I see that Todd has decided to do a bulletin even though its not his turn.  You should be aware that you can’t second your own motion!

Since President Elect  Heidi suggested I do this bulletin. I have been thinking on what I could write about..   In the past few years there has been decent growth in new members in the club.  I suspect many of the newer members don’t know me. Anyway, I thought I could share my past experiences of going through stock market downturns.

 

I started in September 1981 for an investment  firm that was eventually bought out by   RBC .  I retired a year ago Christmas so I am no longer a investment advisor.  What I say here is not been approved by Rotary or RBC and should not be considered financial advice.   Any advice should only be acted upon through an advisor that fully knows you and your risk tolerance.  I take as mucho responsibility for what you do with this as  your barber or hair dresser.

 

I had two managers that worked through 1974 -75 bear market and they were early in their careers but felt it was the worst because of the length.  Start of high inflation no growth  and in Canada wage and price controls.

 

In my case I think 1981 -82 was the worst.  I watched the market go down relentlessly for a year.  When it turned most were in disbelief including myself.  The Dow Jones went from record lows to new highs in the span of 3 months and after that rarely a pause.  Prior to that, the world was scared with 20+ interest rates and massive inflation and double digit unemployment. Real estate development companies went bankrupt along with some trust companies. The chartered banks were extended massively to the oil industry because every one knew that oil was going to $50.  ( it didn’t).  The National Energy Plan didn’t help. National Bank cut its dividend and every one else was frightened.

 

1987 crash hurt.  It was quick and painful.  IBM was $175 on Thursday and $100 by Monday night.  I will never forget this as I had made an error on a option trade on the Friday  that was not discovered until Monday Afternoon.  To compound things when my manager and I went to fix the error we doubled it. Under normal circumstances the error might have been a cost of $100 or $200  but because of massive market moves was $3000 and then became $10000.  It took forever to get to the weekend. That Friday night I watched a show that I regularly watched called Wall Street Week.  Louis Rukeiser was the host. He started every show with a commentary.   I am paraphrasing here but I got strange comfort from the words he said.  “  The same people who loved you last week still love you today. Having said that Holy!!!!!! Expletive more expletive etc.

In this case the stock market had no effect on the economy as nothing seem to change on  Main Street.  Markets had recovered by spring.( Don’t fight the Fed as there was massive intervention)

 

The recession 91-92 was not kind to banks. A major trust company failed.  Olympia and York a privately held company owned by the Reichnann’s became over extended in commercial real estate and left  all our banks holding the bag.  Campeau Corporation also failed and was also a major loan to National  Bank.   It was devastating enough for National to cut its dividend again.  GST was introduced in Canada  and the malls were empty. ( Not as much as today.)  Prime Minister Kim Campbell said an election campaign is no time to discuss serious issues.  So we haven’t since.

If you thought the 90’s were a smooth ride then you have forgotten some self inflicted damage.  The Charlottetown referendum was in 1992 .  The Quebec referendum was in 1995.   President Clinton was impeached by the House  in 1998.  All these events had investors frightened.  To add to this Long Term Capital Management a major hedge fund needed to be bailed out to prevent a financial crisis in 1998..

 

The Teck Bubble ended in 2000-2001 .  Earnings were either fake or manipulated during that period. There were many failures including Canada’s Nortel. This recession seemed to drag on forever.  Markets were also concerned over the fact that Iraq had weapons of mass destruction.  When the USA moved a half million troops to the border they became more concerned.  Markets didn’t start going up until USA invaded Iraq in March of 2003.   This time period was painful for clients in both depth and length of time.  Give or take markets fell 50% in the USA. I don’t recall that I thought markets were scary but rather depressing.  It was just relentlessly down for such a long period of time.  I recall John Roth CEO of Nortel calling the upcoming quarter as “challenging.”  I didn’t know at the time that was code for “ It’s a F!!!! Disaster out there!”

 

I often told clients that 81-82 was the worst. 02-03 not much better and historically once in 25 years should be expected.  Little did I know 2008-2009 would be just as bad if not worse?

 

Most investors think of the tem risk and think of volatility.   I don’t have my textbooks any more so I am going by memory here.

Market Risk  …. Basically price changes day to day.

Corporate Risk or Financial Risk…. Something wrong with the company.

Liquidity Risk    …  Might be not able to get a fair price if you need to sell in hurry.

Currency Risk    … price changes of currency effecting investment or earnings.

Interest Rate Risk  Changes in interest rates.

Political Risk  … change in politics either domestic or international

Systematic Risk    The whole system falls apart.

 

I always thought that Systematic Risk  was theoretical.  I was wrong.   Banks stopped trusting each other.  Credit froze.  Bond markets froze and went no bid.  The movie” The Big Short”.  does a reasonable good job of explaining.   If you are looking for a laugh   I urge you to Google John Bird and John Fortune and watch their take on the financial crisis. ( it won’t take you long about 10 minutes)

 

Canada went relatively unscathed. Our banks all raised capital by issuing shares to shore up their balance sheets.  They also issued Capital bonds paying between 9 %and 10% on these Capital Bonds.  Clients were scared and markets acted in my opinion totally irrational. A major REIT  had promised to build a office tower for two major companies and had  a contract to pay rent for 20 years.  The Reit however had not secured their financing for the building even though the rent was secure.  They were forced to cut their dividend, give up a 1/3 of their company to a hedge fund and borrow part of the money at 10-12%.  At that point the banks were willing to lend the final portion at around 8%.  ( take your pick interest rate risk or systematic risk)

 

This was also a time that a well known pension fund wanted to take BCE private.  There was a major fight between bond holders and shareholders as bond holders were left out of the deal.  It went through several courts to get to the Supreme Court far quicker than you can imagine. Lawyers always win.  Equity share holders ultimately won the court battle  but lost the war.  Interest rate had risen and credit not as available as before.. A well known  National Accounting Firm wrote an opinion that BCE would  not be solvent  if the deal went through.  The deal was scuttled and I have yet to understand their rational.  BCE is still here and very profitable.

 

The Fed and the government did their part with monetary policy and fiscal stimulus.  It took few waves of Quantity Easing,.often called QE to get the economy moving.  Credit conditions remained poor for several months.  There were regular meetings of G 7 or G8 where they discussed new regulations on the banks. Higher capital requirements were demanded and stress tests had to be done annually.  Banks and Investment firms were told to reduce their bond holdings to reduce leverage in the system. There was no one thing that brought back confidence in the system.  It was a slow process.  It took a little over 4 years for S&P 500 to make new highs.

 

Currently we have a medical crisis on our hands. The Fed and the Bank of Canada have lowered interest rates and both are actively working to keep liquidity in the credit system.

Daily we hear from Trudeau who has thought up a new spending program.  If we keep hearing from him daily I am not sure how we are going to afford it.

 

Trump and his team are trying not to stand all together like they were a week ago. At best they maybe 4 feet apart. ( Why is the VP in the same room?)

 

Canada and USA governments have been quick to react fiscally but slow to react medically.  Perhaps this social distancing will slow or kill the COVID.19.  I remain concerned that my golf season is in jeopardy.

 

This too shall pass as uncomfortable as it may be. Every bear market is different but yet a lot similar.  There will be some accidents that you won’t see coming.   I am staying healthy and social distancing.  I will  be 65 later this year and remain optimistic based on both my parents longevity(my mom is 100 and my father died at 94) that I will see 4 or 5 more bear markets and likely 2 more real nasty ones.