It’s been an incredible week and our Hive of experts have been busy debating, analysing and positioning the market moves. I had over 100 pages of transcripts of our discussions to sift through, and I’ve cut it down to the juiciest 15. As usual, the opinions are not the official view of Macro Hive. We cover various markets (credit, equities, rates), we discuss oil, dollar shortages, recession and inflation risks. We also highlight some useful info on COVID-19, and we go deep on complex systems. Finally, we end with some advice from Benoit Mandelbrot and some humour.

Crisis Roadmap

• Big moves won’t be the trigger. Disorderly is the trigger.

• Margin and collateral issues will be their rationale, but in the understanding that that cut would be their last…

• Option shorts and correlation longs are deeply embedded across factors, sector, products… across everything.

• QE has led to the misallocation of risk capital on an egregious scale.

• But momentum has papered up the cracks.

• Black swans fly in formations, hovering over.

• If you want a single name for a systemic disaster: JPM CDS.

• I guess the ‘Deployment Option Value of Cash’ is something everybody is learning about today.

• ALL EXCESS RISK IS BAD – even winning trades.

• Counterparty risk is today’s lesson.

• Liquidity auctions are the name of the game; as various markets shut or cease trading, you need to stay abreast of where liquidity is available.

• But this is the global short liquidity position.

• Minsky Moment. Risk of Ruin > Risk of Recovery.

• Banks saying recent market moves have been a bloodbath… tips guys got crushed… relative value crushed… there’s also talk of someone big in trouble with the breakdown in correlations.

Credit

• The majority of issuance in last 12-18 months has been BB. That’s where the bodies are buried.

• Benchmarking means that just the capitalisation weights force investors to hold more BB too.

• Reality check: the vast majority of BBB downgrades will be to BB, not CCC. It will take another year or so of bad times for most downgraded BBB companies to get to CCC. And most of them will stay in the BB or B range.

• Disagree: we are discussing solvency – it’s not a gradual decline of the business cycle after destocking it’s cash flow??

• The CCC sector is populated with a fair number of small energy producers. Given the news about a Saudi price war, they will fall soon unless the government somehow steps in for national security purposes.

• But BBB companies are BBB companies in large part because they have business models that generate decent cash flow under most scenarios. It would take a plunge into depression and economic standstill to kill them in one blow.

• True, but there is also a point of fees and putting the money you have in your funds to work.

• .. but it’s their supply chain that goes insolvent. That’s the great compounding risk of leverage. That’s the economic standstill depression scenario.

• There is a big risk that a bunch of BBBs go to BB based on what is developing, but only a small risk of going straight to CCC – that is, unless you get the economic standstill scenario.

Equities

My recommendation: keep the shorts on.

Chart 1

Chart 2

• That looks a lot like 35-40% just right there. Time for gravity to reassert itself.

BUT

• S&P profits and economy-wide profits are apples to oranges.

• S&P is the largest corporations. In Monopolistic US, they make the bulk of the profits.

• 500 firms in SPX are only a small part of total firms in the US. Then there is a difference in the way earnings and national accounts profits are estimated.

• If you use a broader index than the SPX, the difference with national accounts profits is not that big.

• Sectoral weights of SPX are far from representative of GDP weights for the respective sectors.

Monetary Policy

Fed Bazooka

• ‘Specifically, the Desk plans to distribute reserve management purchases across eleven sectors, including nominal coupons, bills, Treasury Inflation-Protected Securities, and Floating Rate Notes.’

• Buying now across the curve. And 500 billion slugs of repo.

• The system has tried to deleverage many times now. And the Fed always says ‘no’. This carries a price, however. Risk has consequences… eventually.

• And at PEAK NAV!

• Why the Fed’s large balance sheet poses a problem as zero lower bound nears.

TLTRO and TFS

• The BOE TFS shows that CBs have a very powerful new tool; no need ‘to buy everything’ as CBs worry about financial stability.

• ECB was the trailblazer here with the TLTROs program. I think it is the most innovative CB; the Fed is still stuck firmly in the past.

• Dual rates are the way forward.

