Exponential

Posted on Sunday, March 15th, 2020

There are decades when nothing happens; and there are weeks when decades happen. – V. Lenin

If there was ever a week when a decade happened – that was it. I will skip the amateur epidemiologist spiel but what we find impressive is the math. For weeks we have been watching this virus. The exponential math is overwhelming but I am worrying less now because others are now worrying more. I was on red alert as this approached mostly because it seemed as though no one else was concerned. There didn’t seem to be any plan. Now that authorities are acting aggressively, the virus stands less of a chance of winning.

We have seen mounting risks in equities for some time from over valuations of assets and extreme monetary policy. We are fortunate to have been about 20% underweight equities for all of our clients. We continue to work to preserve capital and reduce draw downs. Even though Friday’s returns were spectacular we still see extreme risk in the market place. In fact, the extreme returns of last week indicate a system under severe stress. Last week saw two of the top ten largest down days in US history and one of the largest up days. That has only happened once before – the Great Depression. The key to understanding this environment is in the knowing whether this is an exogenous shock or a systemic risk to the financial system itself. They require two different responses. As of now we still see this as an exogenous shock but internal market action late last week began to indicate system stress.

In the near term the next problem that has our attention lies in the esoteric area of money market funds and commercial paper. We won’t go into the issues here. Just know that the issues are serious and you do not own any money market funds. If you hear of trouble in money markets next week know that we sold ALL of our money markets positions two weeks ago in preparation.

Markets are oversold and due for a bounce. We would look to lighten up risk and increase hedges should that be the case. We see the Hong Kong Flu pandemic of 1968 as our guide and in doing so expect an 18-24 month pathway to effectively defeating the corona virus. We look forward to allocating additional funds to equities at advantageous valuations. We see the next 18-24 months in the money management arena being one that is more tactical in nature rather than simply buy and hold. We also expect a return to more active management and our increased use of the highest quality and best in breed mutual funds as a way to create more alpha for our clients.

While we saw the early innings of this battle against the virus as a threat to our society the risks are diminishing along with our aggressive response. As for our economy we fully expect to at least technically enter a recession but a quick rise back as monetary and fiscal policies are fired with full force. We see our current position as being in the eye of the storm. Friday’s market response eased some of the psychological stress but there is more stress to come. No one can pick the bottom but know that we are getting better value for our dollar in equities than we were months ago. The average recession has markets fall 34%. We are more than half way to that number. In a way our risk in our portfolio is less than it was two months ago.  Breathe.

The way to tell whether the discounting has been fully reached is when the market stops reacting negatively to every bad headline, which has yet to happen. But once it happens, the market can truly bottom and begin to recover when some of the expected negative events fail to materialize, even though it may rally in the face of other “bad” news it already discounted. – Jim Bianco Bloomberg 2/28/2020 Bianco Research

 

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.