Article: Is there a way out of the Covid-19 crisis?

[Pascal]

You can view the page at http://www.effectivevolume.com/conte...ovid-19-crisis

[ijava3]

The recent rally off of local lows, in of itself, makes perfect sense. The market was grossly oversold. And, pension funds et al were facing the end of the quarter, heavily under-weighted in their allocations, as the grace of the monetary and fiscal gods fell upon them. Throw in some front-running billionaire assholes, add the obligatory fomo participants, and you have the perfect storm for a reflexive rally or an Ackman bottom.

Investors pulled more than $60 billion from equity mutual funds and ETFs over the past week, and as equity fund investors pulled out, “smart money” hedgers rushed in. Latest COT data shows that hedgers were holding more than $23 billion worth of net long positions in major equity index futures. What essentially began as a CTA short covering rally has been driven much further by short term investors i.e., event driven and absolute return funds front running the FED in much the same way corporate bond ETFs were raced higher.

Of course, the existential debate is whether this is a bear market rally or the bottom. It's one of those tautological arguments that only be answered in retrospect; but, it’s difficult to believe that there is actually bona fide optimism about the economy. Profits actually do matter; and earnings, most surely are going to collapse. However, in some circles this is being rationalized and viewed as a “look through” for the next quarter or 2.

In other words, they are writing off the impending horrific numbers because this is an “engineered” shutdown, and not a classic recession. And, when the Fed begins to directly buy equities via SPY, the link between prices and fundamentals will be severed, and price discovery will be relegated to the ash heap. They are saying the risks are recognized and understood, and as a result they are somehow mitigated. The worst is over!

I get what the optimists are saying. Howard Mark's echoed their sentiments.There are 2 kinds of risk that investors face, the risk of losing money and the risk of missing opportunity; and they are mutually exclusive. Stocks are relatively cheap NOW, and if the market were to go lower, they will be even cheaper. Buy some now, and if you're afforded the opportunity, buy some more at even lower prices. After all, its always worked in the past. What could go wrong now?

Well for starters participants are doomed to repeating the same mistakes that got them into this mess in the first place i.e., passive strategies, miscalculation of portfolio/tail risk, insane leverage, and even more insane valuation excesses. And now, because of the origins of the pandemic were in China, protectionism and trade wars will only intensify. The knock on effects from the virus will be deep an long lasting, and while the Fed has always been directly coordinating with fiscal every day under the moniker of QE, they have now transitioned to full blown, permanent monetization of an ever growing, ginormous, government deficit. Again, what could go wrong there?