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Energetic
Forum Captain

Total Posts: 1518
Joined: Jun 2004
 
Posted: 2020-04-08 16:32
How do you expect the recovery shape to be? V, U, L or something else? Where are we now? How do you plan to trade it?

I understand that the market is trending up now in anticipation of the peak of new infections. But as soon as this happens, if not before, the recovery expectations will drive the price action, right? Surely, in the end the stimulus will win and the markets will roar back to highs. But in the interim there will be a lot of bad news from real economy: unemployment, recession, (lack of) profits, bankruptcies, you name it. The real scope of it is a known unknown.

What if the economy doesn't restart b/c people will still be afraid to go anywhere? What if the infections spike up again if/when people attempt to return to normal lives? What if it turns out that we have to stay in home for months or longer? I'm not nearly smart enough to compute it. How much of this uncertainty is priced in?

What do you think?

For every complex problem there is an answer that is clear, simple and wrong. - H. L. Mencken

nikol


Total Posts: 1143
Joined: Jun 2005
 
Posted: 2020-04-08 19:37
From risk man perspective:
- economy will lose its smoothing layer, SMEs. Their function is flexibility to the business. They smooth and absorb risks. Their network should recover to reignite flows flowing again.
- gigantic cash injections (6 trillions of usd and ~1 of eur and how much of others) is being injected to provide liquidity to this layer (that's why we hear calls for banks to hold their appetite).
- These injections go at the price of currencies scaling down. Which is a price of reduced default rate (monetization of default risk). So, welcome the inflation

Economy is not like lightbulb. One cannot switch it off/on at will. Hence L-shape is more likely.

Beyond that there are interesting questions regarding oil, dollar, CBDC's.

Kitno


Total Posts: 492
Joined: Mar 2005
 
Posted: 2020-04-08 22:54
Unch view for 1m: bifratured (low leverage energy suppliers, grocers etc. great) micro but macro low gradient hockey stick.

All the soul of man is resolution, which in valiant men falters never, until their last breath.

rftx713


Total Posts: 128
Joined: May 2016
 
Posted: 2020-04-09 00:50
nikol, that's an interesting and informative way of thinking about it particularly regarding SMEs. Thank you for sharing. I'm trying to figure out the inflation question myself as well. I think I understand the mechanics of the base case that a lot of people are talking about recently, but the inflation rate has been grinding lower each year since at least the 90s and perhaps the 70s, depending on your perspective.

So I can't help but think that even if inflation spikes to 5%, I still look at that long-term chart and struggle to understand the concern. Everything I understood about the US economy pointed to it taking much more inflationary pressure than some might expect in order to really see inflation in the headline numbers. Am I thinking about something incorrectly? (There are more experienced minds than me that were saying the US wasn't prepared for inflation, so I'm inclined to think I am missing something.)

In general I do agree with you though. I am skeptical of a V recovery. Speaking for the US here, but I think getting a V would have required even larger stimulus, with very effective delivery/transmission mechanisms and committed to "as long as warranted," to be up and running at 100% sometime around March 22. Thankfully policymakers seem to understand that all parts of the economy need to be stimulated simultaneously for a quick recovery, but I just don't see the current stimulus being large enough, or more importantly, delivered effectively enough, to see a sharp recovery. Would be happy to hear thoughts on where I might be wrong here.

nikol


Total Posts: 1143
Joined: Jun 2005
 
Posted: 2020-04-09 08:37
I forgot to mention agriculture. Quarantine and crop sowing are contradictory to each other. I vision catastrophe. At least in EU.
Russia has frozen all exports of grain till August obviously waiting for unfolding of events ("let's see").

svisstack


Total Posts: 352
Joined: Feb 2014
 
Posted: 2020-04-09 10:52
@rftx713: I'm not an expert myself, but what you can be missing is the fact that TIPS yielding negative. If there will be lower demand for the credit assets eg. bonds then it will be even more pressure on the devaluation of the USD (unless there will be interest rates increase). That's could be why this time is different, but there is no consensus.

