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Stumbled across this earlier from Ray Dalio and he some interesting comments

https://www.linkedin.com/pulse/my-thoughts-coronavirus-ray-dalio/

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My Thoughts About the Coronavirus

Published on March 3, 2020

Ray Dalio Influencer

Co-Chief Investment Officer & Co-Chairman of Bridgewater Associates, L.P.

118 articles Follow

I will repeat my overarching perspective, which is that I don’t like to take bets on things that I don’t feel I have a big edge on, I don’t like to make any one bet really big, and I’d rather seek how to neutralize myself against big unknowns than how to bet on them. That applies to the coronavirus.  Still, there’s no getting around having to figure out what this situation is likely to mean and how we should deal with it, so here are my thoughts for you to take or leave. In reading them please realize that I’m a “dumb shit” when it comes to viruses, though I do get to triangulate with some of the world’s best experts. So, for the little that they’re worth, here are my thoughts. 

Three Perspectives

As I see it there are three different things going on that are related yet are very different and shouldn’t be confused: 1) the virus, 2) the economic impact of reactions to the virus, and 3) the market action.  They all will be affected by highly emotional reactions. Individually and together they lend themselves to a giant whipsaw with big mispricings, with the off chance that it will trigger the downturn that I have been worried would happen with both the big wealth/political gap and the end of the big debt cycle (when debts are high and central banks are impotent in trying to stimulate).

1) The Virus

The virus itself will almost certainly a) come and go and b) have a big emotional impact, which will most likely produce a big whipsaw. It will most likely lead to an uncontained global health crisis that could have high human and economic costs, though how it is handled and what the consequences will be will vary a lot by location (which will also affect how their markets behave). Containing the virus (i.e., minimizing its spreading) will occur best where there are 1) capable leaders who are able to make executive decisions well and quickly, 2) a population that follows orders, 3) a capable bureaucracy to enforce and administer the plans, and 4) a capable health system to identify and treat the virus well and quickly. It will require the leaders to turn on “social distancing” quickly and effectively ahead of the virus accelerating and to withdraw it quickly as it declines.  I believe that China will excel at this, major developed economies will be less good but OK, and those who are weaker than them in these respects will be dangerously worse. For this reason, I am told that it’s likely that it will s pread fast in these other countries and roughly in proportion to those four factors I just mentioned, and likely as a function of the weather (e.g., the hot weather in the Southern Hemisphere is thought to be an inhibitor). Because it is spreading fast to many countries and the reported cases and deaths are likely to increase rapidly, the news is likely to rapidly increase panicky reactions. Also, in the US there will be much more testing happening over the next couple of weeks, which will dramatically increase the numbers of reported infected people, which will also probably lead to more severe reactions and greater social distancing controls.  I am told that the stresses on hospitals could become very large, which will make handling the cases of all patients more difficult. In short, I am told that we should expect much more serious problems ahead. 

2) The Economic Impact

Reactions to the virus (e.g., “social distancing”) will probably cause a big short-term economic decline followed by a rebound, which probably will not leave a big sustained economic impact. The fact of the matter is that history has shown that even big death tolls have been much bigger emotional affairs than sustained economic and market affairs. My look into the Spanish flu case, which I’m treating as our worst-case scenario, conveys this view; so do the other cases.

While I don’t think this will have a longer-term economic impact, I can’t say for sure that it won’t because, as you know, I believe that history has shown us that when a) there is a large wealth/political gap and there is a battle against populists of the left and populists of the right and b) there is an economic downturn, there are likely to be greater and more dysfunctional conflicts between the sides that undermine the effectiveness of decision making, and this is made worse when c) there are large debts and ineffective monetary policies and d) there are rising powers challenging the existing world powers.  The last time that happened was during the 1930s leading up to World War II, and the time before that was in the period leading up to World War I. Certainly, the wealth gap and political conflict leading to possible policy changes will be top of mind along with the coronavirus on this Super Tuesday. 

3) The Market Impact

The world is now leveraged long with a lot of cash still on the sidelines—i.e., most investors are long equities and other risky assets and the amount of leveraging that has taken place to support these positions has been large because low interest rates relative to expected returns on equities and the need to leverage up low returns to make them larger have led to this. The actions taken to curtail business activities will certainly cut revenues until the virus and business activity reverse which will lead to a rebound in revenue. That should (but won’t certainly) lead to V- or U-shaped financials for most companies.  However, during the drop, the market impact on leveraged companies in the most severely affected economies will probably be significant. We will show you what that looks like shortly. My guess is that the markets will probably not distinguish well between those which can and cannot withstand well the temporary shock and will focus more on their temporary hit to revenues than they should and underweight the credit impact—e.g., a company with plenty of cash and a big temporary economic hit will probably be exaggeratedly hit relative to one that is less economically hit but has a lot of short-term debt. 