• MM rate targeting; UST yield pegging is suboptimal.

• The downside of the new programs is that CB still relies on the banking system for monetary/credit transmission, which means really twisting the banks’ hands to lend. Banks are dying a slow death, with their margins on a structural decline. At some point the CB will have to go into direct lending.

BUT

• The major problem for CBs is exogenous. This is a situation whereby the use of schemes like LTRO are always accessed via collateral and relevant haircuts.

○ The assumption is 100% clear: that the collateral remains ‘money good’ and there is NO DEFAULT.

○ Unfortunately, that is perhaps not a good assumption. They have to make it ‘money good’ and Ponzi it up.

○ No haircuts and zero rates and fingers crossed.

Bank Risk

• Banks, especially European ones, have the following problems:

○ Short convexity risk – check;

○ Solvency risk – check;

○ Counterparty risk – check;

○ Profit margins – absent;

○ Scope to grow – absent.

• Consolidation will occur and staff will get fired, but there is no margin in these businesses. The larger guys will be kept alive as a transmission mechanism for the ECB; the smaller ones, ciao.

• Precisely, these guys’ balance sheets are already shredded; they maintain regulatory solvency but outside of that… not so much.

• Who will want to support the next cash raise for a European bank? And then the next one after that?

○ BoE! But they would be better spending their scarce resources in supply chain funding – they have even suggested this .

Dollar Shortage

• An unintended consequence of this oil shambles is the sudden shortage of petro-dollars in the global system. This will exacerbate USD funding issues.

• And when oil prices collapsed from $147, that was a precursor of the GFC (USD funding crisis).

• Less USD overseas didn’t help real estate or credit for sure, losing buyers of US fixed income markets (outside of govvies). And less USD to service EM debt.

• We never fixed any of this, just papered over it.

• The Fed can save a lot time and lift the whole market with QE.

• But QE needs more ammo this time. Perhaps 4x more Fed balance sheet for the same effect.

• It must go exponentially bigger each time, but there are no real constraints to doing so…

Oil Price Cut

 Not an increase in production

• No-deal on cuts does not mean an increase in net production. For example, Saudi is not ramping up production; they are simply offering discounts on their existing deals. This is not a price war; Saudi is simply trying to win market share from Russia, that’s all. And anyway, apart from Saudi, very few other countries including Russia have much spare capacity left.

• Saudi Arabia has privately told some market participants it could raise production much higher if needed, even going to a record of 12 million barrels a day, according to people familiar with the conversations.

Sheikh vs shale

• This is a repeat of Saudi’s 2014 war against shale: ‘The best solution for low prices, is even lower prices’.

• Saudi lost that battle and MBS was left badly bruised. This is Take Two (and the three arrests are no coincidence). Maybe they think this time round private equity (PE) plus bond investors won’t bail out shale and other producers, so they can kill them once and for all?

• I doubt that will work. The worst case is shale operators go bust, and PE buys assets for a song.

• You have seen heavy consolidation in shale and a move away from SMID caps to large caps and the US IOCs as drivers of shale growth. Also, shale production is easy to shut down and then ramp up again.

• So, major shale operators have deep pockets. And friends in DC.

• Peak to trough shale decline during the last downturn was 1 mb/d in 2016; the base is a lot larger now; and the decline will be a lot larger; if activity stalls US production will crash. Market has baked in 0.6 mb/d crude growth this year…

• There is some lag before a production response is seen, but imagine the swing in balances if we go from the 1 mb/d average growth seen over the past decade to a decline in US production…

• So we are at the lows from back then.

• The truth is, they can’t produce at the levels they claim they can – Trump has already called their bluff: they don’t have spare capacity… And all of the work they are doing is to try and sustain supply of around 10 mb/d, give or take.

• Their largest fields came online 60-70 years ago; they have gone over the top.

Oil stimulus

• Isn’t there an argument here that the Saudis just handed non-petro economies a fantastic and quite timely stimulus package?

• Perhaps also the Russians have delivered a present to China and Turkey, who are both hydrocarbon importers.

• This is Putin winning the geopolitical game.

