Late last week, three of our most experienced directors and friends joined us to provide their perspective on our current macro environment.
Each of them navigated the GFC and have collectively worked through plenty of different investment cycles.
They originally dialled in to talk exclusively to the IIG and Small Giants teams, but the conversation was so good we’ve shared some highlights on our website:
(Transcript extracts have been lightly edited for clarity and context.)
Michelle Goldstone: “My enduring memory of that time is waking up in the middle of the night and looking at Bloomberg, and what was going on in markets. That comes to mind. But I think casting my mind back 2007; Back then [in the GFC], it everyone was saying it was the end of the world. And financial markets going to collapse forever. There was no line of sight out of the financial crisis. Whereas now I feel like there really is a line of sight. We don’t know how bad it’s going to be before we get to the other side, but there will be another side and we will endure. So that to me is the biggest difference.”
Mark Joiner: “The GFC was a financial crisis and this is a social crisis that’s bleeding into financial markets. So it’s different. it was a very bleak, very bleak time, and there was no obvious way out because it went from being a banking crisis, to being a sovereign crisis where a government stood behind their banks. And then one by one, people started to doubt the sovereigns. And so that was that was very, very scary.
This is different because it’s social. It’s playing out in financial terms because of the impact on the economy.”
Mark Joiner: “I do remember my wife stopped inviting people around to dinner because they would arrive rather chipper and leave it ashen. And so she decided I should be socially isolated.”
Mark Joiner “I think the banks are much better capitalised, and I think the government’s well-exercised in terms of some of the stimulus responses. They seem to have been emboldened by this emergence of modern monetary theory, which says that as a government, you can print as much money as you like and it doesn’t matter. I certainly don’t subscribe to that, but it is emboldening the US and some of the other Western countries to throw as much money at it and not really worry about it. So there’s there’s quite a lot of firepower.”
Mark Joiner “SARS never really got out of Asia. It didn’t have the same contagion characteristics as this Covid 19. So it was able to be contained. It became an issue, I think mainly in Asia. But it didn’t really get established outside of that region.”
John McLeod “And also, those Asian economies were not as important to the global economy at the time.”
Mark Joiner “It was a bit like the Asian currency crisis and things like that. It was something you kept an eye on, but it didn’t really change your daily priorities.”
Mark Joiner: “When I was at Citigroup during SARS, the company brought in a WHO expert in pandemics. “He said pandemics typically follow three waves that you’ll get a six to eight week period of infection and then you might have a two or three month period of low activity. And then it comes back, same pattern. And then you get a third wave. And he said the first wave is typically about 30 percent of infections. The second wave is 60 percent. And the third wave, because there’s more immunity out there, tends to be about 10 percent.”
“So I’m looking at this first wave and seeing governments begin to move towards easing people back into the workplace and schools and things like this. I’m wondering if they’re really just setting themselves up for the second wave. Only time will tell.”
Michell Goldstone: “My role is a bit different than [at the time of SARS] at Commonwealth Bank.I didn’t have a Chief Investment Officer role back then, but I do know that Hong Kong property prices were absolutely smashed. And then after three years, they’ve been on an upward trajectory since.”
“A reflection of the short-termism in human psychology is that in times like this, there is a panic first and logic second. And panic, rather than really understanding what one’s risk profile is, what one’s level of debt is, often dictates decisions rather than understanding what’s really going on. Sometimes people are forced to make decisions that are sub-economic for other reasons, family reasons, scared of debt or lost their job. So it definitely creates opportunities.
The other thing is to really look through, what is your time horizon and how much volatility can you stomach? Because as I said, we will get through this.
But I think there’s a long, long way to go between now and then.”
“There will be significant opportunities, market opportunities along the way. There will be some heroes who took massive risks and those bets will be held up as so obvious, so logical with the benefit of hindsight, but that’s discounting the human psyche which plays such an enormous part in market dislocation. Look at the bank stocks that got smashed and Wesfarmers issuing shares at $13 during the GFC. It all seems so obvious in hindsight.”
Mark Joiner: “In these situations, the responses, it’s all about cash. So you reduce your costs. If you can, you bring capital in the door, you term out debt, so no-one can put you under pressure and you exude confidence. But not only that, if you have access to cash, as Michelle says, opportunities will come along. Be they forced sellers or people who just out of mandate, or regulators telling them to get rid of foreign operations or whatever it might be. And you can pick things up, you know, 50, 40, 30, even 20 cents in the dollar.”
“A friend of mine in the GFC ended up buying ANZ Bank subordinated debt at 20 cents in the dollar. And if ANZ Bank can’t pay back its subordinated debt, we’re all dead anyway, Houses are worth nothing. It was a pretty good cut. If you’re sitting on cash or access to cash, then you are in a very strong position when it comes to talking terms.”
