Volatility is here to stay. No matter what the Government or the FED does. This is bigger than them.
There are many people more experienced and versed in providing macro analysis than me. It is not my thing. You will see that the processes and logic that I abide by are far more mathematical and systematic and rely upon probabilities. As far as Macro Perspective (economically and/or societal) I can only look at that bigger picture through the lenses of my life experience and perspective. I will share what I am seeing and thinking based on my life's tangent line.
Having founded and led two separate start ups in the last 10 years has shaped my perspective. Both went from 'Zero to One' as Peter Thiel's book describes - embracing every challenge that entails. Both started as ideas and led to exits/sales years later. Along that path was nothing but volatility - so much so that most, if not all, of the participants involved ended up succumbing to the volatility and opted out. Those that were gritty enough and adapted enough were changed forever monetarily, intellectually, and emotionally. You could say after the last 10 years I am very used to volatility. A few of the primary things that you learn from being involved in a full life cycle of a startup is that:
If it can break, it probably will.
That structural problems cannot be ignored/procrastinated on or they will risk systematic failure of your product/venture.
That if you have a large enough volume of people participating in your product then they expedite the reality of 1 and 2.
Looking at this COVID-19 issue through those 3 here is what I see:
If it can break, it will.
This seems to be happening everywhere. Back in January when I first discovered COVID-19 I began preparing for what is happening now. Family got it - they had been through the startups with me and knew when I said 'the probability of systematic problems with this in supply chains is high' with that unique tone...they knew what time it was. Others told me I was crazy and that there was no threat. Lots of 'its the flu' folks out there back then if not totally dismissing me as falling off the deep end. Fast forward 90 days ahead and we are in what feels like a surreal state of dystopia and it looks to be just the beginning:
Demand has disappeared outright.
Supply chains have failed, sans grocery and utilities (for now).
Food banks are surging in all major US cities and countries like India are now experiencing mass rioting for a lack of food.
Globalization is now being flipped by China as they are withholding medicines and PPE that the US corporate leadership outsourced for cheaper rates when all was good.
Most US businesses (all sizes) had so little working capital they lasted less than 2 weeks when shutdowns started. A true knock on effect of cheap interest rates (the lack of assumed need for savings - hey why save any working capital when you can borrow it at 3%?).
Every US sector needs complete bailouts - no leadership and strategic planning was present the last 10 years, just a process of organized extraction of wealth from the economic ecosystem into the hands of the 'Managerial Class' (as Ben Hunt refers to them as).
Unemployment is going to climb to upwards of 30-35% (low end range estimates)
Mortgage application are down 50-70% last 15-20 days
Our Governmental Leadership are in 100% reaction mode - there is little ability to be proactive now
The timelines for re-opening the economy are in line with that great phrase...'I'm just down the street 5 minutes away'...no one has a clue
I could keep going but what's the point. This is a prime example of the 'if it can break, it will' logic. So if you don't EXPECT things to break now - it's really just because you haven't accepted the current reality that is.
Net Result: More volatility coming.
That structural problems cannot be ignored/procrastinated on or they will risk systematic failure of your product/venture
I am not in any way surprised with the fumbling that is taking place everywhere in the government structures right now. Michael Lewis wrote a book about this called 'The Fifth Risk'. It was written after Trump was elected. I am not for/against Trump here. I am rooting for our government - they have taken a lot of tax dollars from me the last few years and I prefer them not fuck this all up and uphold their end of the social contract.
Lewis' book was not widely publicized but it covered what he deemed 'Fifth Risk' - that when Trump took office, the EPA, CDC, NASA, and many other structurally important organizations where deemed less than essential/important and others over-budget and things were slashed or reorganized. This wasn't a cronyism campaign that he and his team undertook, he was addressing the government like he addressed his businesses (and as he promised his voters he would) to try to make things more 'efficient' monetarily. Problem is that a lot of these things were beyond essential and should have been further funded rather than cut. The transition process he and his team went through is worth reading as what we are witnessing is not in the least bit surprising, as based on how Trump's team approached their first year in office, this almost a mathematical formula outcome that was highly probable.
When you cut all the agencies and funding for these types of structurally important underpinnings to our society (like environment, roads, wildlife, disease control, etc.) then you are setting yourself up for a structural/systematic failure point. The US is a large complex system. Large complex systems require certain underpinnings to function. That was Lewis' point. Neither Democrat or Republican matters to this stuff...this is binary. We have these structural systematic things under control - we can weather most trials - we don't...you are witnessing it in real time what happens when you ignore/fail to address the core structural components of large complex societies.
I would suggest that you read Lewis' book. He details it far better than I am here, but it is nauseating because you will be in disbelief. Lewis is not the boy that cried wolf either...so it is not a narrative piece. It is written with even less story telling than you would be used to with Lewis, it is really just a matter of account of what transpired. He doesn't even project a conclusion - almost like he finished the book in disbelief in what was taking place himself.
