Imagining the Worst

I got a call from a client nervous about the stock market. She had a list of questions for me. The one that stopped me was, “What is the worst that could happen?”

On the medical side, the answer was obvious. More sick people. More deaths. People I know and love suffering and dying. A healthcare system overwhelmed. As awful as those things are, I know there is an arc to the virus’ progression. At some point, one way or another, this will play out. The infection will run its course. The healthcare system will recover. New treatments will be used. Finally, a vaccine will be produced.

But she was asking about her financial situation. She is retired and dependent on a portfolio. The world is grinding to a halt. What happens economically? Will we recover? If so, how long will it take?

What is the worst that could happen economically?

If government officials don’t take this seriously; if there is a dearth of leadership; if there is no quick and drastic fiscal policy, then the worst happens. We are hearing about those drastic ideas now. Talk of cash appearing in our accounts to help plug the hole from lost earnings. Surprisingly, no one is objecting to this idea. The only debate is how much. It is good news that policymakers are getting bold and innovative.

Concerning this “instant cash,” some have asked, “But what if people spend it on dumb stuff?” Economically, it doesn’t matter! They just need to spend it to help spur the economy back to life. The quickest approach is to give people money regardless of their income. So get the word out. When the money fairy shows up, spend it!

When it comes to this virus, the best approach is to pull in and avoid contact. When it comes to the economy, the best approach is to throw the money around. Combining the two will require ingenious thinking, but we’re Americans!

Stay well!

Dispatches From Our North Carolina Office

When the pandemic arrives on your doorstep, the best defense is not to walk out the door. That’s what some health professionals are recommending. Stay at home. But how do you do that when work, school, and life keep rolling?

Amazon, Microsoft, and Twitter are among the companies encouraging employees to work from home. For many, remote working has been part of the landscape for some time. Many work remotely a few days a week, then travel to the office for the remaining portion of the week. Moving to a full remote operation is not that big of a stretch.

For a finance professional, work happens wherever there is a computer, a phone, and internet access. It’s the reason I can set up shop at our second home in North Carolina. My phone is an extension of the office line located in Mississippi. Our web-based brokerage and client information program allow me to have all the same information at my fingertips.

The only thing I can’t do is a personal meeting. That’s why it’s important to have competent staff manning the office. I’ve also found many clients prefer the convenience of a video conference, and, yes, I can even do those meetings remotely.

For me, working remotely means I’m often more productive. First, I’m up early, and I’m on eastern time. Long before my staff hit the Ridgeland office, I’m cranking! There’s no need for a shower and makeup when you’re operating alone. And my hair? Forget about it!

I didn’t come to the mountains to escape the coronavirus. I came to get some R&R while still taking care of business. But it’s nice to know I’ll be doing my part to put the brakes on its spread!

What is the impact of coronavirus?

In the last week of February alone, the S&P 500 dropped almost 13% from all time highs. On March 3rd, the Federal Reserve lowered rates 0.5% to support economic activity. All of this was in response to the Coronavirus, or Covid-19, a potentially fast spreading virus that is hard to detect and for which we have no vaccine. With few cases in the United States, and precious little information about the virus, what really is the economic impact of Covid-19?

Let's start with what the impact is not. The biggest threat to the economy isn't risk of death. We have come a long way from when a few rats and a lack of sanitation could wipe out a third of Europe's population. We currently don't have great data on Covid-19, and currently reported mortality rates cannot take into account the slow onset of symptoms and lack of testing that belie much higher infection rates. In short, publicly reported mortality rates may be unrealistically high.

One real risk to the economy is through missed work. Missed work means Americans are less productive. Lower productivity means less money available for payroll and business owners. For many Americans, missed work simply means no pay. No pay means no spending, and our economy runs on spending. Even the fear of exposure to the virus may keep people out of stores, and keep their hands out of their wallets.