Additionally, it seems to me that this is one of those once in 100 years catastrophic events that annihilates those who provide insurance against it and those who don’t take insurance to protect themselves against it because they treat it as the exposed bet that they can take because it virtually never happens.  These folks come in all sorts of forms, such as insurance companies who insured against the consequences that we are about to experience, those who sold deep-out-of-the-money options planning to earn the premiums and cover their exposures through dynamic hedging if and when the prices get near in the money, etc. The markets are being, and will continue to be, affected by these sorts of market players getting squeezed and forced to make market moves because of cash-flow issues rather than because of thoughtful fundamental analysis.  We are seeing this in very unusual and fundamentally unwarranted market action. Also, what’s interesting is how attractive some companies with good cash yields have become, especially as many market players have been shaken out. 

As far as central bank policies are concerned, interest-rate cuts and increased liquidity won’t lead to any material pickup in buying and activity from people who don’t want to go out and buy, though they can goose risky asset prices a bit at the cost of bringing rates closer to hitting ground zero. That’s true in the US. In Europe and Japan, monetary policy is virtually out of gas so it’s difficult to imagine how pure monetary policy will work. In Europe, it will be interesting to see if fiscal policy stimulations can pick up in this political environment.  Also, in all countries, don’t expect much more stimulation coming from rate cuts because most of the rate cuts have already happened via the declines in bond and note yields which is what equities and most other assets are priced off of. So, it seems to me that containing the economic damage requires coordinated monetary and fiscal policy targeted more at specific cases of debt/liquidity-constrained entities rather than more blanket cuts in rates and broad increases in liquidity.

The most important assets that you need to take good care of are you and your family. As with investing, I hope that you will imagine the worst-case scenario and protect yourself against it.  

 

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7 minutes ago, Anastasis said:

-350 now. 

Could be -500 or +1000 in the morning.

I love it. But still rooting for downside. 

So what's your strategy for a falling market?  

  • Shorting stocks??
  • Flush in cash??
  • Getting Real Estate with leverage??
  • Buying gold or commodities?
  • Praying??

 

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6 hours ago, 52-80 said:

Gonna make some reentries into DAL/UAL.  Coronas taking a big shine out of their price, to where P/E Looks really nice.

This is what intrigues me: opportunities in the travel and hospitality sectors.
 

I’m looking at the three major domestic carriers as well as Carnival. Marriott and Hilton may also be interesting if they drop a bit more. 
 

I’m also looking for compelling hospitality or travel ETFs. 

Edited by The People’s Elbow
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9 hours ago, Blotto said:

Stumbled across this earlier from Ray Dalio and he some interesting comments ...

I had commented earlier that I thought he might realize the paradigm shift he's written about previously earlier than expected because of the coronavirus impact on the global economy.  Looks like he has the same concern.

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6 minutes ago, XYZ said:

What the fuck is a payroll tax cut?

A cut in Social Security or Medicare taxes withheld from paychecks.

Basically a reduction in revenue for the feds that normally funds Social Security and Medicare.  Benefits are unlikely to be cut, so either the govt would take on more debt or the date at which these programs run out of funding would come in.

Edited by Texas Jeff
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Pondering some options that are 10% under SPY prices - $265 SPY 4-08 - puts are $6.62, and calls are $35.06. 
I'm thinking about both - beer virus isn't going away, and until it gets under control major industries will continue to put out warnings - travel related, hospitality. etc. If the NCAA were to move tournament games (or hold them in empty arenas) people will freak. This thing will continue to spread, new cases in additional states are being reported, they aren't going to stop in in the next few weeks....push back on my assumptions to show me the flaws in my thinking.


The puts could expire with little or no value, but the $35 up front on the calls is interesting as that doesn't get to a loss position unless SPY is over $300 in a month.

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42 minutes ago, Wally Fairway said:

push back on my assumptions to show me the flaws in my thinking.

 

Fed rate cut, again
Biden wins more primaries
Weather warms up, beer virus slows down
China gets 100% mfg capacity back up and running
 

never think that you have figured out the market, that is a fools folly
 

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A report from the retail front:

For about a week now, Big Retail has been ordering just a complete fuckload from Big Food.  Shoppers have also been buying up, which was a bit of a worry at first.  We're seeing sustained sales across all channels across the country.

