $98.3 billion, only about $27.5 billion was actually spent on transportation infrastructure projects. Why?

“The problem is that spending it out takes a long time, because there’s really nothing – there’s no such thing as shovel-ready projects,” Obama said in a 2010 interview with the New York Times.


https://finance.yahoo.com/news/happened-shovel-ready-infrast...

The present POTUS ran on a platform of a big infrastructure program. Shares of CAT soared in anticipation. What have we gotten? A few miles of wall that add not one nickle to GDP.

We saw the tax reform: relieving the "job creator class" of their share of the payroll tax.

Safety net? What safety net? A big chunk of the safety net will be jingling in the pockets of the "job creators".

Remember the "three legged stool" of retirement funding?

-employer paid pension and supplemental retiree health insurance (since taken away)

-Social Security and Medicare (in the process of being defunded)

-personal savings (inhibited by flat incomes and Fed suppressed interest rates)

Steve
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Note: There is a pandemic board here at TMF. Started by Loren Cobb in 2005. Unfortunately, that board was not particularly active back then (it is now)

A bit more detail on that:

Started October 2005
152nd post May 2019
153rd post January 2020
Currently at 310 posts

Yep, more posts so far this year than in the preceding 14+1/4 years.
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This pandemic is obviously a black swan because political leadership in many countries certainly did not predict it, prepare for it, or react quickly to it.

"A lack of planning on your part, does not constitute an emergency on my part."

(Well, that depends - if YOUR lack of planning is going to get ME killed, then yes.)

A "black swan" is an event that could not be reasonably anticipated or predicted.

The authors of the book "Black Swan" are among those that anticipated and predicted a respiratory pandemic calling for extreme action. They (correctly) said it was virtually certain to happen eventually, and therefore labeled it a white swan.

New York state medical authorities are also among those who anticipated and predicted a respiratory pandemic calling for extreme action. Back in 2015 they strongly recommended the state acquire an additional 15,000 ventilators in preparation for it. (Which advice was not followed.)

I'm sure there are many others.

This is the third respiratory-disease pandemic to come out of China in the past 15 years. After the first two, it doesn't take genius or a magic power to see into the future to predict that another is going to happen someday.
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The perhaps Black Swan was the perhaps unpredictable fact that governance in the world is increasingly unable to walk, chew gum, and long term remember what its job is besides just in time performative artifice....

Really? You think governmental incompetence might be a black-swan event?

In that case, so might rain. In Seattle. In January.
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This pandemic is obviously a black swan because political leadership in many countries certainly did not predict it, prepare for it, or react quickly to it.

Faulty reasoning! Circular argument. You cannot define an event by posterior actions or inactions.

The Captain
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There are 10 kinds of people in this world:

01 - People who don't know binary, and

10 - People who do...

The Captain
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The perhaps Black Swan was the perhaps unpredictable fact that governance in the world is increasingly unable to walk, chew gum, and long term remember what its job is besides just in time performative artifice....

That people will make mistakes is a given, not a swan of any kind.

The Captain
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"...A "black swan" is an event that could not be reasonably anticipated or predicted..."---warri

Dear feathered Fools:

There's a great deal of misunderstanding of what does and what does not constitute a Black Swan Event.

I had to read it several times to get a good handle on it myself. With respect, a Black Swan Event refers to the occurrence of something that's measured as a tail risk. Nichols Taleb's essay, The Black Swan is more about the inadequacies of statistics and probability when it comes to measuring tail risks. It's about the improbable, like the probability of flipping a coin and having it land standing on its edge.

I recall an excellent example in the book about a statistician who reads about an island where every person is exactly six feet tall. The statistician goes to the island and discovers that exactly half the population is seven feet tall and the other half is five feet tall. Not one single person on the island is six feet tall. The point is that if you tried to take advantage of the statistic and bet a bunch of people dollars to seashells that there was at least one six-foot person on the island, you would have lost big time. But the statistics would indicate that it was a 'can't lose' bet!

Tail-risk statistics can be very misleading. Perhaps better said as very mis-measured. In particular, tail risk events deserve more respect.

Another type of example is that of Charles Darwin's prediction of a moth with an astonishingly long proboscis based on the length of an orchard he was given. It was many years before the moth was actually was discovered. In the meantime, although the theory predicted it few people believed it.

There have been many, many global pandemics. But how many pandemics shut the global economies down and crashed markets all in one week by a virus that can propagate itself stealthy and hospitalized so many people so quickly that hospitals ran out of beds and equipment to such an extent that weeks later global production still can't catch up! Was this possible? Yes. Was it expected? No.

Remember, the Titanic was considered unsinkable. But the ocean floor is littered with sunken ships. But what was Mr. Thomas Andrews thinking while he was splashing around in freezing water two and a half hours later? I assure you he didn't say,"well this can't be a Black Swan Event because the ocean floor is littered with sunken ships".

Your chilling Fool,
FM
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"just in time performative artifice" for the win! (god help us all....)
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But how many pandemics shut the global economies down and crashed markets all in one week
___________________________________________________________

Besides the Spanish Flu, the only one I can think of was the Black Plague. While they didn't take a week, the traveled at "the speed of transportation/communication of their day.

The concept of "quarantine" was developed in Venice during the plague to keep ships anchored in the harbor long enough - 40 days (in Italian quaranta giorni) to see if they had a plague infected crew aboard.

