MD on FI/RE

This morning I was greeted with this article Long term unemployment (>27 weeks) hit an all time high. 27 weeks is longer than half a year, all time high is never happened before. I then moved on to this article on food bank failures in the next 12 months. Boomers, the wealthiest generation in history continue to retire and the majority of Boomer money is in active funds. I have an old 401K that was in a JP Morgan portfolio during the course of my funding years. The JP Morgan funds, actively managed, had passible returns bur nothing spectacular. That fund was automatically liquidated by the custodian into a Van Guard target portfolio, passively managed according to a simple age based criteria which now allocates me automatically to 65% bonds 35% equities. It’s a tiny part of my money and over time has offered a positive return net expenses so I just let it percolate.

How I got from JPM to VG is important because this portfolio went from active to passive meaning there was a net outflow of active funds and a net inflow of passive funds. This means on the margin the ratio of passive/active funds in the aggregate shifted. My shift caused a small increase in the ratio so the NAV of active went down and the NAV of passive went up. On a one person level no big deal. On a population wide basis big deal. Often the first thing a retiree does is move his 401K into a roll over IRA to loose the management fee. In doing so this causes a demand in passive at the expense of active adding a risk premium to passive and a risk deficit to active. So my demand will on the margin increase the cost of passive my passive purchase and my sale of active will cause a decrease in what I receive for the sale. So if I sell $1 worth of active I may get 99 cents and if I buy $1 worth of passive it may cost me 101 cents. Not a big deal for me but it means the next guy will get 98 cents for his JPM and his VG purchase may cost 102 cents. This causes a further distortion because retirees are mandated to spend their money and money spending from a personal point of view is deflationary. If you have $100 and you spend $4, $96 are left a.k.a. your portfolio is deflated. Boomers also change their spending patterns. 2 years ago travel might have been overseas spending in hotels and on air travel. Today maybe an RV was purchased. This is also deflationary. It represents a kind of “stocking the pantry” move. Instead of spending into the economy renting big hotels on a recurring basis you drive your room around making smaller outlays. The RV represents a pantry of travel experience. All of the demand is pulled forward. None of these ideas are new but when linked to a massive demographic such as the Boomers and now Covid, and Now the highest long term unemployment ever, and now possible food shortages in the face of the rich getting richer….

There is a concept of elasticity which is how one variable changes with another. We use this concept when designing efficient frontier portfolios. We want portfolios with low cross asset class correlation so when one thing crashes the other thing remains unchanged, this is called inelastic or poorly correlated. Traditionally portfolios have been built over the past 40 years on a 60/40 model and that worked because of bonds and interest rates. Now in real terms bonds cost money to own and interest bearing accounts also cost you in real terms. This means in a crash you loose money in the equity and you loose money in the bond in real terms meaning the correlation is now positively correlated. In anesthesia when we would dissect root causes it generally wasn’t one thing that caused the disaster, it was 4 – 6 things, small generally uncorrelated things, that momentarily and dynamically all lined up pointing in the same direction.

This

Became

And that’s how volatility happens. The volatility of the upper figure is small, the vol of the lower one is massive.

In addition when you loose 10% you need slightly more than a 11% return to break even. If you loose 10 and need more than 11 to get back to zero that means you’re slightly more than 1% underwater when you make 10% back hence 10 + (-10) = -1

These are subtle ideas until they are not. If bonds no longer provide stability what does?

I read a Howard Gold Market Watch article yesterday with the above title. The above bears consideration. I read a book that looked at the aftermath of people wiped out in 2008 called Nomadland which I found compelling. It tells the tale of middle to upper middle class people who were essentially wiped out in the 2008 downturn. First went the job, then the pension and savings in an attempt to save the stability afforded by having an address, then went the house and people moved into their cars to suffer day work and gig contracts as the means to buy their daily bread. The sugar beet harvest is one of the best gigs all year, but it in reality is a bone crushing experience, especially for a 70 year old once college admin who burned up all his dough trying to save his address.

I’ve listened to a series of interviews (here and here among others) with Jeff Booth. His argument is basically about the creative destruction of technology causing an exponential deflation, and how the FED’s around the world will try mightily to ignite inflation to monetize the debt but will fail because the inflationary action of printing money is linear growth, while the deflationary action of technology is exponential, meaning it’s asymmetric. Broke Americans are also deflationary. If technologic deflation does prevail according to booth the problem will be solved.

