The irony! The Fed caves into the Market (and probably Trump) and made a massive 0.5% emergency cut and the Market's reaction was to quickly sell-off! The reasoning seems to be that the Fed knows something huge about the corona-virus that the Market doesn't.
Let's be clear here: the Fed is not an enlightened assembly of humanity's best and brightest minds leading us to a better financial paradise. More often than not the Fed is just the biggest sheep in the flock taking its cues from the Market which naturally ebbs and flows based on short term bouts of fear and optimism. Yes the coronavirus is disruptive to the economy but neither the Fed nor the Market has any clue how bad so everyone from the lowly analyst up to the Fed chair himself is incentivised to take out big insurance options against their reputations and jobs. Pricing today does not reflect reality and in this case seems caught up in a fear breeding feedback loop. It's a wonderful illustration of Soro's reflexivity principles in the modern Existentialist Financial System. With the proliferation of fingertip information access, low cost trading, quant trading systems, volatility defined (risk control) portfolios is it any wonder that Markets dance with ants in the pants?
What's new?
For March 3, 2020 WHO reported World ex China: 1,792 new cases, 38 deaths. Within China the downward trend continues with 2,652 recoveries, 38 deaths vs only 119 new cases. The existing cases in China has now reduced to 27,433 (cumulative cases: 80,270). As in my last post, we should see either proof within 2-3weeks either China has fully controlled the coronavirus situation or that everything it reported was fabricated.
The increase in World ex China infections rate is the main area for concern. South Korea 4,812 cases, Italy 2,036 and Iran 1,501. The US reported 64 cases and 9 deaths (which means reported cases is too low based on the 2-4% mortality rate).
No updates on virus particulars (mortality, virility, etc) and nothing new on drugs, vaccines.
My view
There is no new information to affect estimates of the infection timeline (2months to 2yrs) and the best/worst case scenarios. The world is still clueless about the >3month impact. The Markets held this view up to the very moment that Powell cut rates and then it decided to reprice Risk...
The US rate cut is downward sticky and will affect other Central Bank decisions to follow suit. More stimulus, monetary or otherwise, is likely forthcoming.
The pricing of Assets continues to be a struggle between the Cashflows and Discount Rate. I would argue that relatively speaking, the Discount Rate changes since the coronavirus started, has made Assets more attractive vs the damage to Cashflows. This accrues to two Asset types:
High yield, low risk investments
Speculative investments (since the discount impact to future expected cashflows is reduced)
Actions
I can't predict if my stock investments or the Market will fall further tomorrow but that's the wrong (and lazy) question to be asking. Among the questions I'm focused on are:
What are known and unknown priced risks? Does anyone have an advantage in pricing? Am I willing to take the Premium for being the counter-party?
Is the situation permanent or transient?
Is my relative risky yield attractive vs other options?
Can I still do ok even if the worst case scenario plays out (including: what's the risk of absolute loss)?
The metaphorical blood hasn't yet become a tide but I'm comfortable continuing my equity accumulation.
I'll continue my "sell fear and volatility" strategy of short Puts in companies I like. Even the tobacco companies are now giving significant Put premium discounts.
Among my investment ideas, China and Chinese internet related names have become even more attractive. Energy is even more hated now despite the majors committing to capex discipline and shareholder returns (e.g. Chevron today said it would return $80bn to shareholders within next 5yrs which is equal to ~9% pa). It's amazing how these huge companies have the capacity to borrow at low single digits (LT fixed if they choose bonds) whilst paying shareholders at high single digits with no changes to their operations... Opec also stands ready to adjust supply to dampen negative price effects.
Final thoughts
In Hong Kong a few weeks ago we saw supermarket shelves emptied of toilet paper, rice and sanitizer products. Last weekend when I went shopping I saw supermarket shelves bulging with all these goods plus plenty of German hand sanitizers, wipes, vitamins being sold at the checkout. Now the same thing hoarding actions are happening in Australia, Europe and the US. Mass fear is a strange thing to witness...
The potential catalyst to this all changing is China's situation by month end. But if the situation remains poor, I guess we'll just have to wait a bit longer for Fear to change to Boredom.
Lastly there are many who believe the coronavirus is just a trigger point for bigger issues like high country debt loads, China macro issues, high asset valuations, historically low unemployment rates rising, etc. I worry about these issues too but that's not the focal point today. Everything is Relative in nature. If all major world governments are gunning for inflation, lowering interest rates and stimulating economies and avoiding recessions then Asset prices must rise with Equities being the most attractive of all. We are nowhere near the point where Balancing (pruning back of excess) is being considered.
As an Individual it's hard to translate personal experience to the country or global level. But remember the optimal actions and objectives of a government or world financial system is often very different. The bigger and more important the country in the global System, the more their ability to affect the reality of the financial situation given they are on both sides - the major Debtors & Creditors, the Referees and Players. Capital flows are akin to Blood with major Economies being the Hearts that collect and direct this flow. As long as Wills are strong and/or Confidence high, these Hearts will continue pump Blood into Asset Prices. This will likely continue until we see some global Inflation (how else to incentivise the Masses?).
There will be a day for rest, but not Today.
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