• The positives of that come slowly… the negatives of a potential credit market seizure come much worse, and faster.

• China will be grateful for the lower oil prices as it recovers from the COVID-induced shock. Also, the oil price drop should soften price pressures in Turkey. It is a sweetener for Erdogan who agreed to a ceasefire in Idlib last Thursday following gruelling six-hour talks.

Inflation Will Be Back

• The clearest asset allocation will be to bet on grotesque inflation.

• Come out of this episode having made a huge allocation from nominal bonds into TIPS.

• For deflationistas, tools are slowly dying – it’s soon time to retrain for inflation!

• Look at where TIPS breakevens are now. Gift.

• It will be a volatile period as we transition, but it’s the right call.

• It’s not a ‘trade’; it’s a long-term asset allocation that anybody with 5-10yr investment horizon should make.

• Stockpiling for basic essentials will now go global. Soft commodities are unloved (the worst asset class returns since 2008), under-owned, under-priced, and may finally have their time in the sun.

• Like DBA ETF? 4% negative carry a year, though.

Past Pandemics and Current Recession Risks

• Reviewing all the pandemic literature leaves one quite bearish.

• There was a recession in 1918, a recession in the 1957 Asian flu, and growth fell sharply during the 1968 flu. If we get similar changes on growth today, it would tip most economies into recession. Currently, consensus has barely revised down their forecasts for the US or Europe (BBG has no revision so far this year).

BUT

• If you look at the impact of the Spanish flu in the US it was panic, not on the same scale as social media-enabled panic, of course, but no output collapse. There was a short recession at the end of 1918, but it was largely driven by the end of the war boom.

• The same thing happened in Russia after the fall of the wall; male life expectancy fell to below 60 years due to violence and cardiovascular disease (i.e. too much vodka). There were 4 million extra deaths, mainly working age males, and growth did not collapse. Model-based estimates are lowered growth by 0.3 ppt.

• What made the GFC what it was is not there today. Banks are safer. It looks like ‘garden variety’ economic slowdown. Of course, there will be bankruptcies and losses for risk assets, but not a financial crisis.

• And influenza is not part of the recession narrative. ‘57 was mainly an end to a global capex boom and higher rates; ‘60-61 was one year after the flu epidemic and basically fed tightening.

• That said, it’s a fair point to say that growth rates are lower and so it is easier for economies to fall into recession.

Recession Risks

• This whole COVID-triggered episode is going to rapidly expose cashflow assumptions. Expect massive DEMAND & SUPPLY SHOCKS.

• Remember this shocking fact: we haven’t had any contemporaneous economic data as yet… (China doesn’t count!)

• The end of March and the first couple of weeks of April see US and Chinese GDP back to back – then the real benchmarking can begin.

• April data will be astonishing, which we get in May.

• These CB moves are going to make literally no difference to consumption. They simply shore up costs of maintaining zombie balance sheets.

• When is some economist going to state how much worse this is than 2008? That was 2Q of bank-only refinancing. This is the whole world’s economy. Surely it’s that simple?

• Banks are super-levered worlds; yet for a less-leveraged world, people think we can pull out of it?

• But when a bank goes its nuclear to the system; this is shrinking by thousand cuts? Just playing other side… I agree this is bigger.

• But all the shadow banking leverage was just replaced with unleveraged central bank balance sheets.

• Debt is 2x bigger than in 2008.

• People think CBs rule the world and cannot be challenged, but if everyone shifts on that notion…

• Cash in chips; CBs cannot buy it all.

• They just need to buy enough to grease wheels, etc., but in a real sudden stop they will let chips fall where they may and pick up the pieces after; that creates for a better recovery and narrative.

GDP Sudden Stops

• With imagination… looking for ‘boundary conditions’.

○ Q1 If whole world ‘stopped’ for 1 month, is that global GDP/12?

○ Q2 If not, then what is it?

○ Q3 Does that ‘scale’ to 1Q?

○ Q4 If not, then what is it?

○ Q5 Is this episode V-shaped? U-shaped? L-shaped? Another letter in another alphabet?

○ Q6 After recovery, what will the global economy look like?