However, here is the problem.  From what I can tell in the industry, the orders from the past week can be filled and anything through the next week maybe.  (That varies by company, though.)  At that point, Big Food will have already run out of its back stock and if the trends from the last week hold up, most companies will only be able to fill about 80-90% of the orders. (Normal number is over 97%.)  Manufacturing capacity and ingredient procurement just isn't there for a lot of these categories and no one was sitting on 2-3 months supply.  Normal number of most product is 2-3 weeks.

We've already seen this happen in the household cleaning categories.  (This includes hand sanitizes.)  There isn't any inventory out there and there won't be anytime soon.  Food won't be like that because of shorter production lead times but the longer this goes on, the more likely shortages are.

(This varies wildly by company and by item so keep that in mind.  I'm just giving a broad perspective of the overall industry.)  

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People can always dig into the three month supply of ramen or Cheerios they bought.  Plus, many aren’t stocking up on the short-term stuff (fruits, veggies, etc.) since that can be a pain in the ass to store.  
We should have a better idea in a few weeks, but then again you may see actual panic buying.   

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3 hours ago, Colonel Sanders said:

Wonder how much it would cost Disney if there are no sports for the next 6 months.  They seem really exposed with cruises, theme parks and movies no one will go to see.

On the movie front, they could do something digitally and get a lot of money back.    Throw Mulan on Disney+, charge $6 for 48 hours or something, and they don’t have to share that with anyone.   Just depends on their arrangements with the theater chains and places like Amazon.  
 

The Marvel movies running early this year (New Eternals and Black Widoe) weren’t going to be that huge.  But Mulan, Soul (Pixar), and Jungle Cruise are going to be a really rough stretch from March to July.  Jungle Cruise Is supposed to kick off a new franchise ala Pirates of the Caribbean.   

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41 minutes ago, atomheartbevo said:

People can always dig into the three month supply of ramen or Cheerios they bought.  Plus, many aren’t stocking up on the short-term stuff (fruits, veggies, etc.) since that can be a pain in the ass to store.  
We should have a better idea in a few weeks, but then again you may see actual panic buying.   

But they’re consuming what they bought.  They’re not going out to eat.  That means these aren’t stock up trips.  They’re changing their behavior.

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47 minutes ago, atomheartbevo said:

On the movie front, they could do something digitally and get a lot of money back.    Throw Mulan on Disney+, charge $6 for 48 hours or something, and they don’t have to share that with anyone.   Just depends on their arrangements with the theater chains and places like Amazon.  
 

The Marvel movies running early this year (New Eternals and Black Widoe) weren’t going to be that huge.  But Mulan, Soul (Pixar), and Jungle Cruise are going to be a really rough stretch from March to July.  Jungle Cruise Is supposed to kick off a new franchise ala Pirates of the Caribbean.   

I wouldn't bet against the MCU's 'other' hero movies at this point.  GotG came out of nowhere and is incredibly popular, and then there is Black Panther ad Captain Marvel breaking a billion dollars.  Considering Antman has become the low hurdle to clear, I'd bet they hit a home run on at least 1 out of the 2 movies.  

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48 minutes ago, Fudge Nuggets said:

The market is forward looking so the next three to six months are already getting baked in.

While I agree with that, the market can't really see what will happen tomorrow - so there's always that risk/opportunity proposition

Edited by Wally Fairway
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I keep reading how retirement fund experts are telling everyone to not panic and that they should leave their funds as-is, marathon not a sprint, can't time the market, etc. I would like for the same question to be turned on those experts. Have you personally made any substantial trades for any account, in the last 30 days?  not that you could ever prove it one way or the other, but I don't think they take their own advice. 

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5 minutes ago, Nice Guy Eddie said:

I keep reading how retirement fund experts are telling everyone to not panic and that they should leave their funds as-is, marathon not a sprint, can't time the market, etc. I would like for the same question to be turned on those experts. Have you personally made any substantial trades for any account, in the last 30 days?  not that you could ever prove it one way or the other, but I don't think they take their own advice. 

It really depends on and is a combination of a lot of factors. Some people play in the market everyday. Aversion to risk is different for everyone. When are you wanting to retire? What are you investing in, small cap, big cap, int'l, etc?

I'm nowhere near as versed as many of the folks on here. I majored in finance but do not play in the market other than making sure I diversified and spread my risk in my 401K. What I do know is that the market and fundamentals divorced a long ass time ago. With that said, it's in everyone's best long term in interest for the market to rise and continue to rise. Every now and then there is a correction of sorts, some more severe than others. And many times the market rises in spite of fundamentals.

