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.


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.


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.


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.

More Video

This morning I was cruising youtube looking for virus update and ran across George. I like George. He has a POV similar to mine but not identical. Right now he’s expat living in Columbia. He calls COVID-19 the “cerveza sickness” because youtube demonetizes any channel that mentions corona or covid. Pretty funny since the whole narrative is pretty much about being drunk with greed and schemes. I also like Jeff Snider who George references several times.

His conclusion as to whether this is a 2008 event or a 2018 kind of event is in my opinion correct. Everyone says you can’t time the market but when you hear the whistle and see that big headlight bearing down on you something is up. Could be the train isn’t on our track. Could be the train will pass by on the next track over. Our mouse trap is set. Every asset class is high (except commodities). The planet is deflating no matter what central banks “think”. They are no longer the dog, they are “butt” the tail. In a deflating planet holding debt means the cost of ownership gets worse. You have to pay down the debt in more expensive dollars or go out of business. I totally agree our fate will be determined by our ability to deal with a simple strand of RNA that affixes itself to the ACE receptor and gains intimate entry into the machinery of life itself. There is no greater drama. No Bernie Sanders or Donald Trump, plastic boy Buttigieg, alzin’ Joe or the blow dried boobs at CNN trying to control your mind. This is the real deal and from what I’ve seen so far nobody’s got a clue. It’s like we’re all living on acid.

With the VIX at 45 I wouldn’t be buying anything or selling anything. Pretty much that train left the station a week ago Friday. I talked to my AUM Sunday and he talked me off the ledge, but it was my realizing the train had already left the station 2 days before, while we were talking that sealed my fate. Once you’ve already jumped out of the perfectly good airplane there is nothing left to do but descend. You can’t finance your lie on a 24% credit card forever. No that’s not a typo for life, it’s another name for narrative. Pop some popcorn boys and girls. Maybe revisit some old MMM or WCI articles about simple math or some bullshit. In the meantime it’s 51 degrees, bright and sunny, I got me a Latte, a freezer full of food and a wife that loves me. Life is good.

It's Not What You Don't Know

That will hurt you. It’s what you know for sure, that just ain’t so, that will kill you dead.

I’ve been studying COVID-19 as best I can. It’s now in 60 countries and is now in Lagos in Nigeria, and in Brazil. We are being flooded with happy talk by the government and no honest brokers of real risk.

Today I completed my deep pantry. I bought a chest freezer and filled it with sirloin fish burgers hot dogs and chicken. I also bought some MRE from WISE Foods, the freeze dried meat, which includes rice. We also have some protein powder etc so we should be able to feed our family and a few more for the duration. It was well under 2K to prepare and we won’t have to go shopping for 6 months one way or the other since this is all stuff we would eat anyway. My goal was some food that is shelf stable, WISE and protein powder, and some food like burgers and steak that we usually eat that could be frozen. I wanted to lay in a supply that was packaged before the virus became an issue. I have a well and we also have bottled so we will see what transpires.

Unfortunately you can’t believe what the media is spreading as facts at all. Virus’s work like machines, are predictable and this virus is ruthless in its infectivity and deadliness. Apparently the RNA is stable so there won’t be much mutation. There is a vaccine test going on using a new technique that injects modified RNA instead of protein and uses the body’s cells to make the protein antigen and antibodies, kind of a DIY approach. I think the idea China is on the downhill slope is laughable. US is not seeing cases because they are not testing for cases which means cases are multiplying undetected. It is unclear if there will be a summer pause but when it’s summer here it’s winter there so there will be continued spread.

Not much else to do except follow along and isolate for the next 6 months or so. How bout that market crash! Pretty impressive. I think we are not done with that yet, but the market did close down only 25 pts compared to the usual 100 to 135, so guess we will see. I was actually a bit surprised the market would recover some going into a weekend. I’m also surprised I haven’t heard as much as a peep out of the other bloggers regarding their portfolio performance. For sure everything coalesced into a strong negative correlation, even gold showed some downward push, but far far less than equities making it a means to preserve wealth. Bonds rallied. I’ll have to spend some time looking more closely to the market action.

Great Podcast

I’m a big fan of Mike Green. The guy flat out understands finance in a quantitative way. He has many videos on youtube but I ran across a part 1 and 2 series that is particularly insightful regarding how markets today are different than markets of yesteryear. If you have a spare couple hours I recommend

I added this as well. This video describes in a more elegant way what my concern is regarding passive investing as it becomes a bigger and bigger fraction of the market. Instead of using risk for the price discovery of when an asset becomes liquid, the market is just a binary switch. The binary is buy at any price, sell at any price. It works as long as buying and selling is slow and small but if the volume becomes massive the price drops exponentially fast and then the order is filled at any price.

This is the scariest video I’ve ever seen. If you can watch only one watch this one. I think COVID-19 is that event that turns off corporate buyback and will promote price collapse.

Rapidly Changing Odds

In 1982 I was in my second year of med school. It was Labor Day weekend and I was headed up to Chicago from Campaign IL after seeing my GF. I had a micro test on Tue so I needed some study time. I had a fully loaded gas tank. It was a bright sunny early fall kind of day about 1 in the afternoon. As I topped a ridge of some newly plowed farm land 10 miles out of town I was greeted with something like this:

Notice how discrete the boundary is. I was much closer to the boundary than this photo running about 75mph northbound on I-57. I had about 2 seconds to decide what to do as I entered the cloud of unknowing. If I stop I’ll be a sitting duck to get hit by the next car in. If I drive on, I’ll likely hit the last car in. As I drove on I was next greeted by something like this:

Literally that fast I had no choices. I plowed into the car in front of me since that was the least likely chance of killing someone. I remember clearly the slo-mo fold up of my front end. The hood buckled giving me a view of my engine and I watched the radiator slowly smash into the rotating fan on the front of the engine. I could see the individual blades spinning as the two impacted but the engine was still turning at 1000 rpm.. I don’t know how that slo-mo thing works but it’s real.

