Economic implications of a SARS/Coronavirus outbreak

[over9k]

Alright so let's dispense with the weekend virus news before we get to the meaty stuff:





Please note that this has barely been covered today (most of this is from the weekend) on account of the, you know, vaccine news, but that doesn't mean it's gone away and I suspect the news will be right back on it now that the vaccine stuff is over on account of the aforementioned virus lack-of-going-away. Do NOT dismiss this as irrelevant now or something. It'll be right back all over the news pretty bloody quickly I suspect.

 

[over9k]

Alright so moderna's vaccine news is great, it's an effective vaccine that we can actually roll out using the world's existing cold storage infrastructure which is excellent, it's about as good as we could have hoped for. I won't go over all of this again as I covered the cliff notes in a previous post, but I will cover how this has effected the markets:


The way it's effected the markets is to give us a case of deja-vu:



Whilst tech was the worst performing on the day, it was still well into the green and it was also once again the russell 2000 (microcaps) that lead the charge. It absolutely smoked the other indices.

But let's get more granular. What soared last time?


Remember me talking about energy & reopening stocks like airlines, cruise companies et al?

Well, what do you think went bonkers today?

Energy (XLE):



And airlines et al!



However, let's remember that last week (the vaccines have both conveniently been announced before monday market open, making comparisons very easy) after the initial monday madness, everything went on a pretty solid melt and then recovered a bit on friday but still closed the week down off its monday peak.

Now if you were to ask the retards in the institutions, the vaccine changes everything and we basically invert everything we've been doing up until this point:



Now, to be fair, that does actually sound relatively intuitive. Now that we have a vaccine, things can start to return to normal, right?

Well, let's compare how the mid-caps have run post-vaccine (both of them) to the alternatives and find out. Below is a graph of all of the mid-cap ETF's vs IWM, the russell-2000 tracking ETF:

As you can see, only one of them, DON, has actually managed to beat a simple index etf. You were overwhelmingly likely to be behind the market if you'd (admittedly fairly reasonably) assumed that either of these vaccines actually change everything/flip the table, so to speak.

The difference becomes even more profound when you compare leveraged etf's. Here's a comparison of the triple-leveraged R2000 tracking ETF (TNA) vs both of the triple-levered mid-cap ones:



As you can see, the only mid-cap etf that beat the R2000 isn't available in a triple leveraged, so if you'd levered into midcaps, you would again, be quite a bit behind.

Whilst tech has done relatively (relatively) poorly over the past week or so and you would have been better off with your money in mid-caps, this is not true for the microcap end of our "barbell".

The above data tells us that microcaps are still the way to go and thus we do not need to nuke the "light" end of our "barbell" and move everything into the middle. If you were in a leveraged etf, there was simply no point (vaccine day or the down days after it) at which you weren't better off with your money in microcaps.

The institutions have again only gotten it half-right, and I think they've actually missed a lot of things with tech (which I was fully expecting to rally today but the vaccine news is obviously the mother of all curveballs) and I'll get into that in the next post.

 

[over9k]

Alright so to understand the other end of the "barbell spread" we need to look at the economy big picture. What the virus has done is create a far more winner-take-all type of market across the board in basically every industry because fact is that the bigger the company the more of a hit is necessary to wipe it out. As an extension of that, the bigger the company, the easier it is for that company to raise the finance necessary to ride the storm out. As a result, small businesses, small mum & dad shops and the like have been absolutely massacred leaving whatever market share remained to channel into the big players.

In short, main street gets slaughtered whilst wall street swoops in and picks up the spoils:



When you combine this with the fact that everything that could go online, did go online, you can understand how putting the two together into big and tech gets us megatech companies like facebook, amazon et al (there's an index for this called nyfang) absolutely soaring and in fact driving the gains of most of the market, sending the nasdaq way, way, way above the dow.

Now, what drove this was first lockdowns and then voluntary human isolation after that. What drove both of those actions were virus numbers. In short, the more virus, the more lockdowns/isolation and thus the more money is driven into big tech.

The market knew this. It also (reasonably) assumes that a vaccine reverses all of this. Hence why this tech was absolutely massacred last monday after the vaccine announcement.

Below is a graph of triple leveraged etf's - one for midcaps (MIDU), one for semiconductors/microchips (SOXL), one for the S&P 500 tech index (TECL), one for NYFANG (FNGU), and then just zoom on its own (ZM):



Now it's pretty obvious to see that the more the businesses relied on everyone being stuck indoors etc, the harder it was hit. That's completely unsurprising. But what isn't surprising (to anyone paying attention) is how they recovered since bottoming out. Take a look at the difference in last week's bottom-out vs its close. You'll see that the midcap etf didn't actually move that much and until friday was actually decreasing whist the others were increasing. Even then, the difference between its bottom out and friday's close number is huge compared to the others.

