Macro Dragon: The Future is Already Here...

2020-Mar-23

Macro Dragon: The Future is Already Here...

Folks as a pin going forward during this turbulent times, let us please remember:

The Covid-19 crisis with all its challenges, stress, chaos & opportunities will also eventually pass. What defines humanity & ourselves as individuals is how we both individually & collectively act under adversity. Think of how you want to look back over this period, doing your part to keep your family healthy, society healthy & functioning. Keeping a cool head, when others are losing theirs, maintaining an objective list of positive aspects & negative aspects of the policy responses & economic shock the world is/could  go through. And lastly gratitude, sympathy & empathy for one another. Asia got/is getting through this & RoW.

The one big positive from all this, is it reminds us we are all One & we are not at the top of the food chain. Covid-19 does not care if you are rich, poor, what your ethnicity & skin color are, what passport/s you hold, nor what you age or profession is. Our greatest achievements are almost always those that we collectively do with others & sometimes as in this case, as a species. Lastly keep your mind open to growth & opportunities.

Top of Mind…

• … So, so many things… hard to even know where to start… or if there is a pocket of silences from being on phones with folks naturally concerned about the state of the world, global financial markets & what the eventual end game is…

• … too early for the latter… let’s take this as summary of what happened over the wkd into the Asia Mon Open… then maybe if we have time we can touch on things KVP feels he can say with high probability given everything we know now… Before that a caveat…

• Take a step back & remember where we are coming out of, As of Jan we were at the tail-end of the longest business cycle in modern day history, with astronomical returns from an multiple asset class perspectives, be it equities (SPX +300%, NDQ +620%) or bonds (TLT +137% in just 12yrs. Lets not even talk about individual stock returns, etc.

• In the space of a few trading days we unwound what had been built in the last 4yrs – the buy the dip lvls of -5%, -10% to -20% lvls on the S&P worked for a long time, until they did not. This clearly tells us we are in a very different regime, from the mother of all bull markets, to what could be the mother of all bear markets. Point being, just as how unprecedented milestones were made on the way up (vol compression, Amazon up +1000x, both bond prices & equity prices rising), we are likely to make unprecedented milestones on the way down.

The Future is Already Here…

• The Future is already here, its just not yet distributed evenly across the board. We are in a global recession folks, this is not fear-mongering… we just have not yet seen the mark-to-market on a contraction in growth, spikes in unemployment, bearish consumer sentiment & spending, scapegoating, bailouts, anger, fear, etc. Yet this is also part of the business cycle & whilst it will get very challenging for most people on this planet, this too shall pass.

• KVP has gone from being stressed & pressured to find a sequence of retirement trades & investments that will be coming out of this storm, to realizing that actually just making it through the storm in good health, loved ones safe & well, plus some liquidity are going to be victories in of themselves. Part of the retirement trade/s is surviving the game long enough to be able to put the retirement trades on. 

• So remember framework before any one trade or investment ideas. We are in a bear market regime, they are characterized by immense volatility & brutal down swings, as well as up squeezes. Make it clear to yourself what your strategy is.

• If KVP was a long-term only investor, then it would likely being waiting to see how markets are looking from at least mid Apr to end of May for more comfort about a potential bottom. Yes, have a laundry list of best of breed blue chip high cash flow generating names & start building a line, yet take your time, the bottom is only known in hindsight. If KVP was a value investor he’s know that one will average down into the lows & also after the bounce.

• If KVP was a trader, his position sizing should likely be a fraction of what it was on Jan 17, with the Vix at c. 75, we are c. +6-8x the lvls. Intraday moves can obliterate you in these markets even if  you only have modest leverage.

• Scalping is likely the name of the game, until there a mini-pockets of bullish moves & bearish moves. Its not yet about making a killing trading wise imho, its staying super nimble & often patient on the side looking for a window with a strong trigger for a higher probabilistic move (be it for an hour, half a session or a day). It’s a very different game, from the attempt of trying to pick the structural lows of a bear market.

• Lastly, money management over anything, even more so  in a bear markets. To win in the game, you need to stay in the game. Simplicity > complexity, liquidity > illiquidity, patience > Greed & Fear. Process Next Best Trade. PNBT. PNBT. And staying on the sidelines is a trade.

