Tina and the V, K, and L Recovery

I’m going to break with my usual pattern of gambling and talk a bit more about a broader portfolio strategy. I started investing in options this year for a few reasons – 1. Vegas isn’t fun right now, 2. there is (was) gold out there and 3. TINA. Ahh TINA. For those of you who don’t know who, or what, TINA is, its a silly acronym for There is No Alternative. With markets at all-time highs, the largest stimulus package in history and the general feeling that things are not alright, there seems to be no safe place to invest today for the long-term. Are we under threat of inflation, deflation, a second dip, the lost decade similar to Japan, or being pushed towards extremism and class segmentation via the winners and the losers of this pandemic? Yeah, all of those things, but you don’t have to worry about most of them. We are certainly not in a state of TINA. Normal investments still function despite the wackiness of this market.

The K Shaped Recovery

There’s been a lot of talk about a V Shaped recovery. Softbank had a hilarious 10K that showed how their investments were going to recover.

Well isn’t that a pretty picture? Does everyone else feel like the world is doing this? Some of you do probably, others don’t. It’s utter fantasy for most Americans. We are most likely going to experience both the L Shaped recovery and the K Shaped recovery. I say we are going to experience both because when you aggregate all economic activity, we are likely in for a slow and steady recovery. However, when you break down the recovery by industry, you see a much different story. Industry would be known as a control variable in a regression, and control variables can uncover very important underlying trends that invalidate aggregate trends and conclusions. Here’s what an L-Shaped recovery looks like.

In all likelihood, forecasts for the Covid-19 recovery are much too rosy. Compared to other recessions we are more likely to recover more slowly as illustrated by the Bloomberg chart above. But let’s look at what is most likely happening if you control for industry.

That chart isn’t even quite right. Tech is significantly outperforming even where it was prior to the recession and the S&P is slightly up or even on the year. Other industries are very much struggling and many will never recover.

The stock market, especially stock market indices, are not great indicators of the economic health of Americans. Albeit this blog is about investing, so maybe that’s not of interest, but let’s see how Americans are actually doing. It’s important to reconcile what we see, feel, and hear to economic indicators and eventually to how we invest.

Here are a few charts that show the chasm of our time. Check out tracktherecovery.org. Really cool interactive charts. Here are a few I made on the site:

It’s a pretty sad chart. Higher income, probably white collar workers are working comfortably from home, while lower income folks are experiencing large decrease in wages; wages are still down 17.5% from pre-lockdown times. From a moral and more compassionate standpoint, we need a second stimulus to support small businesses and those who lost their jobs or wages due to haphazard quarantine restrictions. Here’s a chart showing how small businesses have faired:

These charts are pretty self explanatory. Regarding investing opportunities, it’s important to remember indices like the Dow, S&P, and Nasdaq do not include any of these small business and are generally not experiencing anywhere near the same struggles as local businesses. As Americans, we see small businesses struggle every day: been to restaurant or salon recently? So go support small business, but don’t freak out over your portfolio.

Don’t Fear the Election

In short, I’m not afraid of any instability regarding a contentious election. This isn’t a political blog, but I think it’s no secret Biden is winning at the polls. It’s also no secret both candidates, one more loudly than the other, expect issues counting votes, which could delay the results and potentially put the election in the Supreme Court’s hands. I’m also not freaking out about that.

A Bloomberg article is showing the market is pricing in a Biden win. I’m trying not to be political, but there are believable arguments that a Democratic or Republican party win would be good for the markets. If the Dems win, increased tax revenues paired with increased public spending could help speed recovery, especially in areas that have been slow to recover (it’s not the New Deal, but that worked, didn’t it? Don’t say it didn’t, just don’t). If the Republicans win, it will likely be more of the same lax policies and lower corporate taxes. We know the market likes that (see K Shape above).

Here’s my play going into the election. I’m not selling anything. I’m currently short VXX options expiring 10/30. I’m well in the money now, so at or near expiration I’m either going to actually exercise or just reverse my position and go long VXX in case the election is the shit show these politicians have promised us. A smooth transition of power will most likely be a non-event for the market. Long VXX gives you a nice hedge against chaos. If VXX doesn’t spike, sell on the 4th and take out what you can. Hedging means losing money to protect against unlikely, but possible, events. Remember that.

What the market really needs is for Congress to pass a large stimulus bill. Amazingly, while Republicans have been dragging their feet over concerns of printing too much money and increasing the size of government, Trump recently broke ranks and suggested his own stimulus package, albeit it was completely implausible and overtly political. He made his point: the market wants another stimulus. That means Trump wants it. The Dems want it by default. So, I’d stay long equities through the election. I recently took out a long position in Apple and Google and I have calls that are printing on NIO. By the way, if you’re wondering how to find stocks that move 10% per day, go no further than r/wallstreetbets and scan the comments for something not completely ridiculous. There is no good advice there, but you’ll at least find what is likely to move. Then check out the fundamentals and see if you can stomach puts on things like Gamestop or calls anything that looks like Tesla.

2 thoughts on “Tina and the V, K, and L Recovery”

  1. A few factual errors in this. The current reserve ratio for bank deposits is zero. Refer here: https://www.federalreserve.gov/monetarypolicy/reservereq.htm

    Of course, banks’ risk-adjusted capital requirements still pertain, which serves somewhat as a brake on new asset and money creation.

    Also, M1 is not just currency. It includes demand deposits, and a whole bunch of other things that are like demand deposits. The Fed can still manage the quantity of money when it chooses (how tightly or loosely is up for argument), either through open market operations or by re-instituting reserve requirements. Even the quantity of coin & currency can be managed somewhat, since some of it wears out and a large amount flows through the Reserve Banks’ vault operations.

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