Once stopped I immediately got out of the car and headed to the median. 5 seconds later another car plowed into the mess, into the back of my car with the fully loaded gas tank, and the car exploded. I watched that in slo-mo also but not quite as slow mo as the original crackup. My micro books and notes burned to a crisp as did my clothes.

My GF picked me up and I went to the ER as I had some leg injury and made sure I was a “non admit” decision. Next I needed a ride to Chicago so I got a newspaper and found a Ford Pinto for $500 changed my insurance and drove to the city. I did fine on the test. Drove the Pinto for a year then bought a Honda. I lost that GF (thank God) somehow managed to get my MD and left my crashed Mustang in the rear view mirror to rot in some bone yard. Life is always forward moving and the past is but a mirage, not a reality. Risk is the thing we use to discover reality, so risk is necessary.

I’ve been thinking about risk lately and I think it comes in several flavors. There is market risk, the risk necessary to determine at what price an asset goes from il-liquid to liquid. If you buy a house at 300K and sell it at 200K, 200K is when the asset became liquid and the 100K you lost is the cost of discovering reality.

There is narrative risk. FIRE is almost entirely based on narrative risk. The entire enterprise is based on a daydream. The financial industry is based on narrative risk. It’s based on products designed to get you to part with your money and invest in their reality. Vanguard is such an entity. They hawk products in a way that price discovery is lost. The rules they proclaim are false. They pretend they are not buyers and sellers when in fact they are huge buyers and sellers. The products they buy and sell are not equities but equity derivatives which behave entirely in a different way from equities because they have a different risk profile. The point of buying an index is to diversify risk and in diversifying risk you loose the focus risk provides, the same as I lost my focus when I drove into that dust storm. If you live by beta you’ll die by beta. If the story is not accurate basing your life on the story contains unknown risk.

Another aspect of narrative risk is believing the wrong narrative. “The market always goes up” is such a narrative. It is predicated on a historical narrative view. What’s the evidence the market of today is anything like the market of 40 years ago? The market is all mutual funds these days with their excessive beta exposure and high internal correlation. Index funds become their own entity as they grow larger and larger and as such contain their own risks. I listened to a podcast yesterday that said the change in risk due to passive investing is like the change in risk between a 100 year flood and a 15 year flood.

If you look at the Gaussian curve a 100 year flood is way out in the tail. A 15 year flood is probably closer to 1 SD in terms of likelihood of occurrence. Stick that in your backward looking analyzer and smoke it. The market is also now dominated by machine algorithms with do loops 83,000 times faster than a human do loop. Charlie Munger says of the efficient frontier:

“In your lifetime, the idea of the efficient frontier will go the way of the dodo bird.”

When the risk become jiggered by manipulation price discovery becomes impossible and no one jiggers risk like the FED or Vanguard or machines. That will work all the way, till it doesn’t.

What of the inevitable risk? I was watching a youtube simulation of an earth extincting event like when the dinosaur disappeared.

This is a bit how I view COVID-19. I only have one lifetime and probably less than 15 years left in that lifetime. Not sure how much fun it’s going to be spending 15 years or a significant portion of my 15 years in the aftermath.

It’s definitely a 3 body problem

Market risk

Narrative risk

Inevitable risk

FIRE typically tries to solve with one risk dimensionality “4% x 25”

I try to solve risk in 2 dimensions called the efficient frontier

what happens when there are 3 risks and 3 dimensions?

Time for a cup of coffee while I ponder the truth the risks reveal.

Interesting Suggestion

One of my readers asked whether if I would invest in a Ray Dalio or GB portfolio as a 22 yo if I knew then what I know now. My answer is yes but you would need a clear understanding of what your goal is.

First run an accumulation simulation. If you run a 35 year career and save 45K/yr in a Dalio portfolio your range of expected returns are:

So you save 45K/yr from 25 to 60 (35 years) and have this range of likely outcomes inflation adjusted. Lets say you will retire at age 60 on an inflation adjusted 45K/yr retirement you would need to take out 108K/yr. (The 1985 dollar = 2.4 2020 dollars based on CPI for 35 years)

Next run the simulations for various market conditions (good to bad accumulations) I’ll run a 10% worse case simulation using a 35 year retirement and 108K WR

This means over the course of 70 years you made a net of 8.87M by saving 45K/yr for 35 years (in the 10% worse case market return), and then living on 108K/yr inflation adjusted for 35 years (in the 10% worse case market return). If during the course of the accumulation you don’t just max out your pretax, but take into account the last half tax consequence while saving you would have an even more robust retirement.

A $45K yearly savings at a 20% savings rate assumes a $225K/yr income. That’s likely optimistic so you would have to adjust and graduate your savings rate but none the less the point is a risk adjusted portfolio can generate a ton of money. The cost is during up years you don’t kill, but during down years you don’t get killed. The market dropped 7% over 3 days. My portfolio dropped about 2.6%. That means to get back to zero the market needs to make 14% while I only need make 5.2%.

We will only prosper if we relentlessly search for nothing but the truth, otherwise the truth will find us through volatility”

I prefer my truth to appear in the least violent way possible.