IMHO V shape will not be finalized (we are already halfway through) because we can only fix the liquidity crisis by injecting into BS, it will not affect the EPS significantly as people not working for different other reason - health crisis and the fact that we were totally unprepared to handle it (including a lot of fake news and misinformation). It can help with reducing the default rate. Let me know if this is too deep.

First Commander of the USS Enterprise

nikol


Total Posts: 1143
Joined: Jun 2005
 
Posted: 2020-04-09 11:55
Disclaimer:
I should admit that I disregard financial market completely. It might reflect disillusionary thinking like 2008-2019 debt pumped equity uptrend. For some it is real money, yes, for the economy I am not so sure (see how shale oil and gas are unfolding). My major point is you cannot feed kids with printed banknotes. Yes, it still has some calories for warming.

EspressoLover


Total Posts: 437
Joined: Jan 2015
 
Posted: 2020-04-09 14:12
I wish there was more literature on the economic impact of the 1957 flu. It killed about 100,000 Americans out of 170 million. Which seems to be where most models predict we'll land with Covid-19.

The 1958 recession was the deepest in post-war history until 2008, but the recovery was really fast. It only lasted three quarters. The thing is that most of the economic histories I've read on it, only seem to make passing mention to the 1957 flu pandemic.

Good questions outrank easy answers. -Paul Samuelson

someprimetime


Total Posts: 18
Joined: Jul 2018
 
Posted: 2020-04-10 16:54
Would that data even be relevant today? No more gold standard, CB's money machine going brrr, etc.

nikol


Total Posts: 1143
Joined: Jun 2005
 
Posted: 2020-04-10 20:44
There was some research following crisis of 1962.
It ended up with paper fro H.Minsky about causes of financial crises.

https://fraser.stlouisfed.org/title/fundamental-reappraisal-discount-mechanism-706?browse=1960s

Energetic
Forum Captain

Total Posts: 1518
Joined: Jun 2004
 
Posted: 2020-04-13 18:46
I've been thinking about selling straddles and buying wings on equity indices. And also buying gold.

For every complex problem there is an answer that is clear, simple and wrong. - H. L. Mencken

nikol


Total Posts: 1143
Joined: Jun 2005
 
Posted: 2020-04-13 19:24
What is the likelihood of the full scale war between US and China?

Energetic
Forum Captain

Total Posts: 1518
Joined: Jun 2004
 
Posted: 2020-04-13 20:10
0, why?

For every complex problem there is an answer that is clear, simple and wrong. - H. L. Mencken

Kitno


Total Posts: 492
Joined: Mar 2005
 
Posted: 2020-04-13 22:09
Nikol's question is tangential to the original question but...

@Energetic, unpalatable and undesirable as it is, the probability of a US-China war is not 0%. Low, yes. Seemingly very low, indeed.

Niall Fergusson wrote well about the pre-WWI globalisation and how it was antithetical to fight a war because of the economic damage. Yet we are led by politicians and our own animal instincts.

Backed into a corner because of a deep economic recession coupled with some nationalism and egotistical leaders and you can find yourself in in a war.

My market on Nikol's question?
1Y 6/11bps
3Y 23/32bps

All the soul of man is resolution, which in valiant men falters never, until their last breath.

Kitno


Total Posts: 492
Joined: Mar 2005
 
Posted: 2020-04-13 22:09
[Deleted duplicate]

I came twice to this reply.

If only my gf was so lucky.

All the soul of man is resolution, which in valiant men falters never, until their last breath.

tradeking


Total Posts: 30
Joined: May 2016
 
Posted: 2020-04-14 04:29
"My market on Nikol's question?
1Y 6/11bps
3Y 23/32bps"

@Kitno, I lift your 3Y

Strange


Total Posts: 1651
Joined: Jun 2004
 
Posted: 2020-04-14 04:46
@Kitno, I lift your 3Y

@Kitno, if you are still there on the follow, I'll take the balance :)

'Progress just means bad things happen faster.’