The impact of a productivity slowdown can be seen in China, where heightened containment measures coincided with factory slow downs for the Lunar New Year holiday. Many of those factories still sit idle as workers either cannot return or employers do not want to run the risk of infection. If China isn't producing goods, we can't buy them. In our complex economy, supply chains of all sorts cross through China at some point, affecting a broader swath than the presence of a Made in China sticker might imply.

Coal consumption as a proxy for productivity in China. The big annual dip is around the Lunar New Year.

Whenever a large amount of our effort and attention is directed away from productive activities, the economy can suffer. While stockpiling food and spending more on hand sanitizer and face masks may seem like good economic activity, not all spending is created equal. Higher value activities, such as entertainment and dining out or large, financed expenses like buying houses or cars may be curtailed by people's hesitation to venture out of the house. These have a multiplier effect that will be felt more broadly.

What can you do about Covid-19? The most important thing is to take precautions to protect yourself from infection. Keep your hands washed and away from your face. It is said that face masks do little, but avoiding areas where large numbers of people congregate may be a good idea. Be particularly mindful of your older or already compromised family, friends and neighbors. Know who might need help and who can help you if needs be. Community is always important, but you have to build it before you need it.

Prepare yourself for a time when either you are sick and cannot leave the house, or you find it a good idea to stay inside for two to four weeks. You don't need a large stockpile, but someone recommended to me just to keep an extra $50 of shelf stable groceries on hand. While rice and beans are cheap and keep well, remember, we aren't prepping for the end times, just a boring house stay. In addition to some rice and beans, I bought extra onions, garlic, spices, chocolates, tea and fruit (the man at the Chinese Grocery told me the kumquats are good for your respiratory health - I'll take that).

When the coronavirus keeps me homebound, I'll have to subsist
on rice, beans, greens and perfectly cooked medium-rare steak.

Is your portfolio ok? The initial selling was unusually sharp and short, and that can be frightening. If you are still working, earning and saving money, most equity investments are cheaper today than they were two weeks ago. Stick with the plan and keep buying as you go. If you are living out of your account, you should already have a large portion of bonds and cash to support your withdrawals despite the volatility of the market. It may be a good time to reassess your portfolio if you have not recently, but we still expect stocks to rise over long time periods. We craft portfolios to take advantage of the growth of equities, but manage for the risk that they decline.

As always, keep cash on hand for your next few months expenses. Make sure you have appropriate life insurance for the primary breadwinners in your house. Invest in stocks for the long run, but keep bonds on hand for stability over the next few years of income support.

If you stick with the plan, you'll be prepared for Covid-19.

Sick Minds

The word “pandemic” instills fear in the heart of the most stalwart. A tiny organism that can infiltrate unnoticed. A disease for which there is no cure, one that fells the most vulnerable. Of course, we’re all running scared. Rational minds are few and far between in the face of such a challenge.

But I found one. Dr. S is a client who depends on me for financial advice. This particular morning, I looked to him for medical advice. He was objective and clear-eyed. Yes, this will get worse. The natural progression of the disease combined with a mobile society will result in many more cases. For many, the illness will be experienced as flu-like, with a full recovery in a matter of weeks.

But there have been deaths. The mortality rate for the who contract coronavirus has yet to be fully measured. In China, it looks like that rate may be 2%. In a large population, that is significant. In the US, we don't know the rate is - but that is because we are not yet accurately recording all cases. As the disease spreads and our data collection improves, we will probably find the rate to be about 1%. That is a small number, but it is higher than the flu.

Any deaths are not trivial, but Dr. S points out those particularly at risk. First, our children don’t seem to be affected greatly by the illness. Younger people appear to be able to combat the virus effectively. The people most at risk are elderly and/or those with other health risks. While the flu hits the old and very young alike, the coronavirus takes its toll on the oldest in our population. That’s why the spread of this disease in a nursing home is so scary.

How long will this last? Dr. S told me about “herd immunity.” It is a common concept in microbiology. At some point, people will stop getting sick. It happened with SARS and others. Do we develop a collective immunity? Or has the virus just run its course? We don’t know.