As far as my perspective on this item - I think that we are past the point of no return here as far as structural support goes. This extensive of a complex system (that is the US) is now facing too many challenges all at once when we were least prepared for it. The structural systems are failing (just look at Unemployment sites in every state that are not working as an example - they were never tested for bandwidth or further funded/expanded) so when in our team of extreme need, our systems are failing us completely and that is the price we will now pay for ignoring structural risks.
Net Result: More volatility coming.
If you have a large enough volume of people participating in your product then they expedite the reality of 1 and 2...
This is the most mind boggling of the three to me. This is impacting everything. Prior events 1929/1987/2001/2009/2015/2018 were all related to a specific sector/two that then bled over into the markets themselves. The worst being the great depression. This is effecting every facet of our economy and daily lives.
Since the bulk of the population is now involved in this the problem has exacerbated to levels pretty much unfathomable and/or hard to truly calculate. I said that it expedites the reality of 1 and 2 right? Try this on:
This all started 45 days ago. Within 45 days everything has been blown up. That is velocity pressure.
That is what happens when large volumes are participating/effected in the same problem at the same time. High velocity and volume of water shoved through a pipe will bust it (if it has weaknesses). No different here. Large volume impact in a short period of time. Complex systems that were not prepared and ignored the exact components of their system that needed surety right now are facing the largest of all volumes at the exact same time. Pressure busts weak pipes. I expect far more pipes to burst in our complex system than are even bursting right now because we are truly in a state of reaction. Unless/until the Fed Gov, cities, and municipalities become proactive - more bursting of structural pipes and more knock on effects.
Net Result: More volatility coming.
So what, now what?
This is the United Center in Chicago. No hockey. No basketball. No concerts. It is being used as a backup for Food storage. If you genuinely think that this is just going to 'work itself out' and 'everything is going back to normal' you are totally ignoring the math and the notes above.
Volatility is here now. The unknown/unknown knock-on effects and the optionality of all the different decisions that can be made and all the different outcomes that all this can lead to are so vast and chaotic, pinning an direction is naive and intellectually dishonest. So you will not find that here. What I can share is a few things:
Acknowledge where you are: you are in a regime of heightened realized volatility. If VIX were measured in real life, what would it be? 60 right now? 80? 100? When VIX is this high in the markets, dealers have a different set of rules. I suggest the same thing in life. When volatility is this high - do less. Take less risk. Be more patient. Be more skeptical. Expect the unexpected and start to look at volatility optionality as a potential opportunity rather than as just chaos.
Get comfortable with the 'least bad' decisions: in historical mythology, there are many allegories and parables that reference times in the journey of life (and that is all that it is) where we are faced with sub-optimal outcomes. That is part of it. This is one of those periods. Start looking at decisions through the lenses of the 'least bad' outcome and try to make those decisions to give yourself the opportunity to continue on the journey. This is an example:
If you come to a situation where life or death is 50/50 (option 1) and pain threshold is zero (because you survive with no pain or die also feeling no pain) OR life/death is 95/5 but the pain threshold is 100 (meaning pain no matter what)...which one are you going to pick? Don't avoid the pain is my recommendation because it increases your odds to greater than a coin flip of surviving - make the survival decision which will likely come with temporary pain/inconvenience.
Know that volatile periods are more common than you think: our recency bias is such that we don't think (especially in western countries) that times of high volatility and tumult are unheard of. In fact they are far more common over a long enough time horizon than you probably think. Don't be ignorant to think that this cannot happen or that it won't run its course. This period of heightened realized volatility is in full motion now and won't be stopped, so just adapt to this period of time and get on with it.
IF financial assets continue to appreciate as the economy and human life deteriorates, expect real and elevated periods of chaos: this is interesting in that I am baffled by the logic of current decisions that have been made (like bailing out over leveraged companies that are not systematically important and things like HY credit that is the junkiest of the junk). Financial assets don't matter in a world where disparity is too large. Think of it like this: who wants to be the last rich person in a world in shambles? What does that accomplish? How is that progress at all?
This is such a common failure in most financial experiments where this was tried (there are too many in history to even list). So I am hoping that these recent FED actions are simply to soften the blow rather than hubris to think financial liquidity and asset appreciation for a subset of the economic ecosystem will fix structural issues for the whole (like everything mentioned above) that truly risk collapse of societal infrastructure and the social contract. Is that where we really are? Hard to say. Having said that leads me to my final thought.
Stay balanced: try not to get too emotional or read too many 'narratives' at this point. We know the facts. This is a period of heightened realized volatility in our lives. The market and life are not the same and can bifurcate. So don't make decisions for one based on the other. Don't assume anything is fixed until we get proactive. Give stuff time to play out. Don't get heated one way or another because everyone is reacting around you. The person who typically survives chaos is the one who sits in the corner watching it (until they are forced to higher ground).
Lastly - if you are feeling unsure/concerned, best advice I ever received was to first, sit on your hands and think about why you are feeling the way that you do and then second, help someone else. Whenever I start bending one way or another with all this, rather than staying balanced...I ask myself why I am feeling that way...then I stop and donate some of our fund trading proceeds to No Kid Hungry. Even if some of our structures fail here it doesn't mean we will.
Volatility will be here for a while. That doesn't mean life is over.
Acknowledge, Adapt, Overcome.