Kitno


Total Posts: 492
Joined: Mar 2005
 
Posted: 2020-04-14 08:12
Sorry chaps - fat finger there, we meant to make you:
23/32pts

will amend the confirm for your 32pts lifts Applause


All the soul of man is resolution, which in valiant men falters never, until their last breath.

nikol


Total Posts: 1143
Joined: Jun 2005
 
Posted: 2020-04-14 10:51
@Energetic and @Kitno

> 0, why?

Probability is non-zero. Once in history USA A-bombed Hirosima/Nagasaki, contaminated Belgrade and Iraq. Why it could not be done once again? Civilization will be destroyed? Who cares. 24+ (no one knows how much) trillions on one side and Civilization on the other. There is huge gender dis-balance of single men in China of conscription age (~30-40 millions extra). China economy is in the process of contraction.
The choice is obvious.

Once the war is triggered, animal instinct will be in the driving seat and destroy everything to zero including debt.

> tangential to the original question

My question is exactly about the shape of (non-)recovery.

PS. Since "pre-2008 era" I heard many times that the economy needs "total reset", like a war. It was said in occasional conversations about the state of economy. While the speakers did not mean that literally, the outspoken words shape the mind.

Every new turn in history/technology/innovation starts with denial and appeal to the rationality. Geopolitical logic is different from the logic of commons.

Energetic
Forum Captain

Total Posts: 1518
Joined: Jun 2004
 
Posted: 2020-04-14 15:11
The logic of trying to get out of deep recession by way of war is not entirely unreasonable, I agree.

I meant 0 not mathematically but financially as in a very low probability outcome that I don't care to hedge. Perhaps 11 bps is a fair assessment but what does it change in one's trading strategy?

For every complex problem there is an answer that is clear, simple and wrong. - H. L. Mencken

nikol


Total Posts: 1143
Joined: Jun 2005
 
Posted: 2020-04-14 16:25
Your plan to buy gold seems reasonable.

Entertainment/games/marijuana, everything what blows mind away is also good investment in these rough times. Hollywood, various musical shows boomed during period of Depression. People want to forget.

Once (infected) soldiers/marinaries are removed and replaced with unmanned vehicles the probabilities will rise.

rftx713


Total Posts: 128
Joined: May 2016
 
Posted: 2020-04-14 22:48
@nikol, I see where you're coming from about a war with China, mentioning the huge amount of people they can conscript...

But my strongly held conviction is that a war between China and the US involves:

- Who can turn off or disrupt the others machines fastest (cyberattacks)
- Nuclear weapons

And does not involve:
- Infantry
- Tanks
- Most planes
- Most ships

It will be one nuclear triad versus another, plus some fun with computers. Thoughts?

Edit: I say this because it underpins my belief that the threshold for a war with China is probably higher than a lot of people think.

Kitno


Total Posts: 492
Joined: Mar 2005
 
Posted: 2020-04-15 00:42
A "total (cyber) war" with Taiwan would be interesting.

Nationalistic & solves a Central Kingdom sore. Grey men again a la Ukraine - so not a "real war" and therefore hard to price the appropriate response.

Agreed a US-China war if bilateral would be cyber/space and worst case nuclear.

All the soul of man is resolution, which in valiant men falters never, until their last breath.

nikol


Total Posts: 1143
Joined: Jun 2005
 
Posted: 2020-04-15 07:34
Only 30% of small businesses could restart their business. Which means that major part of population is without the job. They go to protests.

on the other side of the globe
"China had killed our Prime Minister, I said. I’ve never been so pleased to see my copy spiked."

https://www.thesun.co.uk/news/11384787/china-cash-in-coronavirus/


Let's see how grey it will be.

PS. Blackwater (today known as Academi) is pioneer in all these grey military commerce. The others just follow as students.

nikol


Total Posts: 1143
Joined: Jun 2005
 
Posted: 2020-04-15 11:48
Sorry for getting you all into this.
I was in "grey-ish mood".

However, reminder: the price of meltdown at 1yr horizon seen in oct'19 was 10 bps or so.
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