All truth goes through three stages. First, it is ridiculous. Second, it is strongly opposed. Third, it is considered self-evident. -Arthur Schopenhauer
If you have been following my series of articles this year, and received my weekly risk signal in the “Lead and Lag Report”, then you know that I am the furthest away from the permanent bull market. All I did was to determine the conditions of what might happen. In this investment business, we are asked to make predictions, but the reality is that no one knows the future. The only thing I can tell you is the weather. I can tell you how the accident happened and help you determine the likelihood of an accident.
At the end of January, I reminded people that the situation began to favor the risk aversion period of the stock market, which favored Treasury bonds and low-volatility stocks, such as utilities, consumer staples, and healthcare. why? Because this is what cross-market signals with predictive power are talking about. My idea that the market will work like this is almost zero. I don’t know that we will collapse then. It wasn’t until around February 27th, when I wrote an article titled “We may be in a crash, and this is the reason” that I started to come up with the idea that this is not just a regular correction.
Then, I appeared on various media occasions, and started arguing in articles in my book “Looking for Alpha” and on my Twitter feed that we were prepared for a stock crash at the end of March. Say it again-my focus is on the word “setup” because everything I do is about conditions that are conducive to the move. The market bottomed for a short period of time and there was a crash/face-to-face rebound during the time I thought it would happen. Now everyone is thinking about whether we want to retest the lows, or whether the COVID-19 virus will put V on the market.
I have been arguing why one of the key arguments for the collapse at the end of March actually revolves around policy reactions and context. Many people argue that since the stock market is still crashing, we should fall 50% from the high point, which is similar to previous bear markets, recessions and crashes. I very bluntly believe that this is basically a call for the end of the world, and you cannot bet this way. Yes-historically, our declines in the stock market have been worse, but interest rates have never been lower than they are now, global leverage and corporate debt have never been higher than they are now, and we have never overly relied on the stock market for wealth. In short, policymakers have no choice but to actively respond to the resetting of capitalism and must find a way to manipulate the rise in risky assets.
Therefore, we now have huge global monetary and fiscal stimulus measures (I’m sure there will be more stimulus measures). The problem is that I think the initial reaction and collapse of the stock market was, as I wrote in the controversial article “All Overreacting Mothers.” why? Because this is never the end of the world. People are hyping the coronavirus, thinking it’s like a Hollywood story. If you don’t believe me, check out the popular movies and TV series on Netflix in the past few weeks. Pandemics, outbreaks, walking dead, etc. The hysteria caused the toilet paper to be sold out a few weeks ago. The public hysteria is positive because it may flatten the infection rate curve faster than predicted by the model. At the same time, policymakers lag behind hysteria in using their own hysteria.
Unemployed, who can blame them? From all indicators, economically, we may be in recession or even depression.
So, this is my idea. Yes-I have been talking about some interesting short-term things specifically for active traders and investors in “The Lead-Lag Report”, but from a long-term perspective, the coronavirus may indeed cause a large number of coronaviruses. Inflation bubble. If I am right, policymakers will now take further excessive actions by basically writing blank checks to save the system from further economic collapse, and we know that they will not withdraw the stimulus in the near future.
The Fed is doing something they did not even consider doing in the depths of the 2008 financial crisis. The government is considering overnight direct deposits in people’s checking accounts. All of this is to make asset prices not only reflect the economic recession, but also cause economic depression. So yes-we may see a serious bubble emerging from the COVID-19 crisis, although I continue to follow the quantitative and objective risk on/off signal in the “Long Lead and Lag Report”, I will keep this situation It’s going backwards because I think the situation is getting better.
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Disclosure: I/we did not mention any stock positions, nor do I plan to initiate any positions within the next 72 hours. I wrote this article myself and expressed my opinion. I have not received any compensation (except for seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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