62 Finance & economics
~Delta, an American airline. But realloca-
tion can ooly do so much. When all films
face the same economlc shock, they need a
vast increase in the supply of credit.
unfortunately, credit is not readily
available. Fllnding sttains have emerged
across markets globally. InJanuazy Ameri-
can firms that issued risky high-yield debt
paid around 3,5 percentage points more to
issue a bond than thegovemmentdld. This
spread is now above 8 percentage points
(see chart 3 on nm page). But even if firms
did want to issue bonds at such 1ates, they
cannot. corporate debt markets are virtual-lyshutinAmericaandEurope.
If bonds are unaml.able, films tum to
banks. Many have credit lines enabling
them to borrow whenever they need, up to
a certain limit (akin to a credit card). Last
week Boeing. an aircraft manufacturer,
drew down its entire $t3.8bn line in order
to stockpile cash. In America, there have
been reports of firms of all stripes-from
chipmaken to casino and cruise opelil-
tors-doing the same. In Europe Aercap
Holdings, an aircraft-leasing firm, said it
was dlawing down its $4bn credit line.
But banks have problems of their own.A fictional fund manager on the agonies of stock-picking in a falling market
I
SUSPBCTTHATthis not a common
feeling, but part of me is excited about
the crash in stock prices. It is the part of
me with a personal-account portfolio. I
have long-term financial goals. I want to
bold equity risk, even as others mn from
it If I can buy streams of cash flows at
lower prices, I am happy. But another
part of me, the professional who invests
on behalf of others, is anxious. I try to
fuse these two selves. It is not easy.
In my lifetime there have been three
bear markets in which the value of shares
in aggregate bas fallen by half. Perhaps
this episode will be as bad-or worse. I
don't know. I can say this, though. For a
long-term investor who doesn't have to
worzy about perfect timing, there should
be opportunities to buy good stocks at
attlilctive prices. As a private investor, I
canwaitforriskybetseventuallytopay
off. My clients may not be so patient.
Nobody knows how this pandemic
will play out. Lots of people claim to
know, of course. Afewofthemwill be
right, by luck or judgment. That's a mat-
ter for the scientists and for economists,
too. The biggest insight I have gleaned
from economics is that asset prices are
set at the margin. The stock price on the
screen is the one at which the most des-
perate seller and the bravest bu~ are
willing to do business. When the Jani.cs of
thefirstgroupoverwhelmthesecond,
the result is a rout-or capitulation, in
market-speak.
Evezy recession is unique. This one
has the impact of a natural disaster or a
nuclear accident. But every recesaion is
also the same. You can never be sure bow
deep it will be, howlongitwill lastand
what scars it will leave. China has just
experienced its sharpest downturn in a
century. That is scuy. But 2008 was scary.
Thedotcom bust was scary. I was a babyin 1974, but my old boss tells me that was
scary. Troe, this is a different kind of scary.
I call my parents everydaytocbeckhow
they are. I didn't do that in 2008. (I wasn't
trading stocks in pyjamas on a 'ftekday
either.) This could be a savage recession.
But it will be like other recessions in that
there will be a recovery.
In the meantime, stock prices can keep
falling. I understand why people are sell-
ing. A lot are forced to. They may have
borrowed to buy stocks and bad their loans
called bynervy lenders. Pund managers
that promised low volatility must cut their
equity risk. But capitulation is more than
this. It is the dumping of stocks that have
already fallen a long way. Retail investors
are prone to it. Butwhywouldanyprofes-
sional do itl Well, sometimes you sell your
duds so you don'thavetotalkaboutthem
anymo~to the firm's risk manager or to
your clients. OWning a stock that goes to
zero is too horrible to contemplate. so you
sell. And sometimes you sell things that as
a private investor you would hold onto or
double-down on. Clients want you to take
risk. But they don't like what risk-takingThe Economist March 21st 2020The first is that the thicket of global bank
regulations imposed on them since the fi-
nancl.al crisis may be exacerbating the
funding crunch. Take regulations concern-
ing "risk-weighted assets•. Banks must
hold a certain amount of capital relative to
the size and rislcmess of the assets, such as
loans, they have on their books. But as vola-
tility in the value of the assets rises, they
become more risky, forcing banks to shrink
their balance-sheets. Another example is
the new CUrrent Expected Credit Losses
rule, which came into effect for public
companies in Januazy. It forces banks to ~lookslikewbenitdoesn'twork. Tiy
explaining, after the fact, why you
boughtastocktwoweeks before thefirm
went bankrupt, beca.useyoujudged that,
should it survive or be rescued, you stood
to make ten times your money.
I am lucky. I have been in the top-
quartile of stockpickers. So I have eamed
the trust to make risky bets in a falllng
market. A good portfolio in a recession is
not necessarily a good portfolio for when
the economy recovers. I know thatat
somepointI am going to have to change
tack. I would haveto be a genius to time
this shift perfectly. And I am not a genius.
The best I can hope for is not to get it too
badly wrong.
My instinct is to be contJarian, to buy
what others now hate. Some industries,
such as oil, are outside my comfort 7.0ne.
The politics of OPBC are too messy for me
to fathom. But I have an eye on mining
companies with attJacti.ve dividend
yields and low debt. If China's economy
rebounds, they will benefit. And, yes, I
am absolutely looking at airlines. A
national championortwo is bound to be
saved. In the right situation, I might
make a lot of money for clients. Dis-
location on this scale will take out the
weaker pl.ayers in every industty. The
best companies will emerge even stron-
ger. I hope I pick the right ones.
There will come a time when the
market surveys thewholepanorama-
bad businesses cleared out; interest rates
even lower; fiscal policy in the pipeline;
cheaper stocks-and changes direction. I
have to be ready for that. The SlrP 500 is
America's capital stock. It will survive (or
mostofitwill). People will wantto fly,
stay in hotels and go to restaurants and
coffee bars again. I have to keep that in
mind always. I feel queasy. But this is the
game I have chosen to be in.