So speaking as a someone who is on the sidelines, only caring about my 401k, and looking to retire in 12-13 years, I didn't change a damned thing. We survived 2002 and 2008. This is just another blip on the rise to infinity. I'll start moving to cash more in about 4-5 years but only because it's the prudent thing to protect for retirement. The market will rise another eleventy billion percent by then.

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4 minutes ago, crash_davis said:

 

So speaking as a someone who is on the sidelines, only caring about my 401k, and looking to retire in 12-13 years, I didn't change a damned thing. We survived 2002 and 2008. This is just another blip on the rise to infinity. I'll start moving to cash more in about 4-5 years but only because it's the prudent thing to protect for retirement. The market will rise another eleventy billion percent by then.

Same here.

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Fed funds rate cuts seem like they don't really work , so here's a Fed President with some new ideas:

https://www.reuters.com/article/us-usa-fed-rosengren-idUSKBN20T2N1

Spoiler

Fed needs wider QE mandate to deal with economic downturns: Rosengren

WASHINGTON (Reuters) - The Federal Reserve should be allowed to purchase a broader range of securities and assets if the coronavirus outbreak forces the U.S. central bank to launch a new round of big asset purchases to stimulate the economy, Boston Fed President Eric Rosengren said on Friday.

 

The central bank has begun to grapple with what measures it would use if the outbreak of the flu-like illness worsens in the United States and causes a severe economic downturn.

“We should allow the central bank to purchase a broader range of securities or assets,” Rosengren said in prepared remarks to the Shadow Open Market Committee economics conference in New York, noting it would require a change to the Fed’s mandate as set by Congress.

The Fed slashed its key overnight lending rate by half a percentage point on Tuesday to a target range of between 1.00% and 1.25% in an emergency move to mitigate the effects of the escalating global coronavirus outbreak on the U.S. economy. Investors are predicting further U.S. rate cuts in the near future.

Rosengren said such an approach would be necessary because if the Fed was forced to slash rates to effectively zero, the circumstances could have changed, which would limit the effectiveness of purchasing only Treasury and mortgage-backed securities, as the central bank did in the 2007-2009 recession. Those large-scale asset purchases are known as quantitative easing (QE), with the aim of stimulating the economy.

That change is the drop in the 10-year U.S. Treasury yield. It fell to a record low of 0.66% earlier on Friday, on pace for its largest daily fall since October 2011 during the depths of the euro zone sovereign debt crisis, amid concerns the coronavirus outbreak could cause a global recession.

“There would be little room for the Federal Reserve to lower rates through large purchases of long-term Treasury securities - like it did to make conditions more accommodative in and after the Great Recession - if a recession occurred in this rate environment,” Rosengren said.

If the Fed did change its policy, it should be accompanied by agreement from the U.S. Treasury to indemnify the central bank against losses, Rosengren added.

He did not specify what types of other securities or assets the Fed would buy.

Rosengren also said he remained skeptical about introducing negative interest rates to the United States. Other central banks including in Europe in Japan, have pushed rates below zero.

“In my view, negative interest rates poorly position an economy to recover from a downturn,” Rosengren said.

Reporting by Lindsay Dunsmuir; Editing by Paul Simao

 

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11 minutes ago, Rip76 said:

Same here.

I moved about 40% of my retirement accounts into low risk investments when the S&P 500 was just north of 3100. I'm cool with having that money on the sidelines at the moment. I think the bottom is going to drop out soon but I don't want to completely get out in case I'm wrong. This method allows me to reduce the downside somewhat.

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46 minutes ago, crash_davis said:

So speaking as a someone who is on the sidelines, only caring about my 401k, and looking to retire in 12-13 years, I didn't change a damned thing. We survived 2002 and 2008. This is just another blip on the rise to infinity. I'll start moving to cash more in about 4-5 years but only because it's the prudent thing to protect for retirement. The market will rise another eleventy billion percent by then.

Long term survival isn't really the point.  2002 wiped out 3 years of gain.  2008 wiped out out 5 years of gain.  Consider that at the low point in 2008, market was same level as 1997.

 

Of course, this is with absolute power of absolute hindsight.

 

But the point is this, instead of thinking of a move as chickening out of the market, think of it as locking in the tremendous recent gains the market gifted you.  Imagine if you reaped the tech bubble before it popped.

 

And unlike those 2 events, which had sudden and unanticipated triggers, this one seems to be playing out more in slow motion. 

