Two years ago this week I started this little blog. So much has changed, and yet so much has stayed the same. At the time, we were all newly experiencing the pandemic. In fact, one of my two talking points in that first post was the news that Moderna had just tested the very first COVID-19 vaccine. My exact observation was:
"The wires came out early in the morning with a report that Moderna (MRNA) a biotech company based in Cambridge, MA had successfully tested a vaccine in humans with no ill effect. The interview with the CEO Stephane Bancel was extremely positive: "This is a very good sign that we make an antibody that can stop the virus from replicating. The data couldn't have been better".
After this news, Moderna's stock jumped to an all-time high of $87. The trials had begun with just a few hundred patients, and we were all kind of freaking out. Spraying our groceries down with Lysol and living in a weird dystopian world, was breakthrough news at the time. If my memory serves correctly (always hard to confirm!) golf season was just beginning and many courses were installing plastic barriers in the middle of most carts so COVID-19 could not be easily passed between players. Further, rakes in the sand traps and flags on the greens were not to be touched. Moderna's vaccine has turned out to be a winner, and the stock now trades at just over $138 a share. We have learned so much. Sadly, the United States just passed the one million mark for total deaths attributed to this terrible virus.
My second major headline - in retrospect - was kind of unbelievable. I talked about oil and discussed the market action that had recently taken oil futures into negative territory for the first time in history. If only my wife would have let me store a few thousand barrels of oil in the backyard! This was my commentary at the time:
"Oil has rallied significantly from the crazy negative prices experienced in late April when the front month contract traded into negative territory. This had, of course, never happened in the history of the oil market before. Part of the dislocation was due to the complete lack of available storage, so let's temporarily leave the "negative" prints out as a distortion - but still, spot and front month futures traded below $20 a barrel for nearly a month. I'm not an oil man, but it doesn't take a genius to figure out that no one makes money at that price (except possibly some storage facilities). As of this morning, the front month contract (which is June) is trading at $32.30. Still not at the average for the last year which is just over $49/barrel, but still a decent recovery."
Ah, if only we knew the future! I also did spend some time discussing the money supply and velocity of money and observed that velocity was way down. Much of the decrease in velocity was due to the incredible increase in the money supply. Readers of this blog know that I love to opine about the M x V = P x Q equation. Some might say obsessively! Has the velocity increased in the last two years? Actually, it has not. Here is the latest data from the Fed.
What else has happened you may be asking? Well, we went into and out of a recession. As you can see in the graph above where the lightly shaded gray areas represent recessions, we went into official recession territory in the second quarter of 2020 and then quickly started to recover from the shocks caused by the pandemic. According to the numbers, we now sit again on the edge of a recession and are also faced with an incredibly high rate of inflation. The oil that I could have charged to accept into my backyard way back in 2020 is now trading solidly above $100 barrel. The latest quote for the front month contract as of May 17, 2022, was $114.50.
What a wild 2-year period.
One of the constants that I always consider when writing for this blog is how little I actually know. When I think of the future, it is so clear that we do not know what will happen. Sometimes over the last two years, it has seemed a little like the movie Groundhog Day starring Bill Murray.
This will date me a little bit, but that movie came out in 1993! If you know the plot, Bill Murray's character gets stuck in a loop where the same day, February 2, gets repeated over and over, repeatedly. As you can imagine, this would be very distressing. And for many of us, much of 2020 had that feeling. Many people had moved into their home "office" and started doing the daily chores of the job. There were Zoom calls and tons of e-mails, but very little personal interaction. Time kind of stood still. From my office window, I watched the seasons change: the leaves fell, the snow came, and spring sprung. And 2021 was almost, but not quite, a complete repeat. But now, finally, just as in the movie, when Mr. Murray finally gets unstuck from his repetitive life, things are really starting to change.
There is, however, at least one constant that will not change: we still don't know the future.
One of the things that we always emphasize when teaching at our Performance Trust University courses is that since we do not know for certain what is going to happen to rates, slope, spreads, the economy or really anything at all in the world of finance, we must do something that some might consider mundane. It's a discipline of looking at multiple different scenarios, over time, and projecting the potential outcomes to the best of our abilities. By the way, this is almost impossible to do with stocks or any instrument with unknown components. If you need proof of that just look at Twitter (sym: TWTR)! Who could have guessed just a couple of short months ago the wild ride that Elon Musk was going to take it on?
Thankfully, we can have much greater clarity with fixed income instruments. Certainly, even with these we can never be perfect, but as we like to say, at least the system is somewhat closed. Elon Musk's tweets won't change a bond's face amount. For example, I can know the cashflows of many available bonds, such as when the coupons will be paid and when the principal will be returned with maturity. For other types of bonds, like mortgage-backed or asset-backed securities, the timing and size of payments are far less certain, but they are still constrained by their structures. But then, whether cashflow schedules are simple or complex, I still don't know where interest rates will go while I am awaiting them.
So, what's the point? It does seem like we are breaking out of this weird pandemic phase. I spend a lot of time researching and listening to experts and I believe most of them feel we have started moving into what is described as an endemic phase, where COVID-19 will regularly be found among us, and we learn to live with it. Having recently flown for the first time without mask mandates in two years, I can tell you that it felt great. Not having to try and sneak sips of water with a mask on my face was incredibly liberating. I don' think I will take that for granted for many years to come. But, for some, there is still a lot of fear and discomfort in being around other people. That may or may not ever change. I think there is a decent chance that a good percentage of the population will be wearing masks for at least the next couple years. Recently, we saw Shanghai, China and North Korea impose incredibly severe lockdowns again. Could that happen here? It seems unlikely, especially during an election season but I don't think we can say it is impossible…can we?
I believe what we need to do is remain disciplined and get very committed to a multi-scenario discipline to study our investments, our loans, our deposits, and our capital. These things need to be examined and understood in an extremely detailed way. The neat thing is that this belief of mine has not changed over the past two years - or even the past twenty years!
Final, final thought: I spoke in Dallas this week and have come to the sad realization that you just can't get real barbecue up here in the north…but why not??!!
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The information, analysis, guidance, and opinions expressed herein are for general and educational purposes only and are not intended to constitute legal, tax, securities, or investment advice or a recommended course of action in any given situation. Information obtained from third-party resources are believed to be reliable but not guaranteed. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Past performance does not guarantee future results