The bottom of the Dead Sea is the lowest land mass place on earth. In order for a sea to be alive it has to flow and the water in that basin has nowhere to go. I was talking to a friend about the market and she made a comment about valuations falling back to earth, and it triggered this map in my mind. Suppose the valuations fall back to the lowest place? Suppose all the leverage, narrative, smoke, mirrors, sales gimmicks we get sold by CNBC FBN Bloomberg, guys with pony tails and bald heads, what if it all falls back to the lowest place, not a place of zero but a kind of gravity well of negative vitality. Why Not? Covid, Fires, Hurricanes, political idiocy, clueless arrogance, near open war fare in the streets, deficit to 6T, unemployment sky high, bankruptcy, what’s to stop it?

I belong to Real Vision as a narrative source which I use to inform my judgements (among others) and they sent me a survey about whether or not Covid (which actually to me means the present state of affairs) has changed reality forever. In my opinion the answer is yes. Reality feels different. There is a subtle hum of volatility and loss of cohesion in the background that didn’t exist before 2020. There is a radical shift in the narrative.

In times past the narrative oscillated around reality. It was like a metronome.

The center was reality and the narrative revolved around reality sometimes slightly correlated to the negative, sometimes to the positive, but always correlated to a relatively high degree. In times of crisis the correlation became very high. I think that correlation no longer exists.

Now what exists is alternate realities based on narrative alone. There is still a reality, you still need food etc but you can live entirely in a screen, work in a screen, see your people in a screen, and base your judgements entirely on what is presented by the screen and there is no longer much correlation between screen and reality. Reality and narrative have become uncorrelated or even counter correlated. To the extent the narrative is uncorrelated is the extent it becomes unreal and so who is going to win, reality or unreality?

That’s what is different now and why things will never be the same. We now live in a time where we have become unhinged, literally and I see little reason for people to become hinged once again.

Money in the future will be made by exploiting “unhingedness” If the narrative is a complete lie then the narrative will necessarily be crafted to separate you from your money, and that’s how you get to the bottom of the Dead Sea. That’s how you get captured by a gravity well.

We see vendors for THC based hallucinogens. It’s a big industry. In Canada they are expanding to other hallucinogens under the guise of “religion”. I recently met someone who was undergoing a series of ketamine “therapies”. Her particular series cost $11.000. In their nature these things are dissociative to the personalities of the users. Is it a measure of depravity that we have turned personality dissociation into a business under the guise of medicine and religion? I’m not speaking from a moral perspective but at what point does “freedom” become “slavery”? I expect at that point the future no longer a linear progression of the past.

I use a vendor that carves up risk into 4 quadrants based on economic growth and inflation

1. QUAD 1 = Growth Accelerating; Inflation Slowing
2. QUAD 2 = Growth Accelerating; Inflation Accelerating
3. QUAD 3 = Growth Slowing; Inflation Accelerating
4. QUAD 4 = Growth Slowing; Inflation Slowing

1 and 2 are when long portfolios make money

3 and 4 are when short portfolios make money

We are in Quad 3 also known as stagflation. The probability of Quad 4 is rising. Quad 4 is what happened in March. It is called deflation. Today the NAS is down 200 pts and the NASVOL (VXN) is up 2.5% to 37.

I woke up this morning and the Q’s were down 100 points. I sold out. The Q’s volatility (VXN) was 39.32 up +36% over 4 weeks and up +69% for 52 weeks. Apple Vix is 64 up 55% in a month and 92% in 52 weeks. The Q’s are down 5% and Apple is down 6%. Apple represents an overweight part of the QQQ and the XLK (I also sold my XLK), This is an avalanche. I should have sold yesterday but I lost 1% not 5%. It’s only noon we’ll see what 4 pm brings. Overall I made 7% in a couple months on the trade and missed that turning into a 1% profit headed into the red. I now have my 7% available to compound (maybe even in QQQ once again when it quits falling). Buy LOW Sell HIGH, compound the cash get off the mountain the instant the avalanche is happening.

Gold is down 1.1%. GVZ (gold volatility) is 23 down -.04% for 30 days. This is not an avalanche. This is a buying opportunity.

