A Case For the Best Case

A Case for the Best Case

*In an act of hubris I have written this before companies have begun releasing their earnings reports. I can only assume I will be punished by the animal spirits for such reckless predictions!

The news has been grim. The number of people seeking EI has spiked so much, so quickly that it reduces the previous unemployment numbers to a flat line (this is true in both Canada and the United States, US EI graph below). Countries remain in lockdown and some of the worst hit countries like Italy and Spain are starting to plateau, adding ONLY between 500 to 1000 deaths a day. In Canada the numbers continue to climb and the economy has been largely shut down, with governments rolling out unprecedented quantities of money to stem the worst of this. Talk of a deep economic depression has been making rounds, while the Prime Minister has reluctantly suggested that we may be in a restricted environment until July.

Us Jobless Claims - Q3 2017 - Feb Q1 2020
These two charts show the unemployment rate in the US just before the coronavirus, and after. From Refinitiv
US Jobless Claims Including April 2020
These two charts show the unemployment rate in the US just before the coronavirus, and after. From Refinitiv

And yet.

And yet.

And yet, I suspect we may be too negative in our outlook.

First, just how restricted is the economy? Despite the wide-ranging efforts to restrict the social interaction that daily economic activity produces, much of the economy continues to function. Office and white-collar jobs have quickly adapted to remote working. Few have been laid off in that respect. Industrial production is down, unless they are deemed essential, but the essential label has applied to a lot of businesses. Until the recent additional restrictions applied on Sunday April 5, 2020 in Ontario, Best Buy, Canadian Tire, Home Depot and a number of other stores remained open to the public. Those businesses have had to restrict access to their stores, but remain functioning through curb pick and online delivery.

Even the service economy is still largely functioning. Most restaurants remain open providing take out and delivery. Coffee shops, gas stations, grocery stores, convenience stores are all open, as are local grocery providers like butchers and bakers (and candle stick makers). Its’ true that large retail spaces like Yorkdale or the Eaton Centre are closed but this too tells us something.

The government has helped make it easier to get money since people have been laid off, and many of the people who have been let go will only be out of work for a short time. They are the waiters, union employees and airline pilots who will be rehired when the society begins to reopen. Even in the period I began writing this, Air Canada rehired 16,500 employees, West Jet will be rehiring 6,500 employees, and Canadians applying for the new CERB (Covid-19 Emergency Response Benefit) have reportedly already begun receiving it.

You might be reading this and thinking that I’m being callous or simply ignoring the scope of the problem that we are facing, but I want to stress that I am not. I recognize just how many people have found themselves out of work, how disruptive this has been, how scared people are and how this pandemic and its response has hit the lower income earners disproportionately more. But just as few people correctly saw the scale of the impact of the coronavirus, we should remain cautious about being too certain that we can now anticipate how long the economic malaise may last, or how permanent it will likely be, and what its lasting impacts will look like.

Labour work

The sectors of the economy worst hit will likely be those already suffering a negative trend line. The auto sector, for instance, is one that has been hemorrhaging money for a while, with global car sales in a serious slump. Some retail businesses, already on the ropes from Amazon’s “retail apocalypse” may find they no longer can hold on, though government aid may give them a limited second life. Hotels and travel will likely also suffer for a period as they carry a high overhead and have been entirely shut down through this process (sort of).

Longer term economic problems may come about from mortgage holders who have struggled to fulfill their financial obligations to banks, and it may take several months to see the full economic fallout from the efforts to fight the pandemic, so some of the effects may be staggered over the year.

Economist image

But even if that’s the case, the current thinking is that the market must retest lows for a considerable period, with few people calling for a rapid recovery and many more calling for a “W” shape (initial recovery then a second testing of previous market lows) and in the Economist this week “one pessimistic Wall Street banker talks of a future neither v-shaped, u-shaped or even w-shaped, but ‘more like a bathtub’”.