John McLeod: “It’s really the quality argument, the survivability argument – that’s the thing to get your head around. Most things get beaten down, not always by similar amounts, but certainly all beaten down.”
“So you ask ‘Who’s going to be there at the end of it?’ A lot of it comes back to the nature of the business, having the balance sheet to survive this. And then a little bit the track record. Share prices don’t always reflect that. You get panic sellers. Even super funds to a degree are probably doing a bit of that [selling] at the moment to cover the repayments to members who take their 10 grand a year out. So you’re getting that pressure on all listed equities rather than just the ones who aren’t going to do well. So a lot of the research effort goes into “who are the quality companies out there”. Prices are good on all of them with a long term perspective. But it’s the quality ones that are going to be the survivors.”
John McLeod: “One of the big effects on philanthropy is that all the things which a lot of charities are very relied on just aren’t happening. It really came to a head, as we thought it would ,with the Good Friday appeal in Melbourne, where we normally would have expected to see above $18.2 million raised. While it did [reach the target], that was because the state government said we’ll bring it back up to 18.2 million from whatever you raised. The actual appeal raised just over half of that. So that was a massive fall in philanthropy.”
“Philanthropy rises annually by about 5-6 per cent per year and has done for a fairly long period because of that reliance on events, and because some modern trusts and foundations do their giving off the value of their assets. I think this year we’re going to see philanthropy down probably seven per cent. So that’s a sort of a net 12 per cent fall. And 2021 is actually going to be the worst year, I think, where we’ll probably see it down another 11 or 12 per cent and that takes it back to about 2012 levels.”
“Corporate will still be fairly good supporters. Normally they’ve given globally over a long period of time about 1-1.1 per cent of pre-tax profits. In really tough economic times they actually increase that. So when profits are down, they’ve raised that percentage up to about 1.6, 1.8 per cent.”
“I was reading a piece in The Economist by Mark Carney, the head of the Bank of England. He was saying that we respond to crises with vigour, and when we get on the other side we reset our priorities. He pointed to the determination at the end of World War One, in the UK, that Britain would become a country fit for heroes coming back from the war. The National Health Service in the United Kingdom was started in 1948 as a part as a response to the Second World War.”
“I’ve got to hope that through this crisis we hold in high regard health care workers and teachers and people like this. We’ll have some opportunity to reset because we’ve got people in many countries coming out and applauding these people in the streets now. I just can’t imagine that we’re going to go back to ‘normal’ with no adjustment to what we think is important.”
Michelle Goldstone “I think for a very long time we are going to see central banks embedded in the financial system and in deeply in the economy. And I think it’s very hard for governments to wind back and central banks to wind back what’s being done now. It will take a very long time. I think we we’re going to see a significant shift away from what we’re used to about the capitalist system and much bigger government and much greater intervention. And they’re going to be cohorts in society that will have to pay for that.”
John McLeod: “One of the other ones is just on the movement of people and the reluctance obviously at that and the lack of legal ability to do it at the moment as well. But when we are allowed to travel, is there still going to be the same desire to do that going out? I think that’s going to be a really interesting one. And that comes back to people’s psyche as well.”
“I also think it’s fascinating looking at the environment side of things. Clearly we’re seeing some great improvements in environment. So that’s fantastic, but I just wonder when we’re going to start hearing the comments of “look how much that cost economically to get those environmental improvements, do we really want to chase that in the future?” So I think there’s probably a little bit of a dark undertone to the environment argument potentially as well.”
Mark Joiner: “From the position of some of the boards that I’m on, companies are starting to think through, well, ‘do we need to do we really need to bring all these people back to work? Can this work model go on? Because we don’t have to house them. They don’t have to spend time commuting, wasting their time. There’s less risk of people catching things off other people if they’re not moving around like that.’ I can see adjustments like that that might make some contribution [to environmental improvements].”
John McLeod: “[A recent article] looked at a whole lot of crises in the past, going way, way back. It made the point that not all of them induced long term change. Some of them did. And they did a bit of analysis on the ones that did versus the one that did it. It was quite an interesting. Not every big crisis makes people change.”
John McLeod. “I’ve always thought one of the things that we needed to get the world to behave better was an alien invasion. We didn’t quite get that, but this sort of seems a lot like it. It’s the first time we’ve had governments around the world tending to agree and all acting in fairly similar ways.”
“In that sense, you’ve got the elements there that should lead to that change that we want to see. But it depends on how long it goes on for. If it’s all fixed and better during 2020, I think it’s something we remember with a bit of fondness; something quaint that happened.”
“However, to get that long term change it [would need] to go right onto to 2021. And my big thing is that we haven’t really figured out the way out of it yet. So if we do get those societal changes, it may be because it has taken a lot longer than people are currently factoring into markets to get this thing behind us.”