• A lot of folks have been asking KVP for some thoughts of how the world will likely look & function on the other side of AC19 (After Covid-19, rather than BC19 – Before Covid-19 [Fri 17^th of Jan, Mon 20^th of Jan is when China publicly announced the outbreak to the world], will put some works on that soon – yet there is going to be plenty of time for those themes.

• The Future is here, some of us just don’t know it yet… but we will – eventually.

Weekend to Asia Mon Open – Why Today is Key…

• As we alluded to once KVP got back in the home spaceship (tie fighter to the death star), we were going to need a lot more fiscal policy both in volume globally & magnitude

• Was starting to get very impressed by some of the initial very positive numbers – again hats off to the Kiwis for setting the initial bell-curve for the world, the Kiwis don’t mess about – that we are seeing both from a monetary policy perspective, yet even more important fiscal policy perspective

• 5 things really stood out on this front (among a lot of other positives): 1. RBA QE, 2. ECB initiatives that crushed periphs spreads & lead to big risk-on that Thu in EZ, 3. Fed increasing liquidity through further swap lines & measures. 4. Fiscal policy responses out of Europe, especially Germany at already 10% of GDP & talking about equity purchases (this is 1-2wks earlier than KVP was expecting) 5. The +$2 trillion stimulus from the US…

• … which has still not been signed off on & which is why US equity futures hit the circuit breakers this morning Asia on the way down, before bouncing & as Europe comes in we are currently c. -4% at around the 2194 lvls on S&P futures. With most of Europe down over -4% on the main equity indices

• So what does this tell us?

• It tells us, that until politicians around the world (& especially the US – given its size not just of global economy, yet also markets) really need to start taking Covid-19 at the seriousness that it deserves… – both the virus spreading & economic deflationary shock – will take longer & be deeper until they do. If Congress thinks that $2trn is all we are going to need, then they (& a lot of people) just don’t fully appreciate the scale of this challenge.

• The cost 2^nd & 3^rd order effects of not acting sooner & across the board, only make the eventual cost of lives, period of panic & uncertainty, wealth & growth destruction that much higher. Politicians, Policy Makers, Leaders, Managers, Parents, etc.. need to think past 1^st order consequences.

• So because of those actions of a delayed resolution, we are very likely to see a -5% to -10% down session in the US once they come on-line… & a lvl three -20% move is not a small probability today (On the flip side, before we get out of this bear market regime we are likely to also see a limit up session or two of +20%).

• Any declines of -10% to -30% in the S&P from these 2300 cash lvls, may start to get US officials considering whether it makes sense to keep a market open (that is supposed to price the economy), if there is an economy that is going to be shut for an undisclosed amount of time. KVP personally would not want to be outright short (If he wanted a short expression, it would be through long puts) if they closed the market… as it could be a 2-4wk shutdown. And if done right, coordinated globally. Again we’ve only seen this in recent history during the Sep 11^th Twin Towers bombing.

• Also another -10% & up would have people wondering whether the right metric to be looking at the SPX is at least -50% from the highs, which would get us to 1700 lvl, a c. -26% move from these 2300 cash lvls.

• Obvious caveat is, the bill likely & finally gets done today – if during US market hours, we should see a pop… but this is a bear market regime… so things that should, don’t always. Yet could make for a better Asia open tmr, depending again on what the latest numbers are in Covid-19 cases in the US & EU.

• As we put out on the Macro Dragon Friday piece, we are likely to get peak velocity of the growth in the virus over the next 4-8wks across both the US & EU.

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This week KVP will likely focus on a few things for the Dragon, including:

What we can say to expect with high probability - in this current massive re-pricing regime.

Beacons of light - just trying to highlight all the positive data & initiatives out there that is getting lost (For now) in the very bearish sentiment (& rightly so for now).

A world post Covid-19 – been dying to put this together.

Japan Mar fiscal year end & links to the USD funding crisis – KVP does not yet fully understand this, needs to roll up the sleeves… any context, references tied to this would be appreciated.  

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We could continue to be in a gang buster period of volatility both to the up & down side until at least mid-Apr to back-end of May. Some, time decay is needed in the system, both from a Covid-19 spread (past peak velocity upwards), even bigger & even better government / fiscal / monetary policy response, to overall heads of governments giving this the 2^nd & 3^rd order consequences thinking that it needs. This to shall pass. Keep you minds & hearts open.  

Good luck to everyone out there, be nimble & position accordingly. Wash your hands & remember it more than just protecting ourselves & our families. 

Namaste,

-KVP