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Posted on Sunday, April 12th, 2020
A call option is a contract that gives the owner the option to buy assets at an agreed price on or before a particular date. The stock market is trading like a call option. The Federal government has added trillions in liquidity including payroll protection for 130 million Americans. They are supporting payroll for a period of 2.5 months at this time. I think traders are beginning to see the market as having time decay to it. If the economy begins to recover before the 2 ½ month period is over then there is capital in the system that should have never been there. Think of it like this. If the government carries payroll for 2 ½ months and the crisis ends this month then it’s like there are now 13 ½ months of payroll in the calendar year. That is high velocity money too. Money that is given to those lower on the socio economic scale tends to get spent and spent again whereas money given to the upper classes tends to go into savings or asset markets. We suspect that the politicians in Washington may have another go at it and extend those benefits if the crisis is prolonged and perhaps even if it is not. It is an election year after all.
What to think? Inflation. We are already seeing eggs up 60%. I know I know – but the prices of cruises are down. Net net we will only see inflation in pockets of the economy until we see the real thing in 2021. Corporations will bring supply lines and jobs back to the US and will need to pay workers higher wages going forward. The government is already paying higher wages. The Federal minimum wage is $7.25. The current unemployment benefit is $600 a week. That’s $15 an hour.
The questions many are asking is – will people go back to their normal behavior after this crisis? Outside of the NY/NJ metropolitan area I think they will and quickly. I am seeing people that are sick of being cooped up and the Easter weekend may have been their mental stopping point. They may dip their toes in the water but I believe they will go back relatively quickly. From media reports it seems as though doctors and scientists have gone a long way towards getting a handle on the virus as fatality rates are well below originally scary estimates. That may give people the confidence to go back to business. We must, of course, be wary of the reemergence of the virus but that may the buying opportunity.
There seems to be a broad consensus that markets will retest the lows of March over the coming months. We have read thesis after thesis that the markets will test the lows and that those lows should be bought. The lows of December 2018 were never retested as systematic trend following strategies chased the market higher. From Farrell’s Rules of Investing – when everyone thinks something will happen – something else will. That leaves three possible scenarios.
The old saying goes, “The perfect is the enemy of the good.” Likewise, waiting for the bottom can keep investors from making good purchases. The investor’s goal should be to make a large number of good buys, not just a few perfect ones. Think about your normal behavior. Before every purchase, do you insist on being sure the thing in question will never be available lower? That is, that you’re buying at the bottom? I doubt it. You probably buy because you think you’re getting a good asset at an attractive price. Isn’t that enough? And I trust you sell because you think the selling price is adequate or more, not because you’re convinced the price can never go higher. To insist on buying only at bottoms and selling only at tops would be paralyzing. Howard Marks memos
If you haven’t had chance to read our quarterly letter we have posted it to our website.
Happy Easter! Stay well.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.