Here is an interesting video on avalanche. The price represents the snow mass tumbling down the hill. The avalanche is caused by built up potential energy under the surface, being released all at once into kinetic energy as price action.

I own BTC and actually it’s done quite well since March up over 379%. I didn’t buy at the low but I’m up 285% on my latest purchase of BTC and 400% on ETH. Most people will respond that BTC is sooo risky and it does have risk, but this isn’t an article on BTC, it’s an article on framing the risk of passive investing.

I’ve written a lot about this. I don’t think most people really get the danger they are in or actively choose to ignore the risk. When we look at how the stock market has behaved since the March crash, stocks have virtually erased the losses. The QQQ is up 25% and the SPY is up 5% YTD but the economy is still in recession barely up from depression. Unemployment is still out of control and businesses are going bankrupt all over the place. The dollar has switched from strong dollar to weak dollar ushering in real inflation, so economically we are in a period of stagflation, the scourge of the 1970’s. If we’re in stagflation (there is no if about it) how can the market be up for the year?

This video by George Gammon tells the tale. The difference between “then” and “now” is passive indexing. Vanguard was a tiny little fund created in the late 70’s. Today Vanguard, State Street and Black Rock own half of the market. That’s what’s changed and why there is a disconnect between the video game we call the market and the true economic reality.

This article speaks for itself. We’re all freaked about the number of deaths. The dead will remain dead. Re-frame the argument on the obvious ongoing morbidity and the real crisis comes into focus.

I’ve been trading a portfolio of about 29% of my assets while waiting for the election to shake out and the future to declare itself. The other 71% is sitting in interest bearing cash accounts.

My allocations

Cash 71%

Bonds 10%

International socks 0.1%

US stocks 4.3%

Alternatives 14.6%

My efficient frontier calc is 4.1% return and 3.4% risk My actual return YTD is 6.5%. My biggest winner is BTC and Etherium, my second biggest is GLD and my third is QQQ. Other significant proportions include commodities and TIPS as a % of their respective categories. My fee structure 0.25%

I’m trading a quantitative 4 quadrant system that has me long sector funds based on rate of change of inflation and economic acceleration/deceleration. I could go long/short but Roth and TIRA won’t allow shorting except by trading long/short ETF pairs like QQQ/PSQ or GLD/DGZ. I’m not day trading but trend trading a proprietary risk range, so when the price of an asset hits the bottom of the range I buy when it hits the top I sell and either go short or wait for the bottom to buy again. This causes intra-period compounding when trading in and out of a range. In other words if I buy $100 worth and sell at $105. When the price hits the bottom of the range $105 gets invested. If it goes then to 111 that gets invested at the next low end of the range etc. The cycles happen when they happen but they do happen several times a year and so compounding happens several times a year. The system has a quantitative directional test which tells you when a trend switches from bullish to bearish in the short medium and long term so if all hell is going to break loose it tells you to get out. If you’re out and miss a tiny bit of upside, who cares. The point is to not get squished by big downside which takes forever for recovery.

It is not set and forget. It requires daily and sometimes intra-day monitoring. If you can go short in your accounts you make money on the way up and then make money on the way down. If not you make money on the way up and go flat before the way down preserving your capital.

I don’t know what real inflation is today. It’s clearly accelerating based on commodity prices but I’ve made about double my nut/mo YTD, with only 30% of my money at risk, in the craziest year in my investing lifetime, with a net asset risk of 3.4%. Good enough for me. As a 68 yo man the land of Lucy In the Sky With Diamonds, I’m happy enough with base hits. I don’t quite know how to analyze tangerine trees and marmalade skies, except I’m clear we are not in Kansas anymore despite what Larry Kudlow or CNBC says.

As things stabilize with this virus and economic disruption over the next 4 years +-, I’ll be plowing more cash into risk assets always buying low and selling high, compounding that investment while avoiding the killer draw down. As investments permit I will diversify some internationally, and across currencies because given the multi trillion money pump in the US, it’s no longer safe to be 100% tied to US or the devaluing US dollar.

Next Jan. my wife and I start SS. She will be 62 and will file for 800/mo and I will file spousal for 400/mo. When I hit 70 our combined SS will jump to 4500/mo inflation adjusted, till she hits 66 and 10 mos, at which point it will be 5500/mo inflation adjusted. I call this the SS dosey-doe, and will maximize SS payout for my wife and I throughout. Since SS is presently tax advantaged and inflation adjusted maximizing the payout is desirable when it comes to portfolio asset mix.

