March Madness

College students are on spring break and the cruise ships have plenty of idle capacity.  While the coronavirus rightly keeps seniors away, the risks to young people are probably not much greater than getting on an airplane.  Fuel costs plunged last week as the Saudis and Russians engage in a price war, putting even more downward pressure on costs.  Amid this free market match made in heaven, the cruise operators are suspending operations for a month.

Wait, what?

One of the more annoying narratives going viral is the notion that we’re all a bunch of imbeciles and without the authorities herding us around we’d die by the hundreds of thousands.  The assumption is that in times of crisis, central control is superior to letting people fend for themselves.  A tiny minority, among them AIER’s Jeffrey Tucker, say the conventional wisdom has it backwards:

I don’t know what should and shouldn’t be shut down.  But neither does the government have some special magical access to information on risk probabilities and the proper way forward. In fact, government is the last institution that should be making this judgment. Government acts out of self-interest; enterprise acts in the public interest. The obvious answer here is to leave the decision to private actors who are in the best position to make a good judgment on what should shut and what should open.

So why are cruise operators mothballing ships at immense cost when they could be offering cheap rates that would give many young adults the opportunity of a lifetime to travel the world?  Part of the reason is that the government is wielding a big stick, interfering in international travel and pushing people into semi-isolation.  The cruise operators also expanded too rapidly, took on debt and left themselves with little margin of safety, another consequence of the 2008 financial bailouts and a decade of ultra-cheap credit.  When the coronavirus first appeared in China, they remained complacent, maintaining dividends and reassuring investors that the outlook was bright.  Rather than take responsibility, pick a fight with the government, and try to claw their way back, they’ve decided to toss in the towel and get in line for potential future bailouts.

Who can blame them?

Barron’s – March 16, 2020

The financial press is back begging for bailouts, just as they did when the first cracks in the credit bubble appeared in 2007, well over a year before the 2008 meltdown.  The weekend issue of Barron’s shamelessly promotes a massive government response to fight the coronavirus and its spillover effects:

This isn’t 2008, when deep problems were rooted in the financial system.  Covid-19 is a health crisis, an economic crisis, and a financial crisis rolled into one – and policy makers will need to get creative to keep panic at bay…  [P]oliticians from both sides of the aisle must find a way to work together – or risk something worse than the financial crisis.

The Real Crash: Americ... Peter Schiff Best Price: null Buy New $23.95 (as of 05:55 EST - Details) Investors are like spoiled children who go crying to daddy every time they get into trouble.  After decades of moral hazard conditioned a whole host of economic actors to believe any downturn would be painless and brief, they’ve become devoid of critical thinking and prone to emotional reactions.  Since stocks peaked February 14, the S&P 500 has dropped 20%, yet Treasury bonds have been the safe haven of choice – with the “TLT” up 7% – while gold has actually fallen 4%.  Early last week, the yield on 30-year T-bonds hit an all-time low and now stands at 1.55%.

Anyone who would loan money to the U.S. government at 1.55% for the next 30 years needs to have their head examined.

It is $23 trillion in debt.  Its economy is heading into recession.  It is about to take out the bazooka and go on a spending and money printing spree.  As a friend warned me after the 2016 presidential election, “If you are a creditor, the last person you want to see on the other side of the table is Donald Trump.”

Will the confidence game work again?  Will panicked moviegoers rush back into a burning theater?  Don’t bet against it.  Of course, that won’t extinguish the fire.

Most analysts believe the cruise ship industry can survive the coronavirus pandemic as long as it doesn’t last more than a few quarters.  Even so, these companies will be forced to tap into credit lines, making them more vulnerable to the next shock.  Meanwhile, the large banks which provide these loans will become more fragile as well.  The government, too, will become more leveraged (just as the Boomers are set to swamp entitlement programs).  Just as the system’s defenses are dilapidated, a severe economic storm is bearing down.

After decades of lifeboats showing up on cue, there are no more rescues.  Investors and businessmen, you’re on your own.