Buy and Hold

It’s often claimed market timing never works I read an article today about 1482 CEO’s left their jobs last year during the GREATEST MOST HUMMING ECONOMY OF ALL TIME. They just got up walked to the door jumped and puled the ripcord. 219 more left in Jan 2020 and 9.2B of corporate shares were sold by executives by march 2020. In fact Bob Iger the DIS CEO pretty much just said one Friday “Adios Muchacho!!” You might think about this next time BillyBob over on Boggleheads posts: “we all know market timing never works” Seems to have worked out pretty well for these jokers.

CEO’s SPLIT

Will Liquidity Work?

Since the 70’s we have been treated to central planners planning our centrals. In the 60’s we had a recession that grew into the inflation of the 70’s which grew into the inflation of the 80’s. The inflation of the 70’s was attempted to be controlled by a command economy, for example you could buy gas on alternate days. Didn’t work. What we got was stagflation. In the 80’s interest rates went to 18% It broke the back of inflation. It nearly broke the country. 18% is what slopped up the excess liquidity. It was effectively the top of the mountain and we have been sliding back down that mountain since 82. We are now at 0, and once again we are flooded with liquidity.

Everybody and his brother is going to be begging for a bailout. Everybody has been practicing bad business practice except maybe Buffet and now when the piper wants paid they want YOU to pay to make them whole. You are inclined to let them because you own part of the bad business practices and their bailout is your bailout, but its stupid to bailout if the bailout doesn’t work. The central banks have no mojo. Bernake and Jellen have destroyed the world and Powell is following suite. It’s all politically driven at this point. Sending people checks won’t help.

We have been under a state of monster inflation for a long time. That inflation has expressed itself in the stock market. When a market moves over 100% off trend in a positive direction either the universe changed or the positive movement is inflation. 3394 was the peak and the inflation is now in deflation. What will happen next IMHO is we will over deflate and re-inflate again except it won’t be in stocks it will be in commodities. We will see the inflation there. We will see it in the price of bread and gas not in a return to 3394.

I read this account from a respiratory therapist treating COVID in NOLO. This is an experienced guy on the front line. RT understands lung disease cold. If I was the brain RT were the skilled hands who made my will happen in the patients life and they have my respect.

Covid-19 RT experience This article should give you some idea of what we are facing in the 20% who have a bad course. According to Cuomo, who has well over 10,000 diagnosed cases, 50% of his infected that are critical are under 50. So if you’ve been playing the odds that this is an old peoples disease and granny lived a good life, you might want to re-access your odds.

Regarding inflation v liquidity. Liquidity is what pumps inflation. So when Mnuchin writes you a check, the price of a loaf sooner or later is going to 10 bux a loaf. Stick that in the risk hopper as well. In 1980 I bought a house and my mortgage was around 12%. That really happened. Do you think you could own property at 12%? Do you think your kid could? Do you think your kid could buy your house at 12%? What does it take to break the back of inflation? What does it take to climb back up the mountain?

FIRE Land

First let me say this blog is not monetized or advertized and it is barely read. I write it to keep track of my thoughts during my retirement and to allow you to track my thoughts as well. The feedback from the few who comment informs me as much as I hope what I write informs them. Being not monetized, and the fact I never check analytics gives me a writing environment not encumbered by agenda. I don’t write click bait but some of what I write is provocative. I write about stuff I’m studying and thinking about and my choice of topic is based on what I think is interesting about financing a retirement. I try to avoid politics except the political sometimes enters into retirement reality BIG TIME. This is one of those times.

It’s all very interesting. Big ERN is still taking my feedback on his bog for which I am grateful. I consider ERN a blogging buddy and smart as hell and I give his advice considerable merit. I think I have something to say and I hope what I say and because my opinion is considerably different than the prevailing “buy the dip” understanding of reality, it gives his readers some counter point when trying to decide what is going on. Others like CD takes my posts as well. CD is a hell of a writer and always refreshing and is the ultimate UN-Boilerplate in a blogoland full of boilerplate and tripe.

I have posted to Financial Samurai in the past. He no longer takes my posts, which is fair enough but telling about his agenda. His blog seems to be about promoting a dogma as opposed to engaging in discussion and acquiring knowledge. He feels himself a financial mastermind peddling his masterful knowledge to the mere masses. In the mean time he’s about to unFIRE and go back to work because he figured out his 50 year retirement narrative doesn’t work, and he’s smart enough to get it and then change it, and honest enough to share that with his readers. That takes cojones, and will be his secret to success. He’s front running the train.

I was over there this week and he wrote this:

4) Financial Samurai traffic is down ~20% YoY. Instead of Financial Samurai benefitting from fear and uncertainty in the stock market and economy, it looks like more people would rather stay as far away from anything finance-related as possible. It feels better not to look at your finances when they’re getting clobbered, so people don’t.

People also tend to stop trying to educate themselves as it’s simply too painful a time period. With a decline in traffic comes a commensurate decline in revenue. If finance-related companies start shutting down, revenue will decline even further.