I still continue with Roth conversions. It was a better deal for survivors when conversion ended at 70, but I’ll take advantage of the age 72 law as it exists. We’ll see what the Dem’s are going to do about tax law and debt monetization after Bernie Sanders is sworn in as Treasury secretary. Sturgis is this weekend. 250K people are partying and not a mask in sight. It will be interesting to see the spikes in late August. Wonder if they will make book on this event on BarStool Sports?

It’s good to know what you’re up against. In 1996 Blue went up against Kasparov. Kasparov swept but Blue won one game. Blue won the first game, but Kasparov learned. !n 1997 the rematch Blue had been learning too. Blue won in the 6th game in 19 moves. Blue had 256 processors and considered 200 million positions per second, analyzed the probabilities and settled on most probable and contingencies. The papers estimate Kasparov had the power to adequately analyze 2 deep probabilities.

Kasparov described the computer in game 2 as “playing like a god for one moment” and he seemed to be spiritually as well as intellectually defeated. After game 5 he felt the match was already over. He said “I am a human being, when I see something well beyond my understanding, I am afraid.”

Chess is ranked on a ELO scale. 100 = a 64% probability of winning. 200 = 75.8%, 300 = 85.3%. Kasparov was ranked at 2851 and the current human, Carlsen is ranked at 2882 a 31 point improvement in 23 years. The current leading chess computer is ranked at 3496, 614 points better than Carlsen.

Wall street is geared to make money. Casino’s are geared to make money. Casino’s choose games that are, over a population of players are guaranteed to pay them for their trouble. Wall street is no different. Financial television is no different. If you think you’re going to kick big Blue’s ass (or the current reigning chess computer called STOCKFISH) with a simple little diddy of save half, invest in low cost mutual funds, have a nice life, you will be fish food. Interesting that chess computers compete amongst themselves and interesting a chess computer is named STOCKFISH.

You think we are in a V recovery? The above map is how much world countries have indebted themselves in response to COVID. First is the tiny little country of Singapore. Second is the really huge country of the United States. The US was running a debt to GDP of about 105% just marginally over the point where increasing debt has a multiplier on economic output. Now we’re talking 130% well inot the territory where increased spending causes a decrease in economic activity.

What’s all that debt buying us? Zombie companies. Companies that should go out of business remain in business through bailout, which increases debt, which increases economic drag.

In the mean time something like 25% of the trading volume (aka increased volume and volatility) today is from new retail accounts opened by people plowing their $600/wk government check into speculation, like Hertz. What the hell may as well invest in a real zombie.

My BTC and GLD is kicking butt!! Wait a minute, the DXY is down. GLD and DXY have about a -.97% inverse correlation meaning my GLD is effectively shorting the DXY so gold hasn’t so much increased in value as the DXY has decreased. A decreasing DXY = inflation somewhere in our reality. In my case it’s in GLD and BTC and meat. But the Q’s Mr Natural what about the Q’s?? Every day in every way they get better and better, until they don’t. Why do you think the US is darkest of blue in the above map yet the QQQ’s have high returns? With a 50+M unemployment and bank profits down 38% it certainly isn’t because of economic activity. Seems like Q’s might be up because of video game activity from 25M new retail accounts.

Be very clear you are playing against STOCKFISH and STOCKFISH is made of silicon. STOCKFISH like the virus has no arms and no legs. The virus has one goal, to reach maximum entropy in the environment. A computer algo like a stock market version of STOCKFISH has but one goal, to separate you from your money. What was it old Kasparov said? “It was like playing a god for one moment.” He came into that tournament expecting to win.

My favorite saying: you either live in the truth or the volatility will painfully take you there.

I spend my days studying the market, studying the economy, studying the virus, and being present to those whom I love. I’ve lost complete interest in politics. Politics is nothing about reality and it’s all about dueling narratives, none of which have any relationship to reality. Since there is no viable information in the narratives, it’s a waste of time at least and mind clouding beyond that to engage the narrative.

