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  • Writer's pictureChristian Hyldahl


The capital markets have reacted to recent legislation with enthusiasm. The injection of government resources has created an extraordinary BTD reaction. Buying the dip has become the mantra across the investment universe for the past decade. Investment professionals have become so well trained that they simply believe to their core that no matter the fundamental backdrop if the market goes down it must go up immediately. The Federal Reserve liquidity machine has made it so. It is simply an irresistible combination (Robert Palmer is ringing in my ears). Last week was another example of this dynamic. Perhaps it is closer to the machismo version known as buying the f****** dip, BTFD!

It may be that the markets initially overreacted (like most leaders) to the virus. But the suddenness of valuation changes signals to us just how little the markets really know how to value securities. Ultimately, fair value of an asset represents the present value of future cash flows. This can be crudely expressed as V=∑df(t)*CF(t), where df(t) are the discount factors and CF(t) are estimates of cash flows (dividend, coupon, earnings, etc.), corresponding to some future date t. When V fluctuates so massively one must ask which of these variables is changing so wildly? For risky assets, neither input is known with anything close to certainty. It becomes strictly a trading environment with no reference to the basic valuation relationship. So supposed investment professionals revert to the liquidity driven insanity of the BTFD paradigm. It is concerning for anyone who elementarily understands valuation and market principles, like us. The pure hubris and shortsightedness of this reaction is quite astonishing as we watch the world literally shut down.

It is more than a little disconcerting to witness. In the span of a few days the market has spasmed so violently it’s ridiculous. Meanwhile, the world is literally closing operations and university dorms are being converted to hospitals. [Granted, as we wrote about last week, these same universities will probably be going out of business!] And the capital markets have somehow re-estimated valuation inputs upward with these new facts coming out? Why? Because of some poorly structured domestic spending bill? It’s just difficult to understand other than the BTFD-Fed feedback loop. Could this time be different?  Yes, to the downside. The entire world will suffer economically like we have not seen in a century. Emerging markets, including China, are going to be impacted worse than during any other crisis in history. They simply do not have the capabilities to deal with the issues they are confronting, and the developed world is too busy trying to deal with the same problems. Investment opportunities will present themselves for those with liquidity and patience.

Fiscal Policy – We’re all Keynesians Now

The principle that resonates through all government decisions over the last few decades is the government takeover of the economy. Keynes would be ecstatic. Bush-Obama-Trump have used the government as a hedge fund with no thought on the country’s future. Fiscal profligacy. Our debt level is now larger than our economy. This threshold has historically doomed nations.[1] We are there now. We will be writing more about this for a long time. Mindless spending is not helpful in this crisis. Targeted and focused policy is what is needed. We have written about this exhaustively in previous commentary.

Legislation really needs to be more reactive and information based. This proactive, buy votes, legislation is largely a waste of resources. Policy makers need to be facts based not fear and emotion based. We are distraught by the horrible decision making by policy makers. However, we must keep asking what are the fundamental investment implications? When the markets are in the Fed-BTFD mode, is it possible that the markets continue to completely ignore the facts that are plain to see? Can we simply have a situation where so much federal money floods the equity markets it has nowhere to go but up in the short term? It’s a simple supply vs. demand phenomenon – so much cash with no asset class competition – that prices percolate upward as the BTFD approach loses steam. This is what happened last week. We firmly believe that this cannot last. Ultimately, fundamentals and economic reality will pull this equity market and risky debt to a new equilibrium. The days of the Fed-BTFD dynamic will peter out and risk managers like us will enter the markets.


The markets will continue to fluctuate wildly in the coming weeks. The magnitude of what’s coming is just unknown. I have not read or experienced anything like what’s coming. And neither has the trading environment. The BTFD approach will fail miserably in this environment. We must invest, not trade. We believe strongly that investment opportunities will present themselves in the coming months. Right now, we care primarily concerned for the well-being of our society. Make no mistake: that is what’s at stake! The economic impact will be violent and much longer than anyone currently trading understands. These traders really need to familiarize themselves with an acronym that crosses my mind when I watch the tape, WTF?


Finally, a word on the constant harangue across political parties regarding the decision making process on how the virus was addressed over the past few months. Having coached for several years I have always found the MMQB mind numbingly useless. It’s easy to criticize decisions after you know the outcome. It’s disingenuous and unproductive. Shoulda, coulda, woulda is no way be taken seriously. We are here now. Where do we go from here? That’s what we need to focus on. Let’s figure out the best plan forward that exclusively focuses on the health of our fellow citizens. Stop the finger pointing and the perfect hindsight game that is being played out across the media outlets. It trivializes what’s happening across our great country. Overcoming the virus will be far easier if we fight together. God Bless America!

[1] See Reinhart, Carmen M., and Kenneth S. Rogoff. 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton, New Jersey: Princeton University Press.

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