Again I have to hand it to Sam as he rationalizes the death of his golden goose. It’s not that his financial advice that is bullshit, its his readers who are no longer interested that are bullshit. It’s not his overexposure to leverage that is his problem, and so he has yet to come to terms with reality. He started his blog in 2011 and the market has gone strait up in those 9 years. He’s made money in real estate and finance and glories in his non frugality, which is fine by me, but a $300K financed lifestyle in a market that’s going up isn’t that big of a trick. The trick is living a $300K/yr financed lifestyle when the market is blowing up. It’s the Buffet perspective. You know who is swimming naked when the tide goes out. I think old Sammy’s narrative has gone and bit him in the naked ass, but my hat is off because he is man enough to admit it. It’s in the volatility we all learn the truth. The path to success is only understood by the experience of and response to failure. We are in the middle of one MOTHER of a failure and he’s kvetching about his analytics being down 20%. He hasn’t seen anything yet. The unemployment rate is going to 20% and the GDP is projected to be down 24% this quarter. They are optimistic the year ends flat. I’m not that optimistic. Neither am I surprised that people are not tuning in for the latest “how to make a million dollars in your spare time with crowd funding scheme” when job loss makes being able to feed the family a problem.

I’ve surveyed a few other FIRE blogs. DiversFI is still pumping out podcasts about living the life. It’s audio of “the oh so smart” engaged in their own delusion. I got better things to do with an hour much less an hour a week. Our Next Life is writing Our Next Book which will sell zero copies. Who the F*** cares about some middle aged chick with red hair’s take on “living with liberal purpose in the land of plenty” when it’s unclear if your are going to spend the rest of your liberal life living as a respiratory cripple or even live at all, much less whether you will have the funds to do that? It’s shear arrogance. I wonder what’s happened to her analytics.

Dropped by WCI and found the latest boilerplate “classic article” on “6 things to do in a bear market”. What a hoot! A 24% projected drop in GDP and 20% projected unemployment and a world wide pandemic and he thinks we are in a boilerplate bear market! Are you really going to model your life after this idiot? Physician Philosopher is “buying and holding” with the best of them. Jimmy has about 2 years of investing experience. Hopefully if he doesn’t die his portfolio will come back. At least he is pretty smart about having insurance except what if there are no insurance companies? Going to be a LOT of claims I do believe. Jimmy’s a big fan of Pareto, 20% account for 80% and presumes himself part of the 20%. What if he really is part of the 80%? Statistically it’s more likely to be an 80%er than a 20%er. PoF’s latest is on “how much time it takes to manage your own rental property” Guess it won’t matter much of there are no tenants. If you’re levered much you might consider dropping the keys in the mailbox and just walking away. That takes seconds. Get Rich Slowly is heading underground

Believe it or not, the current coronavirus crisis is affecting Get Rich Slowly too. Things are slow around here. Traffic is down. Revenue is down. Production is down. Plus, I have a big deadline at the end of the month. My project for Audible and The Great Courses is due on March 31st.

So, just like the rest of the world, we’re going to press “pause” for a couple of weeks. I will return next Wednesday with my annual birthday article, but you’ll have to scroll down to see it. I’m going to pin this post to the top of the front page

Revenue is down so time to do more profitable things than write blogs about Armageddon that might hurt the brand. Actually a pretty smart move. I think JD is a smart guy. I stopped by MMM what a treat! In true MMM format he’s trying to sell you shit! Pure shit. Stick that in your mustachian and smoke it! (Mustachian does sound like some kind of hookah) Damn the torpedoes full steam ahead screaming 4 x 25 all the way!

The NIH is projecting 70K cases by next week and it’s already Saturday and these bozo’s are telling you how to best fund the 529. Now you see FIRE as it really is. A quaint technique that works during a period of gross if not obscene abundance. When the abundance dies the FIRE goes out. Completely disconnected from reality. Completely worthless in the pinch. Completely without credible risk management. Their advice “when the train is barreling down on you, stand your ground!” Personally I’d get off the tracks. I’m not sure getting run over by a train is good risk management.

The county will survive but I think a very different landscape will present on the other side after the storm passes. I’ve been through a lot of hurricanes. There is permanent and unrepairable damage that occurs. I think permanent damage to the machine will happen to the extent the plumbing will need rebuilding world wide. It’s time to stay humble and try to separate reality from fantasy. The media is not your friend. The media including FIRE bloggers wants to sell you My Pillows and their agenda.

The Chloroquine “Cure”

Chloroquine is an age old pharmaceutical treatment for malaria and amoeba It has a brother called hydroxychloroquine. I’ve been scouring the liturature and found some reports out of China and Korea they used these drugs to fight COVID-19 with some success. The drugs are used in combination with oral zinc. Yesterday was published an article by a EU researcher that used one of the chloroquines with zithromax successfully to treat the virus. The drugs are given on different schedules and in different doses in the various things I have read, but the treatments are short term 5 to 10 days. They are NOT prophylactic treatments and the timing and all of that is not worked out.

Chloroquine and zithroman have QT prolongation and combined my have profound QT prolongation nobody knows so giving these drugs in the face of a bad EKG could be quite dangerous. The virus is thought to attack the lungs but apparently the heart is also vulnerable as cardiac myopathy is seen. So an infected host’s underlying physiology may be sufficiently different from an uninfected person as to be dangerous to these drugs. We are in a stage of human experimentation be very clear and the risks are not well researched.

The chloroquines are generic and cheap and the supply will soon be overwhelmed. It’s almost unavailable right now, but if you can get a few pills it might be worth having. DON’T BUY A MILLION. My dosing schedule is 12 pills of hydroxychloroquine 400mg po bid x 1 day loading dose and 200mg po bid x 4 days and then stop. The drug effect then seems to last for several more days enough to cover 10 days of infectivity. I’m not sure how to tell you how to pull the trigger i,e. whether to wait till a confirmed diagnosis or what. Practicing medicine like this is dangerous since the risks and potential co-morbidity are not well defined and may NOT be trivial. Bleomycin kills cancer, it also permanently kills lungs. I want to emphasize that point. The biology and prognosis of the virus is not well known. It is very unclear. This treatment is very unclear.