Dr. S points to other contagious illnesses. The typical time for the disease to run its course is 3-6 months. That was a great relief to me. After all, we have been hearing a vaccine may be a year or more away.

Rational minds among us are not taking this lightly. They are doing what all scientists do. They are tracking the progression of the disease. They are collecting data on those who succumbed. They are sharing information on effective treatments. But they are not panicking. Instead, they are offering us solid information on how to stay well.

So when I find fear rising in my throat when I hear of more cases and more deaths, I think about Dr. S. And I try to keep my head about me and surround myself with rational minds. Be reasonable. Be safe. And focus on the calendar.

Let The Sunshine In!

For quite a while, I’ve been interested in solar. Fifteen years ago, when I began investigating, there was no one in Mississippi selling or installing solar systems. It seemed just a pipe dream.

Lately, more and more companies are popping up to provide this service. So I decided it was time to get serious. The other thing that pushed me to pursue this option was the lucrative tax credit offered on a solar installation and the fact that this credit was disappearing at the end of the year.

I had to convince my husband to go down this path. Wouldn’t the panels on the roof of our house detract from its appearance? Would future buyers really care about having solar panels? Did this really make financial sense?https://www.nerdwallet.com/blog/finance/save-money-putting-solar-panels-roof/

We met with two different companies. The first was all sales. There was no schematic showing where the panels would be located. No spreadsheets showing usage and payback period. Just a promise that the sun would provide ALL our electricity, and we would only pay a small connection fee each month. Wow! That sounded great.

Of course, if you install solar panels on your roof, you need to consider the age of the roof. Solar panels are designed to last about 25 years, which matches the age of a new roof. If you put on a new roof 10 years ago, this changes the calculation. Most installers prefer to put their panels on a new roof. So now you’re not just paying for solar panels, you’re paying for a new roof.

Of course, we were told if you couple the two, you may be able to get the tax credit applied to BOTH the panels and the roof. That sounded appealing. What is the tax credit, and when does it expire? It’s 30% of the cost, and it IS a credit, not a deduction. That means a dollar for dollar savings on about a third of the project. To qualify for the year-ending tax credit, I would need to sign up quickly (or so I was told).

A few qualifiers…

You are only supposed to take the credit on roofing for the portion of the roof actually under the panels. And in order to get the full advantage of that credit, you need the income (and the tax associated with it) that is big enough to offset that 30% break. Many retired people don’t have enough tax to pay now to take full advantage. Again, a change in calculus.

The second guy showed up with a laptop full of charts and graphs. He pointed out the direction the house was pointing, how the sun changes during the year, and the many shade trees surrounding our roof. He climbed on the roof with his many gadgets to verify his estimates. Full electricity? Not so much. He expects we could supply about half of our electricity with solar, and this would take many more panels than the first group suggested.

And now we’re confused. I really wanted to go solar. It seems like a great idea. We would be using a renewable resource. If the power company keeps getting rate increases, won’t that eventually pay off?

Turns out our payback period would be about 12 years, under a generous set of estimates. Also, we would have to load up our roof to get the most of the system. My husband is shaking his head now. Ultimately, the overall cost of panels and a new roof was now hitting the $40,000 to $50,000 range. Even with a generous tax credit, the dollars made my head spin.

One caution—many solar companies sell customers on a system by offering financing that matches what you were paying on an electric bill. Sounds good, right? But the rate on those financings is in the 7-8% range—not cheap! Also, what happens if you sell the house before you pay off the loan? Maybe you move, but you still have to pay that monthly bill.

We planned to pay the full bill up front to make this a purely economic decision. The problem we encountered is that our electricity is pretty cheap. The price per kilowatt in our area makes going solar unreasonable. I tried. I really tried, but in the end, it just didn’t make sense.

So we’re not going to spend $40,000 to $50,000 on an environmentally friendly and sustainable source of energy. We’re not going to be the progressive family in the neighborhood doing our part on climate issues. I had to give up my pipe dream.

Instead, I’m going to redo the kitchen.