In short, midcaps did not keep pulling after the bottom-out. In fact, the post-vaccine madness actually started to reverse itself.

It was my very firm opinion that this would have kept going and some simple extrapolation tells us that it wouldn't have been long before the post-vaccine runs/drops had all but erased themselves and the reason for that was very simple and was even being talked about (as I posted) by the talking heads on the news:

The virus hadn't gone away.

In fact, the virus numbers were only getting worse and the market, after pulling itself together, was responding to that reality.

Now let's take a look at what happened with today's vaccine announcement, marked on the chart here:

Notice how the mid-cap etf did the same thing again but semiconductors/tech/fang/zoom didn't?

All the others plummeted last time whereas they barely moved today. In fact, zoom only dropped 1.1% whilst the fangs and tech gained and semiconductors actually beat the midcaps:



This tells us that the market knows that monday's reaction was overblown. It knows that even this far better vaccine from moderna is not a silver bullet that just changes everything on the spot and that we have skyrocketing virus numbers and an absolute hell of a winter to get through first. The above movements (or lack thereof) are not the only smoking guns for this either:



I'm not going to move from megatech to midcaps... yet. I want to see how the market plays the next few days. Considering that there aren't any other vaccines with results due soon, if my hunch is correct, from this moment onwards, the only news is going to be virus news, and the markets are going to respond accordingly just like they were pre-moderna vaccine.

Admittedly it's only two hours after close, but here are the futures as of 10.12am AEDT:



If I've eaten my words in a few days' time, it'll be time to adjust.

 

[Smurf1976]

it's an effective vaccine that we can actually roll out using the world's existing cold storage infrastructure

For the record, any decent household type freezer can achieve -20C, indeed they normally operate at -18 which is well within their capabilities, so storage at that temperature won't be at all difficult in practice given that even common household appliances can do it.

 

[sptrawler]

On the subject of virus induced digital currency disruption quite a good overview article today.

Disrupting the disrupters: China is slamming the brakes on Big Tech

One of the most difficult challenges facing regulators around the world is how to deal with the explosive growth and increasing power of the big tech companies. China has just shown how it will deal with them.

www.theage.com.au

Of interest and a subject we have discussed several times, from the article:

There has been explosive growth in the non-bank, or shadow-banking, sector since the GFC as new players without the capital and liquidity requirements of the regulated institutions and, with regulated access to their data, are eroding their traditional dominance.
The growth of the mega-techs is also raising a long-term question mark over the ability of the regulators’ to maintain the stability of financial systems and governments’ ability to protect consumers, protect their data, implement their own monetary policies and police money-laundering, cybercrime and tax evasion. There’s also the small matter if the tax they pay, or don’t pay.

So far the authorities have tended have a laissez-faire stance, seeing more benefit in the innovation and disruption than downside. That now, however, appears to be changing in line with the sheer scale and global market power the biggest of the tech groups have achieved.
Perhaps it isn’t surprising that China, given the authoritarian nature of its governance, has been among the first to react.
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While the external focus of the suite of new regulations has been on its impact on Jack Ma’s Ant Group and its now-aborted IPO, they apply far more broadly and, rather than simply responding to the imminence of Ant’s IPO (or, as some have suggested, inflammatory comments by Ma in the lead-up to its launch) have been years in the making.
China has special concerns about fintechs and shadow banking more broadly. For at least the last four or five years it has been showing increasing angst about the growth in its non-bank financial sector, the rise, and rise, of the levels of leverage in its household and small business sector and the relationship between its banks and non-banks.

IMO this could be the start of much stricter control over fintech companies, it is difficult for a government to run monetary policy, when they don't own the currency.

 

[over9k]

Of course. It's only an issue when it threatens the politicians/vested interests/power. Until then, as far as the power is concerned, it's everyone else's problem.

The bitcoin bulls had this conversation years ago.

 

[over9k]

For the record, any decent household type freezer can achieve -20C, indeed they normally operate at -18 which is well within their capabilities, so storage at that temperature won't be at all difficult in practice given that even common household appliances can do it.

Exactly right. Hence why I didn't lose my mind over the pfizer vaccine but I consider the moderna one to actually be a game changer - it would have taken, at best, months just to build the cold-chain infrastructure for the pfizer one. Moderna's can be put in any household/industrial/etc etc freezer. Hell, we can transport it in normal freezer trucks/containers.

Don't get me wrong, we're still going to see the winter wave, but once we're through that we'll be well & truly on the home stretch. There is light at the end of the tunnel now.

 

[over9k]

Alright so the news is absolutely nothing but virus numbers now. Here they are in summary:



And here they are in a few more specifics:



Consequence:



The americans are approaching things a little bit differently though. They really don't want to lock things down any more, and so are using positive test rates rather than numbers:



So despite news like this:



The markets simply don't care (because as if we're going to roll the pfizer vaccine out anyway).