I believe Trump today is going to announce this treatment and relax FDA testing. Relaxed testing means increased risk. The market is going to hear CURE!!! This s not a cure. Herd immunity is the cure and that’s going to take 2 years PERIOD. Be very clear on this. This treatment will modify the rate of penetrance into the human host it won’t stop the virus so be clear on that. The market is still out of control in terms of volatility.

That’s where I’m at today, you can now use that as one of your data points as you consider the chaos. I own the medicine. I own hydroxychloroquine zinc and zithromax. I’m also taking D3 and C but not massive doses of any. In my opinion immunity is made from protein so I’m long protein and fat in my diet, especially if I get infected.

That’s what I got today I’m not giving advice. The reality of this is unknown and unproven but I’m trying to outrun the reaper. Because I own a few pills doesn’t mean I’ll eat those pills and it certainly doesn’t mean I’ll trade my portfolio on that lack of information.

I hesitate to even publish this post but I’ve spent a couple weeks researching the science and thinking about the consequences, and given what I know and how the media and the politicians are going to spin I need to pace a data point on the time line.

I want to reemphasize this is not completely tested. We for example don’t know what would happen if someone got reinfected because the treatment killed the bug before immunity was established. Viruses are very tricky

Good luck out there

Turning

There is a 1997 book by William Strauss and Neil Howe called the Fourth Turning in which they describe a multi-generational theory. A WIKI describes a synopsis It is from Strauss and Howe where we get the terms Boomer and Millennial. The notion is there is a 20 year cycle that is generational and each generation follows an archetype sociological code in relationship to their cohort generations. Eventually the cycle completes after 4 generations (80 or so years) and there is a kind of societal destruction and rebirth and that which is reborn is not simply a return around the block cycle but an actual destruction of the last cycle, so instead of a circle across time we see a spiral of generations through time.

Ray Dalio has a similar economic theory. He looks at the business cycle and then looks at a business super cycle. The business cycles is about 8 years but the super cycle is 80 – 90 years. The end of the super cycle marks a destruction. Two entirely different pictures (social science vs economic) reach the same exact conclusion in the same exact time frame. The last super cycle ended in 1929. 1929 happened in 2 stages first a 66% crash, followed sometime later by another 66% crash. 1 x (1-.66) x (1-,66) = 0.1089. So a dollar invested after 2 66% crashes was worth slightly less than 11 cents.

From the Washington Examiner quoting the Prez:

The rising death toll and total number of confirmed cases, which now exceeds 4,600 nationally, has led to a number of states issuing restrictions on public gatherings and venues, including gyms, bars, and restaurants. Additionally, President Trump provided new guidelines on Monday, which included avoiding gatherings of more than 10 people for at least the next two weeks.

“It seems to me that if we do a really good job, we will not only hold the death down to a level that is much lower than the other way … and we have done a good job … but people are talking about July, August something like that,” the president said, indicating that the crisis could last through the summer.” They got guns man. They can force that shit to happen.

That’s 5 months. How many businesses can survive a 5 month closure? Let’s take Donna’s as an example. Donna’s is a sit down with take out with stores in every city. It’s the store I used to go to after a night of bar hopping in every college town I lived in. HEY let’s get steak and eggs and coffee at DONNA’S! If the sit down closes only the take out remains, about 20% of the business. Donna’s is levered such that 80% cash flow is needed to service the debt. Restaurant stocks are off 50%, but you have to ask yourself can Donna survive?. If Donna doesn’t survive that’s thousand of permanent jobs lost.

Let’s take schools. If schools are closed for 5 months why pay teachers? Just end the school year tomorrow and let the teachers enjoy a nice long summer break and save the district some money because there is a ton of disruption that will need some money. Teachers are levered as well. Mortgages come due every month.

What about pensions? Pensions are underfunded by 50% in many places. Many OLD laid off workers if they are old enough will simply retire and claim their pensionssssss. which are ahhhhh 50% underfundeddddddd.

Here is a video I ran across this morning that puts it about as succinctly as it can be put.

If you value your savings consider what this guy is saying. It’s the reason I sold out. I sold my long bonds today. I had an excellent gain in EDV and it’s buy low sell high, and I could sell them in IRA’s and generate no taxes so adios, I’ll book the profit. I have no idea if I’m doing the right thing, but one thing is for sure, I’m NOT going to 0.1089 on the dollar. I got out at 95 cents on the dollar.

The market is up today. That I don’t really get. What part of the closure of the hospitality and school industry and the job loss that happens following don’t they get? Even the whore houses are closed! Is it just thick denial? Is it a failure to understand? Is it the narrative the market always goes up? Buying the dip increases your risk. Is this time to risk on or risk off? Is it time to sell the rally? If I had anything left to sell damn strait I’d sell the rally. If I had any damn sense I’d sell my house while it still has value. There is a part two to this but it’s political and I’m not sure I want any politics on my blog. Best of luck out there!