I came across an idea for the virus which actually would work. The bodies response to the virus is nothing like measles. In measles the body creates antibody immunity for life. COVID if it creates antibody immunity at all creates antibodies which wash out in a time frame measured months, not lifetimes. A vaccine to the immune system is merely a competing infection in terms of how the body responds and if the response is not long lasting the vaccine is not protective.

It looks like T cell immunity is the real arm of the immunologic system that successfully combats the virus. That would go along with why old people and compromised people tend to succumb. Over age 30 T cell immunity declines. So that’s the dilemma. B cell immunity is only partially effective for a short time, and T cell immunity is declining due to the biology of the human condition, and yet the virus is nothing if not relentless, because it’s driven by the Gibbs free energy equation, which is a state function. State functions only care about the beginning and ending states. The beginning state of ice melting is solid water. The end state is liquid water. The process of melting is agnostic to the path from solid to liquid. If the conditions for melting exist, melting will occur until melting is completed and the second state, the state of liquidity is achieved.

The virus, not impeded by a competing vaccination, will simply progress until it’s fractal is fully embedded into humanity. We have been focusing on “testing”. PCR testing is what we have focused on. It’s a poor test. It’s sensitive but takes way too long for a result. It’s like having really slow radar. The reflected signal finally reaches you 1 week after the plane crashed and that beep cost you $200. There is a concept in fighter jet dog fighting called the OODA loop attributed to Col John Boyd. OODA stands for Orient, Observe, Decide, Act. When you are in a dog fight you are strictly limited by the physics of your plane, compared to the physics of your opponents plane. If your plane has crappy physics you’re dead no matter how good a pilot you are. If your opponent’s plane has crappy physics, he’s dead. So it’s the physics of the plane and the ability of the pilot to use the physics of his plane to Orient, Observe, Decide and Act before your opponent OODA’s on you. PCA is not on the map when it comes to observing deciding and acting, so why bother? $200 and a sense of “doing something” no matter how ineffective is why.

The next is antibody tests. Antibody tests tell you that you had the virus and your body responded or maybe not, since antibody immunity seems a weak response to infection. Also expensive to perform the amount of information contained is pretty close to zero when it comes to OODA loop decisions.

The third test is a cheap $1 antigen test. It is a test that is printed on a piece of paper and is developed much like a pregnancy test. A little spit, wait 10 minutes, get a result. 10 minutes puts you inside the OODA loop, capable of making a real time decision. The decision is if positive self quarantine, if negative proceed with your life. The test is not as sensitive as PCA but it’s data point exists inside OODA. COVID it turns out is not extremely deadly. It is MORE deadly than flu but not as deadly as MERS or Ebola for example. It’s feature is it’s extremely infective. So you can get shot with a single .44 magnum, extremely deadly or you can get shot by a .22 caliber machine gun also extremely deadly. The machine gun just takes more bullets to do the trick of a single .44. By self quarantining you put the machine gun out of business, and by self quarantining you allow society to continue. Yes you have the disease, but once infected you have the disease 100% regardless.

The antigen test though not as sensitive may be sensitive enough to make a difference in the course of the illness. If PCA can detect a 10K viral load one week ago, the antigen may detect a 100K viral load in ten minutes. The time to go from 10K to 100K may be 5 hours so an antiviral treatment can be initiated very early in the course of the disease before the systemic damage s done. I’ve studied hydroxychloraquine and zinc for example and jf given early is does have a significant effect on survival. Late treatment is not effective, so once again acting within the OODA loop is significant to the outcome.

Antigen testing could as well allow a safer school experience. Testing can be performed daily and a judgement made on suitability for attendance. If attendance is denied the child would then be identified and treated according to best practice.

Would it be expensive? Why yes. 50.1M unemployed is quite expensive. Would it require buy-in from the citizens? Why yes, we would have to start acting as a county again instead of like a bunch of 5 year olds. Eventually the driving force will be satisfied and state 2, herd immunity, will be achieved with a minimum of damage. Oh by the way social distancing doesn’t work very well as a solution. It’s just the illusion of a solution. Hong Kong perhaps the most aggressive social distancer of them all now has out of control viral growth and people are exiting the country in droves.

Did you hear the latest? United posted a 1.6B loss. Stick that in your QQQ Robinhoodie V shaped recovery pipe and smoke it. Better yet think about OODA loops with respect to narratives. OODA matters in portfolios as well.

