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Stimulus or Survival

Stimulus or Survival


I read this morning that Congress is debating whether to include alternative energy tax credits or emission standards into the current legislation. It is truly a remarkable spectacle. The imbecility of our elected leaders never ceases to astonish. God help us all.

Assuming they pass legislation, let’s ask a simple question: Is it a stimulus or survival package? We have written extensively on how Whack-A-Mole legislation is not effective. Rather than rehash those arguments let’s take a slightly different approach. Human behavior. People are getting sick and some are dying. We are being instructed to not leave our homes, not to go to work, not to go near anyone, to closely monitor our health, all primary and secondary schools are closed for the year and to be hyper vigilant about hygiene. All these factors will have an extraordinarily profound impact on human psychology. Suddenly our priorities are far more basic than in most of our lifetimes. In a word, it is about survival. Basic human instincts start to take over our actions. It’s no longer about frivolous consumer spending but rather can I get to the market for provisions and back again with no human interaction? It’s not paranoia but policy.


In this environment our economy will suffer mightily. No legislation can stop this dynamic regardless of how large the numbers are. It is pure ignorance to suggest otherwise. No amount of hubris or spin will alter this trajectory until people feel safe. That’s it! Governors are implementing panicked state shutdowns as our President considers ignoring health experts regarding federal health policies. So, in addition to the aforementioned, we now completely lose confidence in all leadership. It only accelerates the dynamic. It is infuriating to witness. Stunning really. The asymmetry we wrote about a few days ago will come into play now and we will have a tug of war between state and federal mandates.


We spend our days absorbing information. We continually analyze data, perform research, read research, listen to policy makers, and generally try to stay at the forefront of actionable information. The latest is a debate over what effectively are the tradeoffs between life and money. The fiscally profligate argue that an economic downturn is more harmful than a small percentage of people dying from the virus. That argument is made assuming they are not the ones dying. That’s always the case when folks make these arguments[1]. It trivializes those that are infected and suffering. It’s the Marie Antoinette approach and ignores all the above behavioral realities. People aren’t going to suddenly revert to what was when everything is freaking closed! And how do these people know this to be the case? It seems a morally misplaced argument.


The logic behind these arguments deploy what we call the classic paradox hypothesis or the untestable hypothesis. Narcissistic and self-promoting policy makers have always used this trick to justify their existence. It goes something like this: If we don’t do it, the world will end as we know it. Or in the past tense: If we didn’t do what we did the world would have ended as we know it. The principle is the same. Escape true leadership decisions and justify all decision making no matter what the outcome. Central bankers and politicians are most famous for this logic. Hypocrisy and arrogance.


Until the virus is truly contained, we never get to a point where the economy can heal. Without that, no fiscal package will do anything but largely waste resources. The behavioral aspects of the health crisis will cause a severe economic slowdown. Nothing fiscal will change that trajectory at this point. All it will do is make business want more “free money” rather than making proper long-term adjustments. Policy makers are simply panicking. They feel that doing something, even if it is ill conceived, is better than nothing. We disagree. Long-term policy decisions require deliberation, information, transparency, communication, and objectivity. None of those characteristics are anywhere near state capitals or Washington, DC.


We have become a society where instant gratification is the norm and our policy and decision makers create solutions using the same paradigm. Unfortunately, a virus doesn’t operate that way. It is far more methodical, resilient, and unforgiving. Time is of no consideration whatsoever. Humanity is merely a vessel for it to spread, infect, kill, and move on. It cares little about our lives or our economy. Leaders need to exhibit far more fortitude if we are going to defeat COVID-19. Currently, we are losing the fight big time. We need to become far more ruthless toward the virus. Victory depends on it.


Some practical risk management


For a decade, and in the last few years in particular, we have witnessed risky asset classes meaningfully appreciate in value as traditional risk measures declined. This perverse dynamic was exclusively due to excessive liquidity injected by the Federal Reserve.[2] They are now unwinding. It will take time. Be patient. An outcome is that bond indices are now over-weighted toward highly indebted corporations (those with the highest bond market values). Therefore, don’t buy bond index funds as the default risk inherent in them is much higher than being quantified. We recommend buying individual names to exploit valuation decoupling’s due to the liquidity issues throughout the market. Also, equity markets will continue to gyrate. Nothing goes down monotonically. Resist the urge to trade. Invest instead. Again, be patient. As explained above, this crisis will pass but not until fear and panic are eliminated. That will require a new equilibrium and that will not happen until the virus is crushed. Risk management is vital. Be safe.


[1] It’s the same with globalism; the implicit assumption of those that argue for a borderless world is that they will be in charge. Their incestuous arrogance is flabbergasting.

[2] Please read our other commentary. We have written extensively on monetary policy.

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