Authored by Eric Peters, CIO of One River Asset Management
“This game is about inches, little decisions, luck, never forget that,” grunted Bulldog, one of the great trading talents. “I saw that Wuhan mess in late Jan and bought S&P puts,” barked Dawg.
“By mid-Feb they were pretty worthless.” From Jan 31 through Feb 19 the S&P rallied 5%. “Once the market started to puke those puts came back to life, and with days left to expiration I sold them and went on vacation. That cost me a 50-1 payout,” he growled.
“It’s alright, I’ve gotten lucky plenty of times, move on, next,” said Dawg, itching a torn ear from some old brawl. “Stocks trade like they’re going parabolic for all the wrong reasons, like the Fed made a massive mistake, gave away too much free money.” 1998/1999 raced through Bulldog’s mind.
“The coming top is going to be it. We won’t see it again for decades.”
Herd: “I guess we’re entering the stage where we still pretend to care more about people’s lives than economic activity, but we kind of get on with it anyway,” said the CIO. “Looks like we’re going to let this thing just run its course, like the Swedes did, but without anyone ever acknowledging we made that decision.” The CDC’s latest report estimates a 0.4% fatality rate. To hit 65% herd immunity, 858k Americans will die in the absence of a cure/vaccine. “And if there’s one thing you know, it’s that if we get a 2nd wave there’s no way we lock down again.”
Pent Up: “Personal savings soared by $4trln during Apr (annualized),” wrote the economist. Consumption plunged $1.9trln while disposable income surged $2.1trln from gov’t social benefits. Feb’s 8% personal saving rate hit 12.7% in Mar (33% in Apr). “That happens when the gov’t shuts the economy while boosting personal income with $3trln during Apr (annualized).” This more than offsets the $1trln (annualized) fall in income excluding those benefits. “A consumer-led V-shaped recovery is inevitable if the reopening continues without major setbacks.”
Sudden Change: “70% of US labor was on the farm in 1875,” said the CIO. “By 1920, it was 5%,” he added. “This transformation set in motion dynamics that ultimately caused two world wars and a great depression.” We’re again in a labor transformation, an industrial shift. Changes 100yrs ago included electrification, motorization, industrialization. They accompanied America’s ascent, and now it’s China’s turn. “Tech is rising, it’s eating the world. Nothing can stop it. Unsurprisingly, we’ve had a few financial panics to date, but we’ve so far avoided war.”
Sudden Change II: “I couldn’t be more horrified about our political and societal situation,” said the CIO. “But I’m less concerned economically for the time being. Stock buybacks will return fast. CEOs and investors will leverage balance sheets. Capitalism goes on,” he added. “There will be accelerated restructuring of the economy. But these transformations were already happening.” The death of retail, the move to the cloud. “Though, perhaps, changing too quickly could damage the broader economy. Shifting too fast is always hard for people to process.”