Mixing is a well known concept in physical chemistry. If you mix 2 ideal gases, what is the driving force that causes gases to mix, and what causes the mixing to become uniform? Ideal gases don’t react so there is no energy transfer due to chemical change in the constituents. So what is the driving force? The answer is entropy or something called the Gibbs free energy of mixing, in a formula dG = dH – TdS. dG is change in free energy, dH is change in enthalpy, T is temp and dS is change in entropy. In an ideal gas, dH=0 and T is constant, so the formula simplifies to dG = -TdS If dG is negative the mixing occurs spontaneously and it will mix until ALL of the molecules are thoroughly mixed. Once thoroughly mixed the potential to mix (dS) reaches zero, that is when entropy reaches it’s maximum and no further mixing will occur. There are plenty of youtube videos and wiki like sites to more fully describe this process.

The reason I bring this up is this is what drives the virus? Humans are like one ideal gas. Virus is like another ideal gas. The planet is the reaction vessel. The virus mixes by embedding itself into humanity in a manner that is a similar (but not the same) set to 2 ideal gases mixing. As the infection progresses the virus attains a bigger mole fraction further increasing the drive to entropy this would be like H in the above equation becoming a negative value and since H can be a function of time dH/dt as long as it stays negative it can grow exponentially. Thinking about this relationship we have to conclude there is not going to be any Hammer and Dance solution to the virus. The mixing will occur until the Gibbs free energy of mixing goes from negative to zero. If dG goes negative again mixing will again occur. That is precisely what we are seeing. When locked down dG effectively went to zero (Rt < 1). The lock down was cancelled Rt > 0 and means dG once again goes negative and mixing progresses. A vaccine since it interrupts the virus’s ability to mix effectively forces dG=<0 interrupting mixing.

So now you have a mathematical model upon which to base your judgments. If different states have different Rt’s it merely means they are at different places on the mixing surface. It does not mean they are handling things in a superior way, since the driving force is entropy. NY once had a Rt in the 0.8 range, today 1.05. This means dG has gone from zero back to negative and infection will continue until entropy is satisfied.

In anesthesia we measured drug effect in half lives. The curve to equilibrium was asymptotic and it took about 5 half lives to reach 90% of equilibrium (when entropy is satisfied). if we just divide the population into 1/5 ths and use that number as a half life, it means 1.4B people per half life. Herd immunity is about 80% of the population therefore 5.6B people is herd immunity. We are at about 12M worldwide infections.

A vaccine is not a cure. A vaccine is merely a substitute or competing infection. The virus or it’s competing substitute will continue until entropy is satisfied to a level of 80% herd immunity. Never in the history of humanity has a vaccine been created in a couple months so banking on that is like banking on the lotto. As old people die off, young people will take over. Much knowledge and critical productivity is contained in old people that is not contained in young people so a society of young people will be left to reinvent the wheel and reinventing the wheel kills productivity. Dead productivity = a dead market, so be careful when you glibly chop off the geezers. In addition if it’s geezers who are dying what about people who survive? There is significant morbidity associated with this disease. If you infarct 50% of your LV it stays infarcted and you become a cardiac cripple. Knock off 70% of your kidney function by micro infarcts and you’re on dialysis 3 days a week. There is a condition called pump brain where protracted bypass causes cognitive decline post bypass. It’s a soft sign kind of decline but something like this brain fog seems to be happening. Children seem to be showing neurological changes on brain scans. In Hong Kong I read a report that 25% of post infection survivers had long term lung problems and SOB. Do a quick thumbnail on the increased medical cost and lost productivity of this morbidity. Seems to me dying is the least of your problems if you get sick.

If nothing else Covid dumps a load of unmeasured volatility into the system likely long term. If you get the volatility wrong you are more likely to get the truth wrong. That’ll mean you’re long when you should have been short. The next time your Governor is up quacking about Covid and what a swell job he/she is doing you can think back to the Gibbs free energy of mixing and see if they really have a clue. My presentation is about similar sets not about perfect correlation. Certainly there are particular aspects of infection that deviate the model from ideal gases, but the model points you in the right direction. If you have N, S, E, W, to choose from and the model suggests N, go N.

I ran across this video. If you think this recovers like the flu think again.