So we have not posted for a while – somewhat surprising because the COVID-19 situation has everyone working from home which would mean that we have a lot of free time.
We were busy with our real jobs instead of this charity/volunteering, sorry.
Anyway, most market participants are shell shocked right now and for the two primary consumers of our content (people looking for finance jobs and people looking for bad investment advice), you may be looking for yet another talking head that never advertises their track record.
The Investing Strategy That Works Until It Doesn’t
Have you ever heard of the old adage picking up pennies in front of a steamroller?
Last year’s version was shorting the VIX (actually this year too). Trump loved the markets and the markets loved Trump – basically no volatility as the major indices climbed and climbed.
A bunch of traders at bulge bracket investment banks shorted the VIX because it was the trade that never lost. After a quick correction, they blew out their positions and many of the adherents of this trade were summarily fired.
Events like this remind us that portfolio management and risk management are important. In a bull market, a rising tide lifts all boats. Everyone thinks that they are a genius – people were winning with tech bets, people were valuing WeWork at tens of billions of dollars, valuations kept rising and Wall Street keeps cheering.
When the tide recedes, we now see who has been swimming with no shorts. And in this instance, the tide receded quickly.
As with the financial crisis, a lot of people have already made a lot of money. Apparently Bill Ackman made $2.7 billion dollars in a month.
However, far more people are in a bind.
As a function of my profession, a number of contacts and friends who have done well in other industries like to discuss the markets with me and I have to entertain them, despite knowing their field a lot better than they know mine.
Carry Trade on Steroids
One of them likes to market a structured product that his private banker suckered him into making. It is (was) some sort of complex carry trade that involves borrowing in a currency with very low interest rates, exchanging that for Pound Sterling or US Dollar and purchasing cuspy investment grade credit – all the while compensating the bank lavishly via the opaque embedded charges in the structured product.
The leverage allowed works like this. You purchase the underlying bond and the bank provides you the loan for twice the principal you subscribe for.
And then they ask how institutional investors only aim for 8-10% returns on equity when they can get a risk free 15% (on a 5% coupon) as they have for the last three years.
Anyway, I am sure they now know (the risk is in the currency depreciating against the King/Almighty US Dollar, as it tends to do in risk-off situations, and getting margin called or unable to refinance).
A lot of friends had unfortunately decided to stretch their personal balance sheets to borrow and gain market exposure – primarily because of fear of missing out (FOMO). This means borrowing against property, borrowing against securities and taking on unsecured personal loans. Asset managers, especially the ones that target retail customers, are also well known for pushing products with embedded loans.
As the market value of securities have plummeted across the board with notable exceptions given the major societal shifts in adjusting to the virus (Zoom Communications, Microsoft Teams, increased penetration for online shopping and logistics for Amazon), the collateral used to secure loans has shrunk rapidly, leading to forced selling. This means realizing a bad loss – leverage can wipe you out.
What Brad Pitt Said in The Big Short
One thing to takeaway from all of this is to not lose sight of the humanity beyond the numbers.
Well, there is also the other thing which is wash your hands and stay home – to do otherwise dilutes any moral standing you have. Negligence is a crime, and just because it is not enforced (in America) doesn’t mean that your status as a good human being is not diminished.
When you live in a finance bubble, it is easy to worry about 40% reductions in variable compensation that are being floated around but the reality is that real people are suffering outside.
When we appropriate blame for a disease, we dehumanize people. As a society, both nationally and globally, we are the sum of our parts. Setting up walls through divisive accusations only pushes people towards alternative regimes.
Viruses do not have a nationality, and looking for someone to point fingers at does nothing to help solve the problem.
It also separates us from what really matters.
There are people who cannot make ends meet because of this shutdown and feed their children. For countries that do not have these monetary policy responses or enshrined and trustable institutions in the developing world, this is a matter of life and death. And for an incredible what may end up being hundreds of thousands or even millions of people, they may die without ever having the solace of seeing their loved ones before they go. The last image in someone’s head will be a faceless doctor in a hazmat suit.
By nature, humans are social animals. Touch is an inextricable part of the connections that make us who we are. The coronavirus is especially cruel because it denies us of that human dignity.