What's up Levered Asset Prices? How Long Will The Pump Last?

One thing that I have learned is no process, no set of principles, no backstop, no hedges, and no luck can help you navigate this uncertain market. Gold has returned well this year (up 17%), but what if you believed deflation was going to occur or interest rates were going to rise? Gold would drop. Investor psychology is the most difficult to master. Staying cool and dry while a storm is hitting the market. This is what happened in March when the market dropped 30%+. So say you sold and held onto your contrarian views that the market was going to continue its deceleration. You would have been wrong with most markets returning to their former highs. Not many knew tech was going to outperform everything and nobody knew the abilities and capabilities of the Federal