FT China Cinema

That pessimism is well warranted, and I count myself among those expecting markets to have a second dip. But I admit to having my doubts about the full scale of the impact to the real economy. There will no doubt be some fairly scary charts, like thre were from China, showing the drop off in cinema goers and people eating out. But the more certain, the more gloomy, the more despairing the outlooks get, the more I wonder if this is an over compensation for having overlooked the severity of the virus, or if it is the prevailing mood biasing these predictions? Only time will tell, but I am taking some comfort in knowing that there is still a case for the best possible case.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

In Praise of Investor Optimism


My industry is awash in optimism. This makes intuitive sense, for the entire process of investing assumes that the companies you invest in will go up in value. Regardless of how conservative and cautious a portfolio manager is, underlying his dour outlook is an optimist that runs a portfolio of various stocks, each one intended to make money.


For this reason it is incredibly rare to hear outright negativity from professionals, which I suspect contributes to a subtle sense of unease by the average Canadian who must both trust a portfolio manager to look after his money while scratching their heads at a market that can decline significantly in value with no perceivable change to the asset mix they are invested it.

This is Bill Gross. Until 2011 he was a very successful manager with PIMCO, where he headed up their largest fund. Then he made a contrarian prediction about the markets, lost a lot of money and was fired from his fund.
This is Bill Gross. Until 2011 he was a very successful manager with PIMCO, where he headed up their largest fund. Then he made a contrarian prediction about the markets, lost a lot of money and was fired from his fund.

Even when we do get very negative views from portfolio managers, the subtext is still optimism, just for THEIR investment choices. There is never a contrarian market call that doesn’t seem to serve double duty as a marketing plan as well. When Bill Gross famously said that the US was going to tank back in 2011, he was also claiming that his investments wouldn’t and took a contrarian stance that proved to be very costly for his investors. The same is true for Eric Sprott, whose own doubt about the future of stock markets had prompted some very optimistic numbers about the value of gold and junior mining companies.

For the average investor much of this can be quite exasperating as investing shies away from the ways we attempt to establish certainty. Investing is all about educated guesses, and despite many different tweaks the rules for investing remain surprisingly limited: “buy low, sell high” and “diversify”. Professionals have attempted to improve and refine how these two things are done, seeking out the best ways to analyse companies, markets and whole countries, but in the end these two rules still provide the best advice to investment success.

I wish to write to you about a mistake on your billboard...
I wish to write to you about a mistake on your billboard…

But as investment guides go, reveling in the uncertainty of the investments is something that many people don’t want. Instead they would much prefer to hear about what is going to happen in a matter-of-fact manner from an “expert”. This is why there is always a market for doomsayers and contrarian predictions, because of the certainty they seem to offer. It feeds our innate sense that there must be a right and knowable answer about the future that can be revealed to us.

sandwich-board-man-warns-us-of-impending-doomAnd yet like their biblical equivalents, contrarian predictions have all failed to live up to their hype. Just as every “end is nigh” doomsday cult has disappointedly had to move the calendar date for the end of the world, the number of people who have proclaimed loudly the end of traditional investment world is both numerous and filled with failure.

And so, frustratingly, investors are faced with the assuredness of doom-saying predictioners (who are almost certainty wrong), and the cheerfully faced optimistic portfolio managers who routinely remind investors that there is no bad time to invest, that bad markets are “corrections” or “set backs” and that significant price drops are “buying opportunities”.

And yet I doubt we would have it any other way. If we could be absolutely certain about what stocks were going up or down and when there would be no money to make in the markets as companies would always be priced correctly. And whether we realize it or not, it is hugely helpful to remember that there exists no accurate way to divine the future, no Ouija board that can contact the dead, no equation or computer that can process the world’s data to tell us what is happening tomorrow, next week or a decade from now.

I derive great comfort in this, because the optimism that drives the investing world is also a wider optimism about the future. Experts predicted famines wiping out millions in 1970s and 1980s, environmentalists predict the end of all things, and political talking heads bombard us with a daily diet that everything is awful, but our world is healthier, wealthier and kinder than ever before. And unbelievably investors believe in that world, even when they don’t know it.