Instead, the day was completely defensive with bonds running (relatively) hard:



However, on a day when almost everything was in the red, it was once again the R2000 that was head & shoulders above the other indices:



Not just beating the dow by nearly a full percentage point, but also the only index actually into the green. In other words, microcaps are not just gaining the most on positive days but are even actually gaining when all the other indices are into the red and the market has gone so defensive as to move into bonds, yields on which are currently at record lows near zero - putting them in the realm of being as defensive as a rotation into cash.

You'll also note that the tech-heavy nasdaq lost just a third of what the dow did, and I'll get into both that and the aforementioned lack of bond yield in the next post.

 

[over9k]

Alright so the following might seem a little bit "no **** sherlock":



But it was broadcast in the context of three major events: First, home depot reported earnings, second, amazon announced its online/digital pharmacy service (so the ability to order drugs on amazon.com) and third, retail data was released.

Home depot reported more big earnings numbers:



But actually dropped in response and as you can see below, the share price has been absolutely flat for over three months now:



So the question we have to ask ourselves is, of course, why.

Well, retail data tells us the whole story here:



What the home depot people correctly pointed out is that there are a lot of these stay-at-home stocks that are one time events. In other words, what we've seen is a big spike in purchases of "long term" goods, i.e the total opposite of consumables. Things like furniture, whitegoods, home renovations and the like. These are items which once purchased are kept for years and years and years (usually decades) and so while sales are huge now, they are not going to remain so and as you can see from the above data, haven't - once the initial rush was over, well, it was over. Once you've bought a couch or whatever you're not going to buy another one for quite a while are you?

This is in stark contrast to many other goods however. I loaded up on products with much faster life cycles - things like semiconductor etf's (electronic items are in a perpetual state of movement to obsolescence and so being rebought constantly) but avoided these once-off-product selling companies like wayfair, harvey norman etc, and I've shown just how well semiconductors have done lately. They dropped today, but overall, they've been incredibly resilient.



This all coincided with amazon's "digital pharmacy" going online:



Which matters because this is obviously yet another bricks & mortar business that despite being pretty resilient to long term trends that have obliterated many other businesses, is now going to be absolutely massacred by online sales/e-tail just like all the others have, and the markets know it:



Furthermore, if we channel our business degrees here then the next move for amazon is obviously going to be vertical integration - that is, owning their own supply chain (producing their own drugs) where they can, so all the generic alternative drugs that can be produced by anyone on account of the patents expiring are now going to be annihilated too.



Now recall my previous post about bond yields being so low that they're damn near cash levels of a defensive play/port of last resort.

Well, I'm not the only person to notice this. There's a great article by Susan Barton here talking about trying to find defensive plays other than bonds and even forex being a better defensive play because of just how abysmal the yields currently are (and with no signs of increasing either):

Bloomberg - Are you a robot?

www.bloomberg.com

But the real defensive play here even now, is tech. In fact, even the institutions have finally figured this out:



And, as I've shown over the past few pages, aside from the days with vaccine madness, tech has been the place to be along with the microcaps and today was no exception. Amazon's just started the ball rolling on the obliteration of yet another bricks & mortar business.

This will obviously cease to be the optimal play at some point (probably just after christmas) but for the time being, we stick with tech along with microcaps.



In summary, we keep the barbell spread.

 

[over9k]

View attachment 114682

A full article from the saltmine at bloomberg having a cry about retail traders showing the pro's up:

Bloomberg - Are you a robot?

www.bloomberg.com

Retail traders have done well because they haven't been so stupid as to think that quantitative trading/financial modelling is actually valid/functional in an atypical market.

I've said it before and I'll say it again: Modelling only works under normal market conditions and if anyone wants a mind-blowing lesson on how this was learnt the hard way, look up what happened to "long term capital management" in the 90's.

Ok so remember this post?

Well:



Lol.


Not being funny here, how clueless do you have to be to genuinely think that modelling is still valid in this environment?

 

[cutz]

So in SA a security guard who works at a medi hotel also has a part time job in a pizza bar, now the states in lockdown !!! How the kcuf does this happen !!!!

Clearly similar also happened in Vic, low paid workers holding down multiple jobs, this should have been stamped out months ago, pay the security guards properly and make sure they don't work at medi hotels and restaurants at the same time . FFS !!!

 

[wabullfrog]

So in SA a security guard who works at a medi hotel also has a part time job in a pizza bar, now the states in lockdown !!! How the kcuf does this happen !!!!

Clearly similar also happened in Vic, low paid workers holding down multiple jobs, this should have been stamped out months ago, pay the security guards properly and make sure they don't work at medi hotels and restaurants at the same time . FFS !!!

End result SA now in a 6 day lockdown.