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40 minutes ago, 52-80 said:

Long term survival isn't really the point.  2002 wiped out 3 years of gain.  2008 wiped out out 5 years of gain.  Consider that at the low point in 2008, market was same level as 1997.

 

Of course, this is with absolute power of absolute hindsight.

 

But the point is this, instead of thinking of a move as chickening out of the market, think of it as locking in the tremendous recent gains the market gifted you.  Imagine if you reaped the tech bubble before it popped.

 

And unlike those 2 events, which had sudden and unanticipated triggers, this one seems to be playing out more in slow motion. 

I think 2002 and 2008 crashes were truly based on fundamentals, people and the government being complete fucking idiots causing the economy and markets to become vastly unstable. This is mostly hysteria with a sprinkling of validity. We saw a blip with SARS. It went away as seasonal flu outbreaks do and the markets recovered just fine. This is a bit more overblown and serious than SARS but this too will go away, probably within the next few months. The market is bloated (no more than usual) but beyond this temporal event, there's not really a reason for a decline. As such, it *should* recover much faster than 2002 or 2008, hopefully as it did with SARS.

That's my thinking anyway.

If it crashes for years, yall can give me all kinds of shit. Will be nothing compared to my 401k losses.

Edited by crash_davis
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31 minutes ago, crash_davis said:

I think 2002 and 2008 crashes were truly based on fundamentals, people and the government being complete fucking idiots causing the economy and markets to become vastly unstable. Federal Reserve created, monetarily induced bubbles, just like the one we're in now.

 

FIFY

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One indicator that we still have some more downside are all the headlines from experts touting this as a great time to buy while stocks are on sale.  Bitch please.  We’re still overvalued, but not as much as before.

When the doom and gloom headlines far outnumber the “don’t miss out on this chance of a lifetime opportunity” headlines then we’re probably getting close to a bottom.

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2 hours ago, UT_OB1 said:

I wouldn't bet against the MCU's 'other' hero movies at this point.  GotG came out of nowhere and is incredibly popular, and then there is Black Panther ad Captain Marvel breaking a billion dollars.  Considering Antman has become the low hurdle to clear, I'd bet they hit a home run on at least 1 out of the 2 movies.  

I was wrong, Eternals comes out in November, and that is going to be promoted out the ass by Disney.    This next movie is New Mutants,  and it comes out April 10th.  Doubt you’ve seen much advertising for it, because it’s Fox’s last X-Men/mutant movie before the move to Disney, and it’s not a part of the MCU.   There are even rumors it may go straight to streaming.  

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This is one of those moments that reveals an issue with efficient market theory. There is no way that the financial difficulties have been quantified correcly and outlooks adjusted. It's not just about getting stocks a little cheaper. It's a matter of understanding the broad economic impacts, especially on balance sheets. 

Lots of bad earnings news coming. Banks in particular are at risk, although that is always mitigated by central bank action. But when your customers just stop paying loans, well, let's just agree that european banks are the ones most exposed to this. Italian banks in particular were already zombies, Deutsche Bank also.

This is a true financial analyst's dream come true. It's not the headline stocks, it's specific companies that will go to zero or earn a windfall as a result of the virus. This is going to go on for the rest of the year, and nobody was prepard for that. A British airline already went bankrupt, we'll see a lot more of that in the near future, as well as many unexpected financial stories.

Just a true financial analyst's dream come true.

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3 hours ago, Thetexashammer said:

just agree that european banks are the ones most exposed to this. Italian banks in particular were already zombies, Deutsche Bank also.

This is a true financial analyst's dream come true. It's not the headline stocks, it's specific companies that will go to zero or earn a windfall as a result of the virus. This is going to go on for the rest of the year, and nobody was prepard for that. A British airline already went bankrupt, we'll see a lot more of that in the near future, as well as many unexpected financial stories.

Just a true financial analyst's dream come true.

While the rest of us spend 2020 selling our bodies for food and TP.  

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Oil markets in are in a bit of turmoil right now as Saudi Arabia and Russia butt heads over OPEC+ policy.  Meanwhile, Lebanon is set for a sovereign debt default.  Not sure which, if any, big banks are exposed here or if it's mostly IMF/World Bank types...

Quote

The Lebanese had “lived a dream that was a delusion as though things were just fine, while Lebanon was drowning in more debt”, he said.

https://www.reuters.com/article/us-lebanon-crisis/declaring-it-cannot-pay-debts-lebanon-sets-stage-for-default-idUSKBN20U0DH

That line brought the lulz.

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