• A few thoughts: economic activity won’t completely stop. But whatever the haircut, whether it is GDP/12 or not, depends on how much is foregone economic activity vs delayed activity. If you cancel the cruise and just do a staycation, then that is ‘lost’ activity. If you just push the cruise back a few months, that is delayed activity. Restaurant meals, movie tickets, conferences and conventions – those are probably all lost activity. Car sales? Probably delayed activity. And so on…

• Now the shape…V, U, L whatever. If unemployment rises sharply, it will take a long time to get people back to work. In the US, employment keeps rising in part because the participation rate of the 55+ cohort is rising. Those old people will be the first to get cut. One would guess that more than a few will be lost to the labour force if the slowdown/recession is protracted – since GDP growth depends on labour force growth.

• It will take a while for travel and entertainment to recover, but also some investor confidence will be dented.

• So L or ‘broad’ U is plausible.

Tracking Growth Real-time

• Here’s a traffic chart of the past 7 days traffic in a major Chinese city. Looks like weekends are dead but weekdays are normalising.

Chart 3

• Pollution is lower than last year but rising (69%) of same time as last year.

• Shanghai weather is warming, too, so less about domestic heating and more industrial production and traffic.

• But, Lights Are On but No One’s Working: How Local Governments Are Faking Coronavirus Recovery

• Look at China in real-time to gauge their productivity and you’ll see a lot of interesting things right now. Check out this logging of auto-traffic congestion in both China and Italy using TomTom’s public data.

Table 1

• Check daily on NO2 emissions because that’s pretty much the sum of all industrial and traffic-related pollution. From left to right, you have 8 Jan., 8 Feb., and 8 Mar. It shows that NO2 emissions are way up again in March, while US has dropped.

Figure 1

What US growth?

• From US bank on US growth:

○ Our Coronavirus Consumer Activity Tracker aggregates data such as movie ticket sales, hotel occupancy rates, and sporting event attendance. While activity in some of these categories declined last week, our index remained at a fairly high level through the end of February.

○ Our Coronavirus Consumer Price Tracker aggregates data on hotel prices, airfares, and theatre ticket prices, and could also reveal a decline in demand if companies slash prices to fill empty rooms or seats. So far, the index has remained roughly in line with its recent average.

COVID-19: Exponential or not?

• Bill Gates Is Really Worried About the Coronavirus. Here’s Why. The debate is splitting into two broad camps: call them the ‘growthers’ and the ‘base-raters.’

○ Why do we have such divergent views on COVID-19? Here is a possible explanation. You guys are compounders and I am more of a base-case person.

○ Interesting! Add that sell-side/traders are analytical AND (those who have survived at least) hyper-sensitive to asymmetry.

○ You can be a base-rater and be very bearish if you take a historical view and include Spanish, Asian and HK flu. Pandemics are low-frequency events like financial crises. And remember, during the GFC suddenly we all became historians and had to look back to the Great Depression.

• Most people aren’t aware of the risk of systemic healthcare failure due to #COVID19 because they simply haven’t run the numbers yet. Let’s talk math.

Made up?

• Which exact part of a virus is a social construct? This IS real. Compounding is made worse by denial.

• You may be right that folks are overreacting, but that’s the logical corollary of the Precautionary Principle.

• The virus is not a living thing. It is a mechanism for making more viruses. That is all. Like maths is just maths.

• Whoever thinks the authorities, insisting on restrictive measures, are exaggerating the threat, simply does not understand mathematics.

Political Fall-out

• Complacent governments will be torn to shreds as a coronavirus quake reshapes the global order.

• Maybe OPEC is just the beginning global institutions falling apart.

• Economic theory says that cartels will always be vulnerable – and OPEC essentially died decades ago. It’s been effectively a price-taker since the 1980s.

• And various global institutions set up after WWII have become lumbering dinosaurs: the WHO is exhibit no. 1 these days. Others: IMF, world bank, WTO, are just huge bureaucracies stuffed with lifers.

