Three Things I Think I Think – (Mo Ron)a

Here are some things I think I am thinking about:

1) What’s up with the stock market?

There was widespread outrage that the stock market didn’t go all the way to zero in the last few weeks. This image from Mad Money seemed to symbolize the outrage well:

The global stock market is down 20% over the last 5 weeks. It was down 35% at one point. But then things started to look a little better on the virus front. And so the stock market recovered a little, but is still pricing in a pretty bad environment.

That’s basically how the stock market works. While we see the world for what it is the stock market sees the world for what it might become. The stock market doesn’t care that people are getting fired today or last week. The stock market is thinking about how many people might get fired next week, next month and next year. If we expect 20MM people to get fired and only 10MM people get fired then the stock market goes down a lot expecting 20MM and then corrects to the upside when things turn out better than expected. Don’t read into the daily moves of the market too much. As I always say, short-termism kills. 

2) Fed Derangement System Is Spreading!

There’s an unbelievable amount of misinformation about the Fed these days. Some of the worst stuff going around is this idea that the Fed is operating illegally. Several high profile asset managers have been spreading this myth in recent days saying that the Fed doesn’t have the legal authority to enact these lending programs. This. Is. BS.

This was all litigated during the Dodd Frank reforms when the same people said the same things coming out of the financial crisis. You see, there’s a clause in the Federal Reserve Act under section 13(3) that gives the Fed the ability to make loans with broad discretion. The language is extremely open-ended and vague. The Dodd Frank Rule forced the Fed to tighten up the language after the financial crisis and added several new enforcements including the requirement to get permission from the US Treasury for any program. This was all hashed  out over several years and the Congressional Research Service detailed it all in excruciating detail, including the vagueness of the clause.

But one thing is very clear – none of this is illegal as the clause is extremely vague. So, I don’t know why people are spreading blatant misinformation about this.

3) Okay, maybe it’s not all derangement. 

I am being a little unfair with my “Fed Derangement” talk. It’s not all good. For instance, the Fed is buying high yield bond ETFs. Why in the world would they do that? This doesn’t finance the firms directly. It just tries to boost asset prices. In the long run the underlying firms (and the market price) will only remain high if the firms succeed. Buying the secondary market debt is putting the cart before the horse. It’s like thinking that by buying a bet on a horse you will change the way the horse runs. That’s silly. They should stop this now.

There’s also reports that asset managers are getting loans via these programs. Why did they allow this? Asset managers (like myself) are perfectly capable of working from anywhere. And if they’re losing money due to market losses then that’s on them. Market declines are part of the business. We can’t be bailed out every time there’s a decline. Further, many of us have been running extremely prudent strategies for years. My countercyclical strategies have been underweight stocks for years and overweight short-term bonds and money market funds. I am not going to ask for a dime from the government because my firm was very responsibly positioned coming into the crisis and I don’t need help. Why should an irresponsible firm get a handout?

Look, I am perfectly fine with most of the bailout money that’s going to the real economy. If you work at Walmart and you’re being hurt by this then I hope you get enough money to make it through this and support your family. You didn’t do anything to cause your current situation. You didn’t cause the virus. And then the government probably told you you couldn’t go to work. Yes, you deserve some aid to hold you over. But asset managers who were flying high last year sowed the seeds of their current downturn. I’m not sure how we’re justifying bailouts to them.

Anyhow, I hope you all are hanging in there and taking care of yourselves and your families.