The Interesting Times is a short digest of the most interesting things I find on the internet, typically centered around finance, tech, bitcoin, complex systems and decision making under opacity.
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"A good plan violently executed right now is far better than a perfect plan executed next week."
George S. Patton

The Interesting Times is a short digest of the most interesting things I find on the internet, typically centered around finance, tech, bitcoin, complex systems and decision making under opacity.
Thought Bubble: What will happen in the stock market?
One of the most powerful sensemaking tools is the use of analogies. As we are going through a fairly unprecedented event in world history, I think it is natural and logical to lean on historical analogies as a starting point for thinking through what the future may look like.

Here are three historical analogies for what we've seen in financial markets over the last month (though the lessons apply much more broadly than markets).

The first place people start is 2008 and the global financial crisis. It's the most recent large financial crash in most people's minds and the emotional feeling is somewhat similar.

The challenge with this analogy is that what we are seeing now is not just a financial crisis, but a crisis in the real economy in the form of a supply-side shock and demand-side shock - both at the same time.

Demand is obviously falling off because people are working from home. Besides toilet paper which seems to be enjoying a Renaissance, demand for goods and services is falling off a cliff.

The supply side of creating those goods and services has ground to a halt because everybody normally making those items is at home. Given our incredibly globalized supply chain, that reverberates around the world.

Closed factories in Shenzen or Iowa don't just affect Shenzen and Iowa, they affect everyone.

The whole world is stopping for 30 days and that's unprecedented. 2008 was more like rolling recessions or rolling liquidity events related to the mortgage bond market. The problem was primarily in the financial markets, not the real economy like we are seeing now (though it certainly affected the real economy).

As we looked at last week, some (most?) of the moves in financial markets seems to be driven not by concerns around the real economy, but highly leveraged institutional players being forced to sell some of their assets

A better historical analogy for that scenario is the 1987 flash crash where the market dropped 22% in a single day. Similarly, it was a liquidity event in financial markets (caused by what we now call portfolio insurance) as opposed to something happening in the real economy.

The market came back almost as rapidly as it fell. The documentary Trader follows trader Paul Tudor Jones who called the crash and profited from it.

At the end of the documentary, Paul Tudor Jones was pontificating that we were about to see another Great Depression. He thought people were about to go through years, if not a decade of pain. After 1987, unlike in 2008, we saw a sharp "V" recovery.

The roaring 1990s were the greatest ballooning of asset prices in world history, especially, in America. Anyone forecasting a Depression in 1987 missed out on the huge rally over the next decade.

A third and less known historical analogy was the Hong Kong flu of '69. Similar to the present situation, it was caused by a pandemic that had both supply-side and demand-side effects. Like 1987, it was a sharp crash, and a sharp climb back up.

However, investors encouraged by the quick recovery were quickly disappointed. Instead of a period like the roaring 1990's, the market was wrecked by inflation for over a decade. The S&P didn't recover to its previous highs for another 16 years, 1994.

So, for 16 years, investors were waiting on a recovery back to a new high. If we saw a scenario like that, it would be 2036 before the stock market returned to its high of February.

I picked those three examples to try and show both the usefulness as well as the limits of historical analogies.

I can point to a reasonable historical analog for a quick recovery and a roaring market, a stagnant market or an extended depression and recession.

My belief is that investors must be prepared for all these path dependencies.

I have no idea what is going to happen in global markets over the next few months, much less years. I do know that for an effectively diversified portfolio, it doesn't really matter.

I’ve written a couple articles about portfolio diversification including:

I've also launched the Mutiny Investing Strategy which is designed to act a form of antifragility that benefits from volatility like we've seen over the past few months. You can reply to this email if you're interested in learning more about it.

We also have a podcast that includes interviews with some of the worlds leading hedge fund managers that design strategies to benefit from volatility and stock market declines.

To paraphrase an old saying, the best time to diversify your portfolio was 30 years ago. The second best time is today.

Likewise, if you are a business owner or operator and you have not done scenario planning for worst-case scenarios, now is most definitely the time. Hopefully, you will never need it. But, as they say, hope is not a strategy.

Here is a budgeting and forecasting sheet I created for my clients. Please go to file --> make a copy if you'd like to use it for yourself.

P.S. Most importantly, I am wishing health safety for everyone and their families. I was initially writing more about the health aspects of COVID-19 because I felt like it was getting broadly ignored. However, given the plethora of good information from more qualified commentators that have come out in recent weeks, I will return to the regularly scheduled programming of more market and business-related commentary.

Best Stuff I Read
Alex Danco

Useful explanation of antifragility in information-theoretic terms.
Are Commodities Still a Good Portfolio Diversifier?
Dual Momentum

An interesting look at how financialization has impacted commodity futures market.
The World After Coronavirus
Yuval Noah Harari

Important piece from Yuval Harari on how we must not allow governments to use COVID-19 to take away or infringe on essential liberties.
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