So What The Hell is Going on Here

Let’s say this sphere represents your portfolio. The red part is the core of cash you have deposited through your work, aka your human capital. The corona represents cash you have converted into diversified assets. Each one has a direction and a height above the red sphere. If you draw a larger sphere around the corona just touching the tops that volume represents total portfolio value, The difference in volume between red and the larger sphere is the gain you get by investing. Most of us run long only portfolios so we throw away half the potential gain


I’ve traded spreads in the past and they are tricky mothers fraught with danger so it’s reasonable to throw away half the sphere to throw away half the risk. There is nothing buy and hold about trading spreads and it’s a probability game. You have to be right more often than wrong, and you WILL be wrong.

Diversity comes from spreading your eggs (invested money) across the face of the sphere. By investing in many pretty unrelated non correlated directions you can maximize the volume and if any single corona falters not much happens to the volume. Each corona has it’s own 3 space direction and each has its own size. In the picture they are all uniform but in reality we construct our portfolios to be distorted as opposed to be spherical because the distortion seems to provide some out-sized advantage when it comes to profit. In reality we do have dozens of choices and we make them We have US stocks with US large cap US mid cap US small cap each with growth or value tilt. We have foreign with the same litany of categories. We have EM. We have commodities, softs, metals, oil etc. We have bonds upon bonds to choose from both foreign domestic corporate and government of all different duration. We have Real Estate. We have private equity. We have credit debt and interest assets and we have derivatives available for all of these.

We like simple so we lump all this stuff into like bundles Total Stock Market foreign and domestic, Total Bond Market, Commodities baskets, Real Estate baskets etc. If you have a whim there is an ETF that can satisfy your need. There is one last asset CASH. Cash is the risk free asset cash is the red ball. When you buy baskets you loose access to price. Your baskets are not the same as what the contents are individually. As the market oscillates the corona can move on the surface. They “tend” to have pretty constant diversity. Diversity is the angles and distance between 2 corona. The baskets of corona also move around the surface and baskets also have diversity but a different diversity from the underlying. Baskets also have risk. A different risk than the underlying.

In low volatility times (the last 11 years) everything is well behaved. All of the underlying and baskets all float around on the surface is some fairly predictable relationship. Bonds are low volatility, and tend to behave in fashion unrelated to how stocks behave. Commodities don’t pay a dividend and are extremely inflation sensitive so they float around in a very different place.

Capitalism dictates people will try and maximize their personal as well as corporate profits. It’s a fair enough system where you take some risk and hope on some reward. You may try to guild your lily and maximize profit by taking out sized risk while others want to make a little but not risk too much. A lot buy stuff and don’t have the first friggin’ clue what they are doing. They just follow some simple 4th grade math. When volatility is low this works out because simple math is good enough. The monkey business of trying to guild every dollar often leads to buying way too much risk because as a profit seeker you ignore the risk and just hold out your hand to get paid! That kind of strategy works if you’re a day trader because you put on risk and take off risk every day and if you bet right you get paid. I spent the 90’s day trading once trading costs got down to $5.

Buy and hold types access the same kind of risk taking, except they only put on risk, they never take it off. They also never pay attention to risk. They just plow into an unknown sea head first and pray God there is no rock just below the surface.

Sometimes the universe changes and volatility kicks up along some asset class and the risk becomes more dramatic. So if the VIX which measures the risk on the S&P is 15 for a decade you become complacent and just keep chucking dollars into the S&P because if seems to always pay you with 11% return on the average sometimes more but on a year over year basis it delivers the good. Then on week he Vix goes to 75 a 5 standard deviation move, and the S&P is at all time highs 100% above the long term mean. Suddenly there is 1% upside and 99% downside and you move down 130 points the biggest point swing ever. Moving down begets moving down and the VOX stays 5 standard deviations over the past decade and yet again you move down 260 points. then 2 days later the vix stays high and you move down 336 points. that movement down is not linear it’s a power function. You’re movement up was pretty linear about 11%/yr but down we will be at zero long before a year plays out. So that’s point one. Trading has moved from a linear function to a power function.

The next thing is what’s happening across asset classes. Firstly diversity is collapsing. In a power function environment all correlation in an asset class tends to 1 aka unity and it all heads toward zero. Also all risk therefore tends to unity so if you were expecting those foreign stock to save you they will kill you worse because they have lower return and higher risk even though they did provide some diversity when the relationships were linear.

The non correlated assets also have volatility. Bonds have the MOVE index, Gold has the GVZ index, Commodities tend to use oil (OSX) as the volatility proxy. All of these other volatility indexes are also blowing up by standard deviation amounts meaning they are also going to a power function. In normal diversity if one dimension blows out its vol the others maintain low volatility and anchor the portfolio to a relatively mild shock. If the vol of all the diversity dimensions are going to the moon (stocks bonds commodities gold currency are blowing up the internal volatility of that system is frightening. The clip is this. Ignore the politics and focus on the nature:

Imagine you are skiing 5 feet in front of the avalanche. What could possibly go wrong? To me risk off seems prudent, In fact I sold my entire stock portfolio Friday and today. My apparent loss year over year is 5%, which means I lost all of last years gains from March on, all of this years gains and a little more. I kept the bonds and the gold, but I’m keeping my eye on those too. I have no problem going risk free (aka cash) if the situation warrants it. I didn’t come to this to loose half my money based on a narrative.

