by VictorVaudeville

Understanding The Market

No one understands the market, but there are some very broad rules of thumb that the market tends to follow. One of them is that the market tends to go down with uncertainty more than anything else. You can take the recent dips: One came when a single drug was found to maybe not be super effective against COVID, and another happened when Oil went into a freefall. The market recovered fairly quickly, but the dips had less of a real-world impact than the uncertainty surrounding them.

I know we joke that bad news means green because stonks only go up, but the reason the “priced-in” memes have some weight is because the bad news is already accepted, and the world banks have tapped their cheat codes to prop things up.

The thing is: banks can’t solve all the real world problems.

Things Banks Can’t or Won’t fix even with Infinite Cash

Oil was another domino in the collapse, but why did the banks not just use cash to fix it? Because the problem wasn’t cash, it was physics. Cash doesn’t just buy space to keep oil, and buying oil doesn’t do shit if you don’t have a place to put it or people to consume it. In theory they could just dump it in the ocean or burn it, literally burning the cash they used, but they won’t do that. They would just as soon let the whole thing work itself out while pumping money into the market.

Commodities are much more difficult to manipulate because you’re dealing with something that is real and takes physical space and actual labor to produce.

My point is that there are things that infinite cash cannot address, and if they are addressed (e.g. burning oil bought with infinite cash), you’re probably going to see your dollar become useless anyway. There’s an economic breaking point where you will Sophie’s choice the market vs real-world issues, and the Fed has already shown it will chose the market.

Understanding the Virus

A lot of places in the US are getting itchy to reopen as our measures appear to be working. The thing is: COVID isn’t going to just disappear. No one expects it to, but the way things are playing out, we are likely going to see a significant deceleration of cases in the next several weeks. The result will be a political nightmare to keep things closed. Wait until someone suggests cancelling Football and the South will start a civil war.

So, given the path we seem to be taking, expect it to be politically adventageous to open the country in the June-to-August range. This will see people get sick, but we’re going to likely sacrifice Nana to the Economy god “for the good of the country.”

What will happen, then, around October? A couple things: One is that the virus may have more staying power with cold weather. It will now be mostly dispersed in the population rather than isolated to a few hot spots, and with the globe open again, it will have a chance to come back harder than before. This is something that is likely “priced-in.” But, there are two things that are likely not “priced-in:”

1. The Flu
2. Congress

The Flu

Constantly being compared to COVID is the flu. I’m not going to go into detail as to why the comparison isn’t really relevant, but flu season is basically baked into society.

I can tell you that hospitals, at times, get pretty crowded when it comes to the flu. Certain seasons can hit critical care units pretty hard. You can’t predict how bad the flu will be year-to-year, but I can guarantee you that this season is shaping up to be a humdinger. You thought COVID was bad? Combine it with a peaking flu outbreak. Suddenly you have a resurgent COVID running in with the flu, and all sorts of speculation is going to happen with “how bad is flu season going to be this year??”

Congress and their shitty stimulus

Congress has shown its hand in doing what they have always done: giving money to people who really don’t need it, and leaving workers the honor of footing the bill after getting the crumbs.

Right around election time, the state of the country is going to likely be at the forefront of discussion. If we’re open for a few months by then, there will be bitching about closing for no reason, and accusations that we opened too soon. This bitching will likely be marbled into other discussions for how their massive stimulus bills benefited X people when they should have gone to Y people.

The result is that congress, around October/November, will likely be super hesitant to approve more stimulus, even if the need arises.

A Perfect Storm

If COVID went to zero tomorrow and the global economy reopened, there is likely going to be a chain of events that would happen in fairly rapid succession:

First, the historic unemployment levels will likely be very slow to reverse. Many have already stated here that businesses are very likely to use this time to “trim the fat.” What better opportunity to cut staff than to simply not rehire them? This lag is going to be exacerbated by the fact that businesses are going to be scared to add more expenses to their books after the recent downturn. This hesitance will snowball as service industries are likely going to have a significant drop in customers with people still hesitant to gather in large groups. The spending power of the populace will continue to drop and businesses that were expected to bounce back, won’t.

This is likely not going to be addressed by the Fed because it will be at the worker level. It would have to be addressed by Congress, who I just mentioned would likely be politically hesitant.

Back to the Market

So, what does this all mean? Uncertainty.

You have an economy that just reopened, a virus that will start coming back, the flu season starting, a congress that had diamond hands, an unemployment ATH which is not rapidly reversing, and to top it all off, you have the election.

All of this isn’t even accounting for possible commodity collapses, interruption of supply chains, and already collapsing shipping industries, all of which are likely going to peak in the future despite being disrupted now.

The only way the Fed can keep the Market afloat long-term is to literally nationalize stocks, at which point you should probably just invest in Gold.

TL;DR: Uncertainty breeds crashes+Volatility. We’re comfy now with the idea that we will return to normal in a few months, but a lot of sparks are in front of us that are likely to start new fires.

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.