Monday, November 30, 2020

THINK STRATEGICALLY: The Insensible Sense of Entitlement

By on June 29, 2020

A group of mask-wearing citizens, somewhere in California, during the flu pandemic of 1918. (Niday Picture Library)

Why wearing face masks is a life and death deal.

We have seen a significant segment of the population behave with an insensible sense of entitlement. This means that some people believe they deserve more privileges than anyone else; they do not care if their actions are arrogant and impact others.

Very often in life, one can find the answers to some of today’s problems in the past; such is the case with COVID-19. We began to research the 1918-1920 Spanish Flu pandemic and found some very stark contrasts among both pandemics. For starters, it surfaced in waves. After the first wave in the United States, the virus abated, and like now, most Americans were anxious to have businesses reopened and for social life to resume. 

A call to protest by the anti-mask league. In San Francisco Chronicle, January 25,
1919, p. 4.

Back then, like now, there was a movement for people not to wear masks. Masks had become like now, second nature to wear them. The campaign for not wearing masks grew so large that the Anti-Mask League of 1919 was created. Its main argument was very similar to the one used by today’s protesters. They thought the public health ordinance requiring people to cover their nose and mouths violated their liberty, and they claimed quite unsuccessfully that it was unconstitutional. 

This insensible sense of entitlement caused the next two waves of the Spanish Flu, which became deadlier and killed more than 675,000 Americans and about 100 million of the 500 million people it infected worldwide. This tragedy could have been largely avoided if the people followed simple rules of sanitation, washing hands, social distancing and wearing face masks. The insensible sense of entitlement, mixed with a dose of stubborn ignorance resulted in millions losing their lives.  

As we review all available data and the areas of the United States where the coronavirus has come back with a vengeance, we note that the Sun Belt is seeing the brunt of the rise in cases, notably Arizona, Texas, Florida, North Carolina and South Carolina. Protesting in many of those states is about face masks being unconstitutional, a violation of freedom, among other arguments that are eerily similar to those of the Anti-Mask League of 1919. Historians now agree that the use of masks could have prevented many infections and saved lives. 

Pandemics are not political issues, where one can argue against a position. Pandemics don’t care about theories or speculations or losing civil liberties. Once the coronavirus attacks you and begins to destroy your respiratory system, the insensible sense of entitlement you once had vanishes and you will wish everyone had worn a mask.

Week in markets: June, a seesaw month; COVID-19 surge impacts markets 

The U.S. and global stock markets finished the week down following the dynamics of the teeter-totter. This time, the rapid rise of coronavirus cases has forced Texas and Florida to rethink economic reopening initiatives. As skittish investors peruse the new COVID-19 statistics, their sentiment turned negative. Texas and Florida became the new coronavirus epicenters, reporting north of 46,727 new cases during the week. Florida alone reported close to 25,666 by Friday, while Texas saw 21,061. White House public health adviser Dr. Anthony Fauci stated that the majority of those being infected were young people , most of whom may be asymptomatic and thus oblivious to having contracted the disease. Meanwhile, New York, New Jersey and Connecticut, which themselves were epicenters of the virus, have issued a 14-day quarantine order for visitors from any of the new epicenters. 

On Thursday, the Federal Reserve released the results of its periodic stress test; the Fed analyzed large banks’ resiliency under three hypothetical scenarios that may occur due to the coronavirus shock. The scenarios tested follow:

—A V-shaped recession and recovery; 

—A slower, U-shaped recession and recovery; (which is our predicted recovery)

—A W-shaped, double-dip recession.

In all three scenarios, the unemployment rate peaked at 19.5 percent, which is higher than any of the Fed’s current numbers. 

The tests concluded that the 34 banks examined could post loan losses between $560 billion to $700 billion. Tier 1 capital ratios declined from 12% in the fourth quarter of 2019 to between 9.5% and 7.7% under the hypothetical downside scenarios. The tests showed that under the U- and W-shaped scenarios, most firms would remain well-capitalized, but several would approach minimum capital levels. Because of the stress test results and to avert any crisis, the Fed said it would cap share buybacks and dividends by the biggest banks.

On to the markets. The Dow Jones Industrial Average closed the week June 26 at 25,015.55, a loss of 855.91 points, or 3.31%, and a year-to-date (YTD) return of minus-12.3%. The S&P 500 closed at 3,009.05, dropping 88.97 points, or 2.87%, for a YTD return of minus-6.9%. The Nasdaq closed at 9,757.22, a loss of 188.9 points, or 1.9%, and YTD return of 8.7%. The Birling Puerto Rico Stock Index closed at 1,384.23, losing 69.73 points, or 4.8%, for a YTD return of  minus-32.08%. Meanwhile, the U.S. Treasury’s 10-year note closed at 0.64%, down 8.57%, and yielding a YTD return of minus-1.3%. The U.S. Treasury’s two-year note closed at 0.17%, a change of minus-10.53%, and a YTD return of minus-1.3 percent.

The Final Word: Which trends should investors be mindful of?  

Fortunes are gained and lost because of either good or ill-timed decisions. When dealing with the stock market, several layers of risk are added. Regarding market dynamics, in light of all that is going on now, we want to point out certain trends that help in navigating the current scenario.  

  • The Economic Recovery and any new COVID-19 Impact: The significant rise in the price of most stocks has been based on the reopening of the U.S. economy, mixed with the timely fiscal stimulus from Congress and very aggressive monetary policy implemented by the Federal Reserve. A setback due to COVID-19 infections may derail both the way the economy recovers as well as current stock pricing. Investors must be quite vigilant of all developments to stay ahead.
  • Corporate Earnings: The second half of the year will be quite telling to evaluate how quickly most corporations recover from the imposed lockdowns. We already noted that U.S. retail sales saw the most significant jump in history, 17.69%, providing a sense of where the economy may be headed. However, we must comment that the consensus estimates predict a 44% decline for all S&P 500 companies compared with 2019. This would be the most significant decline since the great financial crisis of 2008. However, the silver lining is that the economy is on the right track, and we could be in for a positive surprise. 
  • Banking Sector Earnings and Loan Losses: The banking sector has been quite active with the Payment Protection Program and other stimulus programs. One must consider banks’ broad exposure to all kinds of industries that have been impacted by the coronavirus pandemic in one way or another. We feel that evaluating banks’ earnings and their loan loss reserves will serve as a barometer to determine the health of the overall economy.

Lastly, we continue to recommend to all investors the benefit of a diversified portfolio that maintains the right balance of stock and bonds, consistent with their overall risk tolerance and long term goals.

Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.

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