I may be wrong and the S&P will explode 2000 points by Friday. Doesn’t matter I booked my gains because I did book quite a lot of capital gain, effectively I bought low and sold high which is the point. The reason I don’t see this happening is the Virus. Several states just closed down restaurants, a low margin business. That means unemployment went up, and it may be permanent. To smash the peak you have to extend the base. If the peak is expected in 12 weeks, a 50% smash results in 24 weeks because the volume has to be equal. Immunity happens only through illness at this stage of the game. That means the same number of people have to become immune regardless of the smash. How many restaurants will survive a 6 month forced closure? What about lettuce growers? They supply the salad makers in the above restaurants If the restaurants are closed I’m not growing any lettuce and if I’m not selling lettuce I’m not paying the mortgage or my farm hands, and so on and so on.

Look at the clip again and think long and hard about buying that dip. I could well be wrong, but I bet my fortune on that analysis. There is always something to do, including nothing. The trick is to do what is wise. At some point some are going to win and some are not. Check your narrative it may just eat your lunch.

The Wuhan Fractal

Fractal geometry shows repeating patterns as you drill down in perspective. The same pattern exists at a universe level as exists at a microscopic level. The video below describes such an example

I was watching a video from a man who is quarantined in Italy discussing life in Italy and he put up a graph

I’m calling this the Wuhan Fractral. This is a graph of the virus embedding itself into the population of Wuhan. Wuhan is in red. Green is Italy. It’s the same graph. The same graph will occur in Spain, France, the US etc. The same graph will occur in London, NYC, Toronto. The same graph will occur in TN, FL, and CA. The same graph will occur because we are all human and the virus is the virus.

Presently the only way to immunity is through infection, so the Wuhan Fractal will hold till that’s no longer true. There is a notion age some how provides immunity. It does not. The virus has a bimodal course which I’ll call severe and mild. The expression of the modes seem to be age dependent so 20 year olds have a 0.2% death rate and 85 year olds have a 15% death rate (numbers I read not sure of accuracy). So the bimodal “80% mild 20% severe” is actually also stratified by age. It turns out there is also morbidity with the disease. The Hong Kong experience is 20 – 30% of virus survivors suffer pulmonary disability severe enough that a brisk walk causes complete breathlessness. If the old die, that means a greater percent of the remaining young will suffer respiratory disability. I don’t know this to be the case, but that’s what the fractal sets suggests. I can’t even begin to predict what this means economically except I don’t think iron workers who can’t breath are going to stay iron workers. Imagine a world of respiratory cripples and what that does to productivity.

The old get hit harder with death. What if 10% of senior management in our corporations die? What’s the likelihood of corporate survival, much less accelerating corporate profitability? Consider the Wuhan Fractal as you’re buying the dip. This thing is going to take 2 years to play out before we have base line from which to start growing again. I expect the growth won’t be gangbusters.

If you believe Wuhan numbers the death rate was 4.4%

New cases have dramatically tailed off so even though the numbers are dynamic they are about right. Wuhan is about 2-3 months ahead of us in terms of growth.

This doesn’t take into account a second wave, if there is one.

My best advice is don’t get the virus before you’re vaccinated. That kind of puts a time frame on the problem and how to think about planning. The media jokes and drool’s about this being Trump’s Katrina. This is humanity’s Katrina. Katrina was a tragedy, but also represents a fractal set. Imagine that fractal blown up to world wide scale.

The Day The Universe Changed

When you buy a stock, you buy its risk. Yesterday I sold 25% of my stocks. I may be sorry I didn’t sell more. My financial adviser gave me ample things to think about before he pulled the trigger for me but in the end I think we are way beyond owning risk, so I held my nose sold into yesterday’s rally.

Phil, my adviser asked me: “So you think that corporate earnings will be permanently impaired going forward?” This is a good question and used to head me off, but the real question is do you think corporate risk (volatility) is going o rise to Lehman brother levels. I think we are at Lehman levels. In 2007 I saw the crash coming. It was absolutely clear but I didn’t know what to do. The right thing to do would have been to get out. IT’S ALWAYS BUY LOW SELL HIGH! The argument is “ya but when do you get back in?” The answer is when risk normalizes.

