Ray Bradbury in 1962 wrote a great fantasy novel “Something Wicked This Way Comes”. He could have been writing about today and the world wide recession being caused by COVID-19.
I would like to be writing a post that says don’t worry, we will get through this COVID-19 problem, and everything will be sweetness and light. I would like to, but I would be lying. Here’s why.
The corporate world is awash in debt, much of it risky, junk bond rated debt that has been used, amongst other things, to buy back their own shares and prop up stock prices to make CEOs look good. As the attached article says, COVID-19 is the fuse that is going to light the debt bomb. Read it here:
Every major financial disaster has been caused by too much easy credit. The ultra low interest rates of the past 10 years have enabled feeble companies to borrow way more than they should have been able to. As usual, financial instruments, in this case junk bond ETFs, have enabled selling this debt to ill educated retail investors desperate for yield. One of my favorite investment writers, Steve Blumenthal, wrote three weeks ago (and which I republished), “This is Euphoria, Wait for Pessimism”. He should have said Wait for Paranoia. Read his note here:
So what do you do about it ? At this stage there is really nothing that you can do. If you have been following my Blog Site, you are 60% invested in blue chip dividend paying stocks which should continue to provide you with cash flow, and 40% bonds. The bonds will provide a buffer against the fall in equities, although even good quality corporate bonds have been badly beaten up. So turn off BNN and CNBC, and the news in general. (Don’t you note how the news channels love a great crisis to make them relevant, when their announcers who know no more than we do are able to sound like they have great insight and understanding, while we mostly ignore them the other 95% of the time ?) Relax, drink some wine (at least the LCBO is still open) and wait for this all to bottom in another 12 months or so, hopefully.