 

[over9k]

So in SA a security guard who works at a medi hotel also has a part time job in a pizza bar, now the states in lockdown !!! How the kcuf does this happen !!!!

Clearly similar also happened in Vic, low paid workers holding down multiple jobs, this should have been stamped out months ago, pay the security guards properly and make sure they don't work at medi hotels and restaurants at the same time . FFS !!!

Yeah it's kind of surprising that there isn't some kind of self-isolation condition(s) with having that job. You'd obviously have to pay them more, but so what? The costs of contact tracing would be 1000x any extra wages you'd have to pay.


Governments trying to cheap out as usual.

 

[cutz]

End result SA now in a 6 day lockdown.

Apparently, according to the press conference, not exact wording but the message I understood was.. the state cannot impose restrictions on people's freedom to hold down multiple jobs including medi hotels in the mix... those freedoms have enabled medi hotel leakage and a potential repeat of Vic's disaster... I really hope I'm wrong !

 

[Smurf1976]

So in SA a security guard who works at a medi hotel also has a part time job in a pizza bar, now the states in lockdown !!! How the kcuf does this happen !!!!

The concept of quarantine is like many things. Crucially important but inherently simple and easy to understand for anyone who wants to understand.

A mistake is someone failing to pay their gas bill on time or driving 5 km/h over the limit at the bottom of a hill, those things could reasonably be described as unintended mistakes. Having people working in quarantine facilities also working in another place that involves contact with the public is however not something that could sensibly be described as a mistake. That's simply outright stupidity and represents either a serious misunderstanding of the entire concept of quarantine or reckless behaviour.

Looking at this, I'm thinking that the wrong sort of people have been placed in charge. Quarantine doesn't need a doctor as the boss but it does need someone who's good at religiously following and enforcing rules and who won't bow to pressure no matter who it comes from.

Among others, aircraft captains come to mind as one group who generally have the right attitude and there's quite a few of those out of work right now. They're not experts on quarantine but they're good at taking charge, following procedures to the letter and making sure others do likewise etc and that's the skill that seems to be lacking in all of this.

 

[Smurf1976]

the message I understood was.. the state cannot impose restrictions on people's freedom to hold down multiple jobs including medi hotels in the mix...

I'm not arguing with your post or comment but if that's true then it's ridiculous.

I've personally been employed in the past in a job which precluded any other employment without the express permission of senior management.

 

[cutz]

I'm not arguing with your post or comment but if that's true then it's ridiculous.

I've personally been employed in the past in a job which precluded any other employment without the express permission of senior management.

Unbelievable but true, the ABC may have it on iView, it's difficult to watch.

 

[qldfrog]

Unbelievable but true, the ABC may have it on iView, it's difficult to watch.

Actually who really care,seriously, if not today then tomorrow, with a truck driver, by contact via a rubbish bin, an airvent as in Hong Kong, elimination / eradication is a pipe dream...
We are heading into summer so all will be good for the next 4 months here but northern hemisphere will have plenty of new contamination, not thatbit really matters as many of the frails are already gone and the virus is weakening..as per normal virus behaviour.
So more cases, even less death, but gov pushing the scare tactic even further
So invest in the firms of utopia of the great reset and first xnd giremost orotect your assets, we should see some serious unfolding in the next 6 months

 

[satanoperca]

Yeah it's kind of surprising that there isn't some kind of self-isolation condition(s) with having that job. You'd obviously have to pay them more, but so what? The costs of contact tracing would be 1000x any extra wages you'd have to pay.


Governments trying to cheap out as usual.

Is that your solution! Crap you didn't provide a possible solution.

 

[Garpal Gumnut]

It is pointless blaming the Health Services or Premiers of Victoria or SA for the recent outbreaks of Covid in those states. It is what it is. Quarantine in a mollycoddled 21st Century is in hotels for gawds sake. As a teenager I spent some months as a night porter in a large metropolitan hotel during school holidays and hotels are utter dens of iniquity, the posher the more iniquitous.

Further the keepers of the well people awaiting 14 day clearance in quarantine is in the hands of minimally paid security guards.

The security guards normal jobs are shining lights in to industrial complexes at night-time or enduring Kiwi or Pacific Islander jokes from stoned or drunk patrons of night clubs of a weekend, or calling a copper.

No amount of training or advice will prevent these people from stuffing up unintentionally because they are not Quarantine trained or Quarantine officers. They have second jobs because they are poorly paid, are often migrants and want a better life for their children.

Only the Police or Army are suitable to fulfil this role.

If I were in charge I would quarantine everyone in a remote camp such as was done in Portsea for Victoria last century or on Christmas Island for returning Australians from overseas. It would be run by the Army and would have medical backup.

We need to harden up as a nation. Accept orders. Quarantine in some gawd awful faraway place and allowed leave when cleared by a test.

And stop whinging.

gg