My reasoning follows

  1. This is a chart of the S&P 500 going back into the 70’s. I drew something like a long term up sloping trend line which shows market growth over the past 40 or so years i.e a long term trend. I next drew a line that captured the market peak in 2000 and about the time Trump was elected. The chart shows the recent year high of 3397 and the year low of 2480 put in Thursday. I don’t know what the value of the long term trend is, but it seems clear we are still above long term trend. This means from a long term perspective stocks are still not cheap. The laws of large numbers preach mean reversion, I don’t think we have yet reached mean reversion.
  2. The market has been going up for decades based on boomers saving for retirement. Every month tens of millions of people invest in “the averages” and according to this trend people are not buying low, they are buying high because the trend slopes up. Since that buying pressure has been the case for decades the price of funds does not represent the true value of the underlying shares but the true value plus an upward buying bias due to accumulation. That upward bias is coming to an end as boomers are forced to stop buying. It can be exacerbated if they are forced to sell. An example of forced sales is RMD. Another example is a market crash and no ready cash to live on eg SORR.
  3. I believe the COVID virus is going to be far worse than we think. Everybody is looking at this like it’s some kind of flu. It is MUCH more disruptive than the flu. The CDC projected a nightmare of 1.7 MILLION deaths. You see that kind of disruption happening in Italy. My wife told me nearly 20% of healthcare workers are infected or dead and this is before the peak. ALL of the ICU beds in the country are over capacity. They are using OR’s for ICU and no surgery is happening. Italians are not genetically different than we are. The Virus will do to us what it’s doing to them. They are just 4 weeks ahead of us. if you want to know the future just go study the Italian experience. We talk about 3% mortality. It maybe as low as 1% mortality, but I think it could be higher once the ICU beds are overwhelmed. There is some idea the old are at risk but not the young. This is not the Italian experience. The old came first, and now the young are coming. It just took longer for the virus to burn through the excess health reserves of youth. Once the aveola are burned out they fill with fluid regardless of age and this is the definition of ARDS. The Hong Kong experience is there is a 20-30% post infection respiratory morbidity in recovered patients. This manifest in no respiratory reserve. Walk fast and you huff and puff like you’re running a sprint. If it’s a 1% death rate and 1.7M die you can expect 170M infections. If 25% of those have morbidity you can expect an additional 42M to have some level of permanent respiratory illness. What does that do to a work force that requires good lungs to be productive? At this point in time the only way to achieve immunity is to get sick. It typically takes 2 years to achieve herd immunity in a pandemic.
  4. Pensions have no money. They are virtually ALL underwater. This means pensioners are ALL virtually underwater. How does an economy grow when the number of retired is growing and no one has any money?
  5. Companies have been financially engineering their stock prices since 1990. Corporate debt is being used to buy back shares to raise the price/share. Less shares forces the price to go up to keep the ration the same. Lets say 2 shares has a value of $4. Lets say you buy back a share leaving only 1 share available to trade. To get back to a $4 equivalent valuation the share price must raise to $8. If the company dumped the 1 share of stock it would go back to $4 but that share is being used for collateral on the loan that was taken to buy back the stock. This is called leverage. When the world crashes the debt becomes junk and buybacks cease. Buybacks provide a source of demand and demand raises prices. A crash kills that source of demand and therefore prices must fall because the price was artificially high in the first place. Stock funds encourage companies to use this trick and it works till it doesn’t. Regardless when you buy a stock you pay for its risk and if the price is inflated due to financial engineering you pay too much for your shares.

It turns out there are 2 different classes of 10 year treasuries they are called RUN and NON RUN. Run treasuries are what the FED uses to add liquidity. Non Run are treasuries that live in investment accounts. They price differently. Run treasuries usually price 14 basis points higher than non run bonds. When Lehman crashed the spread was 60 bp. A couple days ago the spread reached 50bp. This show the instability of the economies foundation AKA 3x normal risk. In addition the FED is allowing all terms as collateral not just T-Bills aka the entire curve. This I believe was called a twist. This is QE4 period! This means we are deep in instability IMHO

7. The VIX hit 76. Only 3 times in history did the VIX hit 76. 1987, 2008 and this week. A VIX this high totally distorts the ability to make rational decisions regarding stocks aka risk becomes unknowable. As VIX goes up it becomes more and more like trying to divide by zero from algorithmic perspectives.

8. The supply chains are screwed. Even if they come back online but there is no demand there is no need for supply. The virus will assure demand is screwed. As people loose their jobs, no mon, no fun. Money printing isn’t going to cure that. No mon no fun no corporate profits. No corporate profits? That’s just the question Phil asked me. Why own corporate risk when you can own risk free cash and all the arrows are pointing into the ground?

I think that’s the set up for the next 5 to 10 years. I think we have shot our collective world wide wad. I think there is much more downside likelihood than upside. Even if 25% of my doomsday happens it’s still a relative doomsday. My present allocation is about 35% stocks about 30% bonds, about 10% gold and the rest in cash. I’ll wait to see how the Virus plays out and how much permanent damage is done, and who wins the election. If I am wrong I will loose a little upside. The market isn’t going to double. If I am, right I’m well protected. The market could very easily fall in half or more. That’s my bet. After writing this I may double down. There is something satisfying about owning the risk free asset, until inflation hits.

How I Did

While I’m sitting around waiting for the COVID train wreck to come to fruition I was reviewing my performance in Personal Capital over the past year. In 2109 I made a deliberate choice to “risk off”, meaning I changed my asset allocation considerably to a less concentrated allocation to stocks. Personal Capital doesn’t capture all of my holdings. For example BTC is not represented and I have a 401K which PC can’t access, so the analysis isn’t perfect. BTC and the 401K tend to further reduce my actual volatility, but I’ll use the tools I have to consider my asset allocation performance compared to other portfolios. To do that in Personal Capital I choose under “Investing”, “Performance” and choose a 1 year time frame.

Blended

I think the “Blended” portfolio is a comparison of my portfolio against the stock Personal Capital efficient frontier asset allocation for my given risk choice. Oct 25 is the day I changed my risk profile, sold equities and bought bonds and gold and BTC and opened an actively traded Roth. I compare my change in risk across all the available asset classes in this tool. Notice how my particular portfolio has a trend line that flattens out after Oct 25. The blended portfolio apparently has a greater relative risk compared to mine. The 2 portfolios meet on Feb 19.