While the speed which this hopped around the world is awesome, the coordination to halt it, while chaotic, ranging from leaders who took draconian efforts to those who were in denial, shows the potential for more coordinated responses in the future.

The existential risk to the market is if catching this does not give long lasting immunity to reinfection or if the virus shows a tendency to mutate into additional versions which don't respond to the initial vaccine. If this shows the "stickiness" of malaria instead of the ability to be wiped out like smallpox, we may be experiencing a world-changing moment.

The good news about this version is that it seems to spare the very young for some reason. It is important to research the reason for this, because the next iteration may not be so benevolent. My guess is that one of the common infant inoculations also provides some level of protection from this virus (maybe polio?).

Jeff
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"just in time performative artifice" for the win! (god help us all....)

"Just in time" does not mean "single sourcing."

The Captain
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Thank you for recommending this post to our Best of feature.

...

Many people have lost much of their retirement savings and their time horizon as investors is too short for recovery.


warbac

Seems to happen a lot doesn't it?


After 'watching' a few crashes over the years:

I was working squadron ops when the nasty dump in 1987 took place. One of our senior instructor pilots asked if I could find someone else to take his mission as he was trying to call his broker ... a glare from the OpsO ended that discussion. During the mission he called in asking what the latest numbers were every 15 minutes.

When I was working in Germany my tax free salary combined with my military pension in spite of my efforts to travel kept building so I talked to the young German at the bank and he took care of it for me with monthly statements (no capital gains taxes in Germany). When I was preparing for our move back to Canada in late 2000 we had a large sum, some of which was needed to pay for our new home. Rather than get complicated I pulled it all out and transferred most of it back to my bank account in Canada so there wouldn't be any surprises when the end of May departure arrived. Of course the tech crash got really nasty.

Arrived back in Canada in early June 2001, very busy with new home, daughter's wedding, and the like but finally got around to calling the investment person at RBC 6th September and made an appointment with her for the next week (13th I think). She had several suggestions over the phone that we could look at.

Of course I was becoming really confident as I ended up buying stuff (mostly mutual funds) at bargain prices while she was very busy trying to talk people out of selling everything ... I think it was a bit over a week after 9/11.

Finally got caught by the '08 mess after I had my own IB account and even a bit of margin! }};-#

I switched to Questrade (Canadian low cost broker that does do TFSA accounts) hold only Canadian dividend paying stocks (1 exception) (I live in C$ and IRS doesn't recognize my tax free accounts and withholds the dividends).

I am forever thankful for my federal government pensions that more than support my modest no debt lifestyle and my suite of Canadian banks, pipelines, mid-streamers and one airplane techie in my Questrade account are doing quite well thank you.

Tim
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Will the descent be a long ride into the capitulation like the others? Or will this exceptionally volatile, rapid crash bounce back rapidly as soon as the epidemic is brought under control?

That depends on how poor everyone is when we get back out into the world. Anyone who has money will go on a shopping binge. Everyone will need a haircut and style. We'll all go out to eat at any place that is still open. All the kids will need new clothes and shoes. Etc.

All the poor people will take whatever job they can get as soon as they can get it. Folks who moved in with family will be looking for apartments.

Things will ramp up quickly, is what I'm trying to say, once they open the cages. The Fed will make sure there is plenty of money to goose restarting.

Of course, all this assumes that they will develop a vaccine and settle on a treatment that at least keeps people alive long enough to heal when the virus reappears every year. I'm pretty sure that will happen. I'm thinking deep trouble for a year or two, then rapid rebound.
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Really? You think governmental incompetence might be a black-swan event?

In that case, so might rain. In Seattle. In January.


LOL

Cheers
Qazulight
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'Furthermore, some people claim that the pandemic is a “Black Swan”, hence something unexpected so not planning for it is excusable

3M has been planning for it for many years. They have a lot of “surge capacity” at the factories where they make masks, and they started it up back in January when they first started getting reports of increased respiratory problems in Singapore.

At some cost they have had the machines which produce the masks standing by, they have refined plans (and used some of the extra capacity during the H1N1, bird flu, Ebola and other smaller pandemics) over the years. It still takes time. They have to hire people, then train them. They have to get suppliers to kick up the process and there are other issues, but (and this is prescient) they do their best to keep their sourcing for China in China, for Korea in Korea, and the US within distance of their US facilities. (Some in Canada, oops, sorry about that Trade Pact you threw out.)

Anyway, interesting story in Bloomberg, and the kind of business story I love. Here:

How 3M Plans to Make More Than a Billion Masks By End of Year

The company is using “surge capacity” to increase the production of N95 masks to fight the pandemic. Localized supply chains are a secret weapon, too.


The Aberdeen plant had already ramped up production of respirator masks in response to demand from first responders battling wildfires in Australia and contending with a volcano in the Philippines. Now, Rehder told his charges, Aberdeen would shift to “surge capacity.” Idle machinery installed for precisely this purpose would be activated, and many of the plant’s 650 employees would immediately start working overtime. “We knew it wouldn’t be a two-week blip, it would be longer,” Rehder says. “But I had no idea.”

https://www.bloomberg.com/news/features/2020-03-25/3m-double...
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Official assurances from DC that "pent up demand" will make the economy immediately soar higher than ever, is as much a pipe dream as pews crowded with worshipers on Easter.

Steve, never underestamate people's reliance on their invisible friend.

https://www.google.com/search?client=safari&channel=mac_...

Desert ($5 and a prayer will get you a Big Mac and fries at McDonald's) Dave
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