Thursday, 19 March 2020


Time the crash? We all failed.

What a difference 20 days can make. Since peaking at all time highs in mid-February, US stocks have fallen by a staggering 30% - the fastest drop in history. The FBM KLCI did its best to catch up and fell 20% (!) this year. Maybe we should mention that it's only March.

Everything was pummeled, and everything was shred to pieces. Your portfolios are probably suffering. So is ours. Pity our fund managers and their favorite stock picks this year.

Oh no...

We have been flagging the risks inherent in the markets for quite a while.. but it doesn't matter as we failed to see this crash coming. Neither did Trump or the Fed, of course.

In our blog post in December 2018, we did nothing but predict doom and gloom. Little did we know that US markets would skyrocket all throughout 2019.

But now, suddenly we are being catapulted straight towards a prolonged recession on a global scale.

You'd have thought the experts would know when one was coming, but name us one President / US Fed chair who had correctly anticipated a recession and we will eat a hat.

 Article from Feb 2020 - not even a month has gone by! Source

But to be frank, we were also gobsmackingly wrong on so many things. The markets were irrational for far longer than we anticipated; it literally took years.

The collective herd in the markets - the animal spirits - became detached from all reason and started having faith in Trump and Fed's pronouncements: they were the cheerleaders of a historic rally.

This includes many who think that the president is a complete doofus but still expects him to 'save the stock market'!

It took a worldwide pandemic to bring markets down, but collapse the markets did. And now, in a matter of weeks, suddenly we find ourselves in a world of pain: markets, deleveraging, recession, ineffective policy, companies going bust, unprecedented travel curbs, national lockdown... you think anyone contemplated any of these in January?

For future reference - this shit will happen again - it's important to note the key triggers for the collapse.

1) The COVID-19 outbreak turning into a global pandemic

2) Emergency rate cuts by the Fed, signaling recessionary concerns

The Fed's been bumbling around : it suddenly did an emergency rate cut of 50 basis points, and this action carried all sorts of Armageddon-ish implications. Do you know when the Fed usually does rate cuts? On the eve of recessions, or at the peak of a bubble.
Note the 'emergency' term in the rate cut. It is not seen primarily as an economy support measure; instead, it's a recession indicator. On 15 March, the Fed cut rates to zero. It did not bother waiting for a scheduled 18 March meeting to announce because the whole world now knows; it's an emergency, and markets are in a panicked state.

After seeing that this further cut had absolutely no effect on the markets (rate cuts are not very effective at warding off new viral strains, it turns out), the markets threw an absolute fit. Everybody ran for the exits in record time. It was a stampede of bulls throwing themselves off a cliff. The message is "The Fed can't save us, and no one will".

The day after the zero rate cut, in a truly historic rout, we got this - the biggest decline since 1987's Black Monday. Wall Street wishes that the markets would just close already.

While we do believe that the market collapse is fundamentally justified, it was exacerbated, and accelerated, by the coronavirus. Whatever feel-good grandmother stories we had about perpetual US economic growth and jobs growth were banished by reality.

The economic concept of sudden stops suddenly dominated the news, and it's as virulent as the one infecting us right now.

We just popped this generation's bubble, so now let's get ready for that impending recession. 

It is happening as you read this.

But we do not feel vindicated by our predictions, because they do not matter. Now is the time to be really, really concerned. So, what happens next?

The below formulation is reproduced from our November 2018 blog post, where we explored the chain of events that would lead to a market bubble popping, and then an economic recession. We will expand on these themes for your knowledge.

The gist is : we are in the middle of this impending economic downturn which will be catastrophic for some businesses and people.

Jobs may be lost, companies you didn't think would go bankrupt will eventually do, and all you can do now is prepare for the storm.


A bear market can bring about a vicious self-perpetuating cycle, but we don't want to be emotional or fear driven in our thinking. Let's look at the broader market environment sequentially, which means that as one thing occur in a long chain of events, the greater the likelihood of the next thing in the chain occurring.

Here we outline a progression of events that are already happening in the world today.

Scenario A (Macroeconomic): Global economic growth slowdown ----> Lower demand for key commodities (palm oil and crude oil) ----> Malaysia's economic growth slows down ----> corporate earnings (banks, construction, property companies etc) slows down ----> added pressure from even weaker ringgit (due to our weak fiscal position) ----> [Scenario B] for Bursa Malaysia stocks

Scenario B (Markets/Sentiment) : Lower investors' expectation ----> stocks lose premiums over book value ---> lousy sector prospects ---- > lower investors' expectation ---> further stock market declines

And, to cap it all off:

Scenario A and Scenario B occurring concurrently ----> steadily weaker quarterly GDP growth ----> negative GDP ----> recession scenario.

Blue = Events that are already happening as you read this
Green =  Events that are at risk of happening soon (give it six months)
Red = Apocalyptic worst case scenario that will probably cut the KLCI's value by half

What previous stock market crises look like. Black is where we are now!

Let's run through them to get an idea of the current progression.

Scenario A:

1) Global economic growth slowdown : HAPPENING, the world is now expecting this.

2) Lower demand for key commodities (palm oil & crude oil) :  HAPPENED with the OPEC+ collapse brought about by the Saudi-Russia price war, driving down prices even more. Randomly rhymed there. At the time of writing, we just hit $26 per barrel of Brent crude. Shit.

3) Malaysia's growth slows down : HAPPENING, with Malaysia's 2020 GDP forecast downgraded further to just above 3%, as per one research house estimate. We did 4.3% in 2019, by the way.

4) Corporate earnings (banks, construction, property) slows down :  HAPPENING. Banks' earnings are closely correlated with economic growth. Let's just put it this way: no one's taking up loans at the moment, hence interest based income will suffer. As for construction and property, forget about earnings growth already lah.

5) Added pressure from a weaker ringgit due to our weak fiscal position : HAPPENING. Ringgit is at its lowest point in nearly three years, while our fiscal deficit is widening.

 The rest of the world is following China's lead

Scenario B :

1) Lower investors' expectations : HAPPENED. The FBM KLCI dropped 16% this month alone. What do you think?

2) Stocks lose premiums over book value : HAPPENING. Several research estimates pegged the FBM KLCI trailing price-to-book at 1.4 times as of end February. The index has dropped by quite a bit since then. We expect it to have dipped to around 1-1.1 times by now, which would be comparable to global financial crisis levels. Once it goes below 1, stocks are no longer trading at a premium to book value, indicating investors' absolute pessimism towards future growth for the companies.

3) Lousy sector prospects : HAPPENING. With overall economic growth weakening, expect lousy performance in a broad range of sectors. You know that tourism and aviation are already in the dumps due to COVID-19. There's also banking, telco, property, manufacturing, construction, etc etc. The silver linings are healthcare and utilities only, and just maybe, our favorite chicken stocks.

4) Lower investors' expectations : HAPPENING. We capture this as Round 2, which means that already weak expectations can go even lower if market conditions are bad enough. And they are already bad enough.  

The next outcomes: 

1) Steadily weaker quarterly growth : HAPPENING. We have cut our GDP expectations for 2020. First quarter will be terrible, if not negative. We already face a loss in GDP of up to RM17 billion this year from COVID-19.

2) Negative GDP : HAS NOT HAPPENED. But if it does...

3) Recession scenario. We'll put it this way. The FBMKLCI was at 1,860 points in April 2018. An economic recession will likely cut it in half, so prepare yourself for the possibility of the index hitting 900 points and below, if it gets bad enough.

Our personal opinion? Expect a lot more of red ink ahead.

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