On Feb 19 the VIX looks like this

So in a low volatility environment (VIX<15) my portfolio acts like the blended. Note what happened yesterday

My portfolio has diverged from the blended and out performed the blended by >1.5% based on a 1 year (or year over year) return, in the face of monster volatility

This is exactly the performance I’d hoped to achieve. In times of monster volatility my portfolio performs quite well. This is an end of business cycle time, post 12 years of expansion and it “was” time to take your profits, when the market “was” up. On Oct 24 the day before the day I derisked, my return was 12.62%. On Feb 19 my return was 14%. Today my YoY is 5.47% v 3.89%. So in performance terms I’ve lost 8.5% while the blended has lost 9.92% on a YoY basis. That’s 142 basis points out performance or I’ve beat blended by 16.7%. A man has to have some solace when the world is crashing. Actually a 5.47% positive return YoY can hardly be called a crash. I’m still worth more YoY this year than I was last year and that includes the money I spent as income to live on, plus the money I spent on Roth conversion, quaintly referred to a “sequence of return risk”

Compared to US stocks my portfolio outperformed 12.62% to 8.31% before derisking. In other words my portfolio was ahead of 100% US equities by 51% before I derisked and ahead by 12.8% the day after I derisked. This is the evidence proper non correlated diversity pays. As of today following a 135 point gain on the S&P, I’m still ahead by 5.47% v 3.57% or 53% on a YoY basis.

Foreign Stocks

This is an extremely interesting comparison

On a 366 day basis my portfolio outperformed every other category except BONDS! Stick that in your pipe and smoke it when you are sneering at bonds. Last year would have been a hell of a year to be long exclusively long BONDS. Actually it was my switch to a greater % of bonds that improved my overall performance. You see on this chart why I am down on Foreign as a major asset allocation. I do own about 10% international stock. Most days I wish I didn’t, but it keeps me on the efficient frontier. I’ll leave you with this image of Foreign

You can think about this chart next time some dumbassed bogglehead starts quacking about owning “foreign”. Tell me about how this diversified your portfolio? My account is up 7.22% compared to – 8.14%

My advice is yes you can correctly time the market, in the face of asymmetric risk. You can see in the “all stock” portfolio there was monster upside all the way till there was monster downside. Why do you want to own that kind of risk when you can own some much more rational level of risk? What is it Bernstein says?

It’s the wrong time to trade when the VIX is 51. VIX 51 is a good time to horde cash. This market is not done falling. The US hit over 1037 COVID cases this morning with 28 deaths and only 8 recovered. In my state in the last 12 hours the cases doubled from 14 to 28. We are walking into a virus buzz saw. The government has adopted a buy and hold passive strategy. Let the buzz saw hit and wait and see what parts remain. After all parts is parts ain’t they? Korea OTOH is managing their risk actively, and winning. In case your denial is still intact, understand today is March 11. It’s not even St Paddy’s day. Harvard, the home of Man’s Best Medical School, cancelled all “in person” classes for the rest of the semester.

Oh ya life goes on long after the thrill of living is gone… Let it Rock, Let it Roll…

may as well enjoy the ride.

The Eve of Destruction

This picture has become my favorite meme to describe reality. The progress of a molecule in the column stays linear until the little eye forms half way up. At that point progress becomes rotational. A little farther up the road the progress becomes chaotic.

This is my second favorite meme. It describes how a normal Gaussian distribution is generated. The question you can ask of either meme is: If I were a molecule in the smoke, or a single ball in the distribution what can I do to wind up in a good place.

In the case of the smoke IMHO get out when rotation starts and before chaos ensues. Getting out would be like heading for the storm cellar when you see the rotating wind, tornado approaching. If you look at the laminar smoke the distribution is uniform and predictable. A bit of smoke in the middle of the column isn’t much different than the bit of smoke at the edge so the volatility is low. Staying for the chaos would be like staying for a hurricane. A small weak hurricane is survivable. I’ve survived many. A Cat 5 is not. The infrastructure was not built to stand the energy contained in a 200 mph wind for several hours. Recall energy is a power function of velocity E = 1/2 MV^2. You may have some narrative but the math will simply kick your ass in short order.

The same is true of the balls. As a ball enters the matrix, the probability of ending up in the middle is high and ending up in a tail is low. When the smoke starts to rotate the probability of ending up directly above the laminar column goes way down. You can almost draw an inverted normal curve on the smoke with the center in the center of the laminar column and the horizontal axis encompassing the width of the expanding turbulence. The balls represent the same thing. A single point expands into a broad distribution.

Lets say on the Galton board, you win if you wind up in the right half of the distribution and you loose if you tend left. If there anything you can do to wind up in the right? It depends on your point of view and your timing.

At any decision point as you descend through the matrix you either go left or you go right. To end up right you absolutely need more right choices than left, and you need those right choices sooner as opposed to later. If your half way down the matrix and you’ve been bumping left your likelihood of finishing right diminishes with every decision because making all rightward decisions in the bottom half of the matrix becomes vanishing small.

The point of all of that is you have to front run the choices early. You have to place yourself in a position whereby the probability of getting bumped right early is THE PARTICULAR THING you need to focus on.

In the Galton board every decision is 50/50 but in life every decision is not 50/50 and every prior decision effects the probability of the success of a subsequent decision. In a 10 row matrix if you make 5 initial right decisions your chance of ending left is virtually zero regardless the subsequent 5 decisions.

There is a practical example of outrunning the Gaussian curve. In poker the randomized odds of the house winning strait up is about 60% and the player loosing is 40%. If you pay attention to what cards have been played, that tells you something about what is left to play. By knowing what is left to play, your odds become different more like 49% while the house retains 51%. But you don’t win at poker just by playing the cards. You win at poker by getting paid, and the thing about the house is it has to cover your bet if you win. So if you understand how to count and how to bet your chances of winning more MONEY (not necessarily more games) than the house goes up over 50%. But to be a money winner you need to size your bets correctly. If the house discovers you are a card counter they will invite you to leave. They also counter card counting by dealing from multiple shuffled decks making the odds calculation beyond human ability. It’s just to point out the power of Bayesian stochastics, when running a game.