• The one good thing about the Trump presidency is that it is forcing a rethink of these various institutions. He’s delivering a useful message even if he is a god-awful messenger, mostly undoing any good he might otherwise do. That’s not to say that we shouldn’t have global institutions – just that they have to evolve or be allowed to die and be replaced with new ones as society changes.

• The EU and eurozone are other institutions that seem to lack the ability to evolve, leading to (among other things) BREXIT.

• The US federal government and its 18^th-century constitution also isn’t evolving fast enough.

• Interesting point: if that is what happens (and it well might be), the irony would be that the only way to effectively deal with pandemic problems like coronavirus and climate change is setting up effective global institutions.

• Also, worry about closing elections, closing markets. And the internet is THE key variable. Power to the people.

Global leadership

• Germany and France: suspiciously quiet, an alarming vacuum of political leadership – the lacuna at the heart of the EU.

• So far, countries in Leadership Roles

○ Japan

○ Italy

○ UK

Understanding COVID-19

Re-infection

• We don’t know what happens ONCE the measures are loosened absent an available vaccination. Can the R0 shoot back? It seems so. We don’t have antibodies. Everybody could still be susceptible!

• Reinfection seems to be associated with significantly higher mortality. Scientists have reported two variants, one being more medically aggressive. So, does this imply that it might be necessary to have to quarantine more than once?

Risk factors

• Apparently about 10% of US population has diabetes. But about 100 million have diabetes or prediabetes. So 30% of the population seems vulnerable .

• But don’t let the data convince you that you can’t get sick. Its highly contagious and there are multiple forms. And it’s a virus, so it can mutate. You can still be perfectly healthy, fit, have a BMI of 25, and be 35 years old… and die.

Seasonality

• Temperature and Latitude Analysis to Predict Potential Spread and Seasonality for COVID-19

A significant number of infectious diseases display seasonal patterns in their incidence, including human coronaviruses. We hypothesize that SARS-CoV-2 does as well. To date, Coronavirus Disease 2019 (COVID-19), caused by SARS-CoV-2, has established significant community spread in cities and regions only along a narrow east west distribution roughly along the 30-50 N” corridor at consistently similar weather patterns (5-11OC and 47-79% humidity). There has been a lack of significant community establishment in expected locations that are based only on population proximity and extensive population interaction through travel. We have proposed a simplified model that shows a zone at increased risk for COVID-19 spread. Using weather modelling, it may be possible to predict the regions most likely to be at higher risk of significant community spread of COVID-19 in the upcoming weeks, allowing for concentration of public health efforts on surveillance and containment.

Failings

• This Politico article is a pretty good compendium of failings across the board. It includes the airport screenings.

○ How testing failures allowed coronavirus to sweep the U.S.

○ Diamond Princess passenger dies, bringing ship’s death toll to seven

Reference

The best, and the worst, of the coronavirus dashboards. There are dozens of sites that show you how coronavirus is spreading around the world. Here is a ranking.

European Risks

• Which country in the EU has the biggest debt problem, with ridiculously low bond yields?

• And, now has a current nominal GDP of €0?

○ And whose banks benefit immensely from ECB TLTROs,

○ With no political stability,

○ And a demographic timebomb?

• The problem the ECB is facing, and soon the Fed will face, is that they depend on banks to transfer the liquidity. It was a good decision not to cut because banks are getting killed now independently of negative rates. But that means they now need to come up with something extraordinary.

• There’s a greater likelihood of a direct capital injection from the German government into German banks if needed than there is of a sudden announcement of Bund supply…

• Another €120 billion in APP… focus on ‘private’ sector (this is why peripheral bonds are under pressure) but will they focus on the fallen angel candidates? Single A and double A candidates don’t need help; one could dare to suggest that they never did (remember LVMH…).

• Lagarde says the ECB is not here to close bond spreads; are we hinting at a potential eurozone breakup if the ECB is not there to arrest fall in Italian spreads?

Complex Systems Under Pressure

• One of the biggest worries is that we all end up in lockdown and the internet fails.

• That contingency must be uppermost on the list/state acquisition of core infrastructure.

• Social and economic exclusion will follow for communities without higher-speed connectivity. Equally, can domestic infrastructure cope with the demand of commercial users as bandwidth becomes an issue?

