Markets have been chaotic
Extremely high realized volatility.
- Weekly moves look more like annual moves. In other words, the market has been sqrt(52) or about 7x more volatile than in past years.
- There have been days when bonds and stocks have simultaneously sold off significantly. Gold correlation is a random number generator.
- Some of these are ETFs and closed-end funds deviating from NAVs. This screener can show you closed-end dislocations. Be careful with this stuff.
- Treasury basis trades
- This week gold futures surged higher relative to spot prices amidst talk of delivery bottlenecks across the pond. Then Friday front month-second month gold futures spread collapsed $30.
- Oil contango exploded wider this week with the front month now trading at a 15% discount to the second month. Annualize that. It’s not surprising that tanker pure plays surged higher (if you are interested in a deeper look, check out this Adventures in Capitalism post.). The contango widened similarly during the GFC as the arb was limited by supply of credit. This time it’s about the limited supply of storage/tankers.
The chaos reflects the uncertainty in the real economy
Unemployment claims this week was a 30 sigma event which says as much about using normal distributions on financial variables as it does about how acute this shock is to the economy.
Options trader turned restauranteur and entrepreneur extraordinaire Nick Kokonas linked to Vanity Fair’s:
“You Can’t Speak in Strong Enough Dystopian Words to Describe It”: Why the Coronavirus Pandemic Could Change Dining as We Know It, Forever
The combination of perishable inventory and high labor costs as a percentage of sales makes the restaurant biz especially vulnerable. Restaurants are one of the better examples of the types of businesses facing an existential threat. Businesses that are exposed for their outsize degree of operating leverage.
I recommend Howard Lindzon’s Panic with Friends YouTube interview with Rob Koyfin as they dive into that idea. Rob’s the founder of Koyfin which is what Yahoo Finance would be if Bloomberg owned it. That’s a joke by the way. I use Koyfin myself but really liked watching Rob navigate the platform on the call to demonstrate just how the market was reacting to high operating leverage businesses. It was a markets lesson and tech tutorial in under 30 minutes. (H/t to Brian for the rec)
I like reading how markets people invest personally. We have a professional subscription to Jared Dillian’s Daily Dirtnap and he posts his portfolio and what he’s doing. His letter is paid so I will not share his allocations.
2 of my favorite fintwitters are public about their own investments:
Corey Hoffstein (Link)
Meb Faber (Link)
If you are curious about the Moontower portfolio it’s roughly:
1/3 real estate
1/2 short term notes and cash
15% public investments
<5% private investments
A look at the public portion:
39% international equity
14% domestic equity
18% US energy
Recently doubled down on energy/metals tilt, rotating out of treasury notes.
I refer to the public portion as the Seppuku Portfolio since it would be suicidal for a US investment manager to hold.
A note on carrying so much cash compared to most recommended allocations. It is a risky long-term proposition. Just consider the price of stamps in the past 30 years. But in the near-term, it provides a lot of optionality.
It’s reasonable to argue we overpay for this. While we don’t own our own businesses, there is a lot of volatility in our professions. A lot of lumpiness in our cash flows. But just like financial options I believe there are additional multi-order greeks on this optionality. They don’t come from differential equations. They are psychological. A behavioral edge even though I sort of hate this term.
Let me rationalize, I mean, explain.
We put a lot of value on the ability to not work for an extended period if we chose to. Not because of laziness but for the feeling that choosing to work where you are is an active choice. When Yinh took 2018 off this felt like a stress-free harvesting of the optionality. She was able to search for the best possible match for a new job. I feel like the payoff from being able to find a match without pressure is a payoff that does not show up in your Mint view as a line-item. But it will one day show up disguised as a different balance sheet asset.
Our parents are immigrants. They came to the US in 70s with little. We learned everything about grinding from watching them. They still have little. They passed scarcity mindsets to us. And Kiyosaki likely thinks we are fools who learned our lessons from “Poor Dads”. But we did manage to learn about leverage and its many forms.
Our lack of financial leverage enables us to maximize our human capital leverage. With implied prospective returns uninviting for the past few years, this seemed like a reasonable trade. Our total allocation reflects that tilt. With that lens, I guess you can file this under market-timing. Call me a sinner.
If you can’t watch a bull market rage without you this is just as risky as being YOLO long. No easy answers when you think of multi-order effects of an allocation. You need to do what’s best for you. It starts with asking the right questions. And they mostly have nothing to do with finance.