SUCCESSFUL LIFE IS SIMPLY A MATTER OF COUNTING CARDS.

Life, if it’s honest, will have to pay off its bets. If dishonest, as in the case of Communism or Socialism life will always eat your lunch.

I’ve been watching the development of the Virus. In my view the forces keeping the smoke laminar are about to be extinguished. In my state 5 days ago there were 2 cities on the west coast of the state with infection, 3 cases total and no deaths. 5 days later there are 8 cities state wide with infection, 9 cases and 2 deaths. The virus is a machine. It does not feel. It does not care. It does not think. It simply satisfies the math. As a system we have moved from laminar flow to rotational flow and now chaotic turbulent flow is on the horizon. THIS IS THE ENGINEERING PHYSICS OF THE REALITY. In my opinion you have less than 5 days to make a move to improve your eventual outcome and wind up in the rightward part of the distribution.

TO BE CLEAR YOU ARE ON YOUR OWN.

The government has already failed:

The Governments of Singapore and Hong Kong have succeeded. They have managed to keep the Virus from going exponential. They are also small island nations of very civically well ordered people. In those countries the services and supplies will not be overwhelmed, at least for a while. People will die but disruption will be minimized and once the Virus become endemic and not pandemic rebuilding will ensue. That’s like owning a well diversified portfolio. In the time of disruption, the damage is minimized but damage occurs. Island nations however are not self sufficient and require external infrastructure and supply chains to survive. The rest of the world is hosed. If India hordes the drugs the US will have no drugs. If everybody buys up all the food and 30% of the population is sick and quarantined where is the food going to come from? If the virus kills the older, and men 5/3 compared to women, that means the managers and people with the most expertise are going to die. A 30 year old jr engineer can not do the job of a senior project manager with 25 years of experience with sufficient productivity to make the venture profitable

So what’s a mother to do? Simple flip your Galton board and start anew. Do not be paralyzed by the past. You will have a new chance to make the first 5 choices in a rightward direction over the next 2 years. Your first choice would be to stay alive and make provision your family will stay alive. The second will be to place yourself in a position to prosper when the game is reset.

When I was an engineer I studied and took some government certifications that granted me licenses to construct install and maintain high power radio and TV transmitters. I already knew how to design them. There is big money in keeping that infrastructure alive. I went on a local job interview on a Monday and there were no jobs at this place. On Wednesday one of the senior engineers met the widow maker and on Thursday I had a job. The guys death was unfortunate and I didn’t plan to fill his slot, but I did acquire the necessary credentials and I had the necessary experience when the odds changed. We may very well see this exact scenario play out as the older die, so consider who is above you that you may be able to replace once the smoke clears. As an oldster you may want to consider who you would want to replace you.

The history of pandemics is they last about 2 or 2.5 years. If seasonal they swirl from north to south back north to back south and maybe north again. It’s like taking a round bottom flask filling it with solvent dropping in some solute and swirling. First there are streaks as solute mixes with solvent then uniformity. Uniformity is called herd immunity. Till uniformity, chaos will ensue. Achieving herd immunity is like starting at the top of the smoke heading back down through rotation and back down toward the flame. There will be life, there will be death. What is assured is disruption. So learn how to trade disruption. 60/40 buy and hold ain’t going to cut it. That is how this virus is going to proceed. So place yourself in the spot where maximum benefit is likely to occur.

The way you win at hokey is to place yourself where the puck is going to be, not where the puck used to be. You have to front run the developing reality on a probabilistic (Monte Carlo like) basis.

If you want to be above the yellow line you have to actively choose to be above the yellow line. There are levers to pull like asset allocation and withdrawal rate that assure floating to the top.

Do not cling to the past. If 150M people world wide are dead, half the available expertise is dead and the efficient means of production is severely crippled the future will look nothing like the past.

I bought a freezer and filled it with enough meat for my family to survive for at least 6 months. Meat is the ideal food. You can survive for decades eating only meat. Next I bought some shelf stable protein in case the disruption is worse than I expect. It has a shelf life of 15 years I have a shelf life closer to 10. Once the money is spent the worse that can happen is I enjoy my stores as I place my bets. My life is hedged. Near as I can see the only solution is going to be some measure of self quarantine, while the winds rage overhead. I’ve lived that threat of wind as well.

One hurricane that lasted 24 hours in passing, the power went out exactly at 6pm. What I had was a fashlight, a battery radio that could get local TV on the FM band, a low power ham radio set from which I could talk to people using morse code all over the world, at least till the antenna blew down. I spent the night in the dark, as the storm raged talking to people, mostly in Europe with occasional update from the FM radio. I had sent my family safely out of town. When “morning” arrived I went outside and took a shower in the rain as we had no running water. The storm still raged but it was waning. You gotta pick your points. That particular storm I was without power for 14 days but not without resources. I was annoyed but not dead in the water.

If you own a business, set your people up for telecommuting and let them self quarantine with their families. That business has a chance of survival IMHO. Businesses that require presence at a location are pretty well hosed.

I think think by May, the die will be cast. The resources will be gone and triage will have commenced and positioning will be over. In the movie The Matrix the die was cast 3 times. Each time started a new set of relations and outcomes.

Enjoy the sunshine. God’s sun shines on good and bad alike. Today, is the day before life goes on.