• My Weltschmerz doesn’t originate from pessimism. It’s just the 2nd Law of Thermodynamics: all systems tend towards increasing disorder (unless sufficient energy is applied).

• Honestly, check out The Strange Attractor…’equilibrium flip’. Dynamical systems…

• The virus scenario is an almost perfectly ‘designed’ biogenic kryptonite to our interconnected complex system. ‘Life’ is like that. 4.5 billion years of random mutations…

• The only way to contain the virus is to take the economy to a standstill like China, Italy, and Korea. But the US and UK do not want to do that.

• A centralised health system and a government that actually believes in science (Cummings is a physicist by training) puts the UK in a better position, though! One hope for the US is that congress’ money mobilises the private sector, which could work out better on the vaccine hunt.

Infrastructure

• The point on internet infrastructure security is massive. If anything, it’s highly supportive of SpaceX and the satellite constellation they are trying to build as a mechanism of higher capacity bandwidth.

• Reference podcast: The Digital Economy’s Voracious Energy Demand

• With commercial use of domestic infrastructure that could be saturated from increased device use, speed/productivity/economic output will be massively reduced.

○ The wheel of death for economic growth?

BUT

• Not a great fan of saturated satellite constellations for this reason.

○ Kessler syndrome – theoretical scenario in which the density of objects in low Earth orbit (LEO) due to space pollution is high enough that collisions between objects could cause a cascade in which each collision generates space debris that increases the likelihood of further collisions.

Bad Consequences of Remote Working

• NY trading desks, heard from multiple firms, are going towards split staffing (half in and half stay home and alternate). And some traders are registering their home addresses with FINRA in order to trade remotely.

• Assume that when trading desks are split up and start working from home risk limits will be dramatically reduced, right? Liquidity next week will be horrendous.

• Once this behaviour (remote working) is acquired, will we really revert to previous coworking behaviour?

○ Not great for commercial rea estate, but the impact upon social interaction is huge.

• For everybody, the problem is going to be whether there is a job to go back to!

• Expect that some Draconian cost-cutting plans are being prepared behind the scenes. This is the Big Excuse that management has been waiting for.

Pension Crunch

• LOOK AT THIS! From February (*not* March!)

○ PPF 7800 index funding deficit jumps in February

• Interesting, but what’s the problem… central banks can find a missing 150 billion pounds in a meeting of 150 seconds.

• This is a Feb. reading before the long US treasuries evaporated; no yield and rising liabilities equals larger deficits with less tools to tackle them.

• They are discussing just this in Switzerland – SNB is causing zero rates yet benefiting from asset inflation; there is a move to make the SNB top up social funds.

• Yes, but the world will make monetary and fiscal policy one and the same – more so than now.

• Pension liabilities must be challenging some of the former state utilities to the point of solvency stress now.

• What If This Is a Financial Crisis, But With People?

• Just as shutting down the flow of credit triggered a deep recession in 2007-09, shutting down the flow of people could be disastrous this year.

• It’s guaranteed they will be proposing DELAYING recalculation of their mismatch. So we kick a much more dangerous can further down an alarmingly perilous road.

Market crash not helping

• Widespread shock in pension schemes globally utterly, utterly, utterly hosed.

• Private equity and credit are the huge exposures.

• How do they mark to market? P/e? PE is illiquid, not marked to market and opaque.

• How do you address the impact of the evaporation of the 10, 30 year?

○ If you have it, you’re ok.

○ If you don’t, you’re dust .

• Wait for dust to settle and obtain yield from any given source?

• Divs, nope; Equity, maybe; Credit, urgh; Sovereign, pointless.

Bailing out pension funds

• State Pension and ALL DB schemes are in *tatters*… even before PE and Infrastructure re-pricing.

• That will take time to play out. Is there a risk of a pension fund actually experiencing a cash crunch over, say, the next 12 months?

• Banks could step up, if the government implements some form of regulatory forbearance.

