Feeding the Beast

Posted on Sunday, March 29th, 2020

 

Every bottom has a bounce. Every bounce isn’t a bottom. – Mike Santoli

 What a bounce it was!! While we all enjoyed the bounce this week we are under no illusions that we now in the midst of a new bull market. The largest up moves are usually in bear markets. It shows the fundamental psychology of the current market. There has not been capitulation. There is still hope. We haven’t seen what we see as capitulation in markets. We have seen a great decline in asset prices, violent declines and massive liquidity issues. What we have not seen is capitulation. The leaders of the market – the Amazons, Microsoft’s, and Apples of the world did not make serious new lows as investors hold onto their darlings.

This crisis has been much different than the one in 2008 and the response has been too. What we thought was massive in 2008 pales in comparison to the response in 2020.  The big guns came out and fired their weapons. Paul Tudor Jones, legendary hedge fund manager, said that instead of a bazooka the Fed dropped a nuclear bomb. The Fed has done more in two weeks than what it did in 8 months in 2008. No central bank or government has ever responded as forcefully, monetarily and fiscally, as the Federal Reserve and the US government has in 2020.

 

In Howard Marks latest memo, Flattening the Curve, Mr. Marks offers his invaluable opinion in regards to the current environment. The read is well worth your time.

• “The bottom” is the day before the recovery begins. Thus it’s absolutely impossible to know when the bottom has been reached . . . ever. Oaktree explicitly rejects the notion of waiting for the bottom; we buy when we can access value cheap. 
• Given the price drops and selling we’ve seen so far, I believe this is a good time to invest, although of course it may prove not have been the best time. 
• No one can argue that you should spend all your money today . . . but equally, no one can argue that you shouldn’t spend any. 

Ryan Detrick from LPL Financial had some interesting points this weekend that we thought we would share with you. We have been researching and comparing this flu pandemic to the Hong Kong Flu of 1968 and have found the symmetry of a semi centennial flu pandemic very interesting – The Spanish Flu of 1918, The Hong Kong Flu of 1968 and today. Not quite 50 years but you get the drift.  Ryan is one of the few people talking about the Hong Kong Flu of 1968. We assume it is because it doesn’t generate the fear that the Spanish Flu of 1918 generates. As a further aside there was no penicillin in 1918. Perhaps that’s why we shouldn’t be comparing 1918 to today. Comparing the pandemics here is what Ryan emphasized.

 

1918 Spanish Flu globally 50 million dead Dow Jones down 33%

1968 Hong Kong Flu globally 1 million dead Dow Jones down 36%

2019 Wuhan Flu globally 33,000 dead S&P 500 down 34%

 

As we move forward in the market most are expecting a retest of the lows put in last week. If that happens quickly or over time we do not know. We do believe that we will test those lows and prefer that path. It is much more easily identifiable as a low than other scenarios. The one thing that we don’t like about that scenario is that most seem to agree. The market has a tendency to make a fool of the most people that it can.

 For years we have been saying that Fed policy was feeding the beast. It was the expansion of the Fed balance sheet and low interest rates which pushed equity markets in the US higher. We also noted the rise of the corporate buyback as the marginal buyer which generated the rote like algorithmic buying patterns. Well, those corporate buybacks might be done for awhile but the Fed balance sheet is exploding again. You cannot fight the Fed. While other countries are throwing billions at this problem the US is throwing TRILLIONS. The market is down 34%. In the average recession the market falls 34%. While this isn’t your average recession – neither has been the world’s central banker’s response.

As we have been saying…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. No one can pick the bottom but know that we are getting better value for our dollar in equities than we were months ago. In a way, the risk in our portfolio is less than it was two months ago.  

 

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.