Living in two Americas

Dear patient readers: I’ve been meaning to post for weeks, but work and a sick wife have kept me quite busy. On the work front, Moody’s is antifragile — when shit hits the fan and most companies start laying off employees, we actually get busier as we adjust credit ratings more often, pump out more research for the market, and have to react to the crazy conditions that we find ourselves in. Not a bad place to be employed in a downturn. On the wife front, she’s feeling much better now! Anyway, just before the post I wanted to give a sincere thank you to everyone who has reached out to me saying they’ve found value in my blog and are excited for future posts. It means the world to me, and I’m always looking for ways to clear up confusing topics, help break down what’s happening in the world, and drive you to think about how you could make your life better by paying attention to the world of finance. Let’s get into it.

Daily new cases in the US plotted from March 8 to May 25. The 14 day average line in red appears to be trending down ever so slowly, but with every state opening in some capacity, has the curve flattened enough?

In my mind, Ray Dalio’s description of America post 2008 1 provides the most accurate view of the world. While you should read his post, the shorthand is that going into the financial crisis, the American dream was alive and well. Income and wealth inequality existed, but there was a plausible way to change your circumstance through hard work and a bit of luck. Following the crisis, though, America fractured into two countries. One country — the 40% — slowly returned to the American dream. Stock portfolios recovered, savings accounts replenished, kids earned college degrees, and things went back to the way they were before. For the remaining 60% of the country though, the world had changed. Almost overnight, the American dream was lost to them and their ability to forge their own destinies vanished. The loss of hope in their world was most awfully realized in the form of the heroin epidemic and, with it, an increase in suicides and deaths of despair. While being larger in size than the 40%, the 60% feel invisible in society and in 2016 smashed the panic glass by electing Trump. For them, the system is broken and more of the same is not going to help.

Since I first read about Dalio’s two Americas concept, I’ve seen the notion over and over again. In the most general sense, the idea boils down to this: how can two seemingly opposing beliefs exist simultaneously? How can America be experiencing the best economy since the 1920s – and until COVID, the longest running bull market — while also having stagnant wage growth for most of the population since the 1950s? How are attention spans shorter than ever but longform podcasting is exploding in popularity? How are we in the golden age of television, but I had a lot of trouble finding something to watch during quarantine? A lot of things in life, it turns out, are counterintuitive like this.

Right now, we have two narratives about the virus. The narrative grabbing more attention in recent weeks is that it’s time for the quarantine to end. We gave it our best shot, we don’t really know why we did it in hindsight, but duty is duty and fine, I’ll stay home if you want me to, but enough is enough. I’m ready to go back to work. And by the way, the only people dying from this disease are old people with underlying medical conditions, so why did we have a 100% lockdown for something that really only affects the oldest 10% of Americans? The other narrative is that we should continue the lockdown until we know more about the virus. We still have 20,000 people a day testing positive for the virus, so what was all that curve flattening for if we give up now?

Both of these narratives make sense and exist simultaneously. That is the hard part about life and the even harder part about finance. How can you feel confident making predictions about the future when you don’t even understand the present? I don’t have the answer, but I take comfort in the wisdom of people much smarter than me.

“The propensity to action should be avoided at all costs – [right now] is when you should be learning, not trading.”

Chamath

I get a lot of texts during the week asking me what I think on what’s happening in the stock market. This blog started with my knock it out of the park call to sell my stocks in February. (Seriously, I’m not going to be modest here – if I was on the buy side and convinced my portfolio manager to sell before the sharpest drop in stock market history, I would have a massive bonus coming to me. Sorry, Sem). But now, three months later, stocks have erased most of their losses. After having dropped by 31% at one point, the S&P 500 is down just 8% year to date.

So, what’s happening? Well, two worlds are coexisting. In the first world, unemployment is something like 20%. New cases are trending down but refuse to drop off, and with virtually every state opening back up, it is an inevitability that cases will soar. By July, anyone who suggested reopening the economy will be verbally tar and feathered. While Dr. Fauci continues to make pleas to the public to be responsible, his volume knob seems to be getting quieter by the day. The first world cohort won’t be returning to restaurants, bars, or any place with more than 10 strangers until a vaccine in found, and, as a result, the gears of the economy will continue to grind to a halt for most industries. In the second world, the Federal Reserve has not only stepped into markets, it’s leading the dance now. Promises to buy virtually every asset class has reduced or entirely eliminated risk of bankruptcies for healthy firms — it was always just a matter of time for firms like Hertz or JC Penny to declare bankruptcy, COVID just gave them the extra push they needed. As states reopen, jobs will come back to those that were furloughed or laid off, and those that were able to work from home full time are anxious to get out and spend the money they’ve been saving. It’s summer bitches – time to drop it like it’s hot.

So how to invest in a bipolar world? Would a bipolar strategy make too much sense? That’s what I’m doing right now. I have 70% of my portfolio in a short term bond fund (only because my 401k provider won’t let me sell to cash for whatever reason) and the remaining 30% in bitcoin. I’m both ultraconservative with a healthy dash of light-my-money-on-fire reckless. That position makes the most sense to me right now because, like Chamath says, now is not the time to be trying to find the perfect trade. Betting on airlines or trying to buy the stocks of companies that have tanked puts you subject to a huge array of risks. If you really wanted to put some money to work in the market right now I would probably recommend FAANG stocks — that’s Facebook, Apple, Amazon, Netflix, Google (and sometimes Microsoft is thrown in there too but that messes up the acronym) — but most of those stocks are quickly approaching their all time highs. Never feels great to buy there. Those stocks should benefit from both worlds though – if business as usual returns, people will go buy more iPhones, and Google will sell more ads. And in the case of a second wave in the fall, those companies have tons of cash and fat, juicy margins to cushion any drop in revenue.

Looking to the future is difficult in a world where is is and isn’t at the same time. I made a very simplistic graph of what future cases could look like. In the three scenarios, cases fall off from the current levels by a certain percentage each day. Under the best case scenario, at 6% a day, we only see 24% more cases than we have currently. By August, we are at less than 100 new cases per day, and with effective contact tracing, the financial effects of COVID-19 begin to wane. In the more pessimistic scenario — representing just a 1% decline in daily new cases — the virus lasts for significantly longer. Total cases through the end of the year are 3.75 million or over double what we’ve already witnessed. Even by the last day of the year, we are still registering 2,500 new cases per day.

Are these scenarios realistic? I think so. We could find the virus does not transmit as easily in hot weather or when people spend more time outside. As a result, new cases could plunge. On the other hand, we might find that our simple hope that the virus would go away to be nothing more than the folly of the restless and bored. I could also be completely wrong, and the future will look nothing like what I’ve presented. Anything (and nothing?) is possible.