• They will hide behind their ALM guidelines and say ‘the regs told us to do this’, and so unless you want to shoot the messenger the claimants will blame the government regs that forced them to hold zero yielding debt rather than property or gold or something that can actually hold real value.

• Also, we could see huge consolidation in Investment Consultants (IC). IC’s run the global Pension Fund (PF) business.

• The ICs are the reason that DB Public Pension schemes are the biggest owner of Private Equity (approx. 30%!). They never saw a high yield that they didn’t like. High yield debt is ‘safe and normalised’ now.

Private Equity

• Private equity will emerge as the bogeyman of this crisis like bankers did in ‘08…

• It’s possible to agree that PE has had a good run and should naturally de-rate following a liquidity shock. Unlevered PE doesn’t really exist anymore, so the liquidity mismatch can be huge.

• One of the Big Stories is the major PE firms calling USD lines from the banks. This is hugely exacerbating the USD funding shortage.

• There is NO TERM FUNDING MARKET.

• It’s all going O/N. EVERYBODY NEEDS SECURED FUNDING.

If PEs buy public markets at low, for a pop, do they sell at lower high to get some PnL to offset private asset losses?

• What about Fed repo?

• But still, 500 billion will be hard to tap.

• They need to post UST and MBS.

• And dealers don’t have 500 billion, let alone 1.5 trillion.

Mandelbrot Advice

• The mathematician Benoit Mandelbrot wrote an amazingly useful book titled The (Mis)Behaviour of Markets.

• He drew 10 conclusions to keep in your notes:

(1) Markets are turbulent.

(2) Markets are very, very risky – riskier than the standard theories imagine.

(3) Market ‘timing’ matters greatly. Big gains and losses concentrate into small packages of time.

(4) Prices often leap, not glide. That adds to risk.

(5) In markets, time is flexible.

(6) Markets in all places and ages work alike.

(7) Markets are inherently uncertain, and bubbles are inevitable.

(8) Markets are deceptive.

(9) Forecasting prices may be perilous, but you can estimate the odds of future volatility.

(10) In financial markets, the idea of ‘value’ has limited value.

Humour

Virus ALERT levels

• The English are feeling the pinch in relation to recent virus threat and have therefore raised their threat level from ‘Miffed’ to ‘Peeved’. Soon, though, that level may be raised yet again to ‘Irritated’ or even ‘A Bit Cross’.

• The English have not been ‘A Bit Cross’ since the blitz in 1940 when tea supplies nearly ran out.

• The virus has been re-categorized from ‘Tiresome’ to ‘A Bloody Nuisance’. The last time the British issued a ‘Bloody Nuisance’ warning level was in 1588, when threatened by the Spanish Armada.

• The Scots have raised their threat level from ‘Pissed Off’ to ‘Let’s Get the Bastard’. They don’t have any other levels. This is the reason they have been used on the front line of the British army for the last 300 years.

• The French government announced yesterday that it has raised its alert level from ‘Run’ to ‘Hide’. The only two higher levels in France are ‘Collaborate’ and ‘Surrender’. The rise was precipitated by a recent fire that destroyed France’s white flag factory, effectively paralyzing the country’s military capability.

• Italy has increased the alert level from ‘Shout Loudly and Excitedly’ to ‘Elaborate Military Posturing’. Two more levels remain: ‘Ineffective Combat Operations’ and ‘Change Sides’.

• The Germans have increased their alert state from ‘Disdainful Arrogance’ to ‘Dress in Uniform and Sing Marching Songs’. They also have two higher levels ‘Invade a Neighbour’ and ‘Lose’.

• Belgians, on the other hand, are all on holiday as usual; the only threat they are worried about is NATO pulling out of Brussels.

• The Spanish are all excited to see their new submarines ready to deploy. These beautifully designed subs have glass bottoms so the new Spanish navy can get a really good look at the old Spanish navy.

• Australia, meanwhile, has raised its alert level from ‘No worries’ to, ‘She’ll be alright, Mate’. Two more escalation levels remain: ‘Crikey! I think we’ll need to cancel the barbie this weekend!’ and, ‘The barbie is cancelled’. So far, no situation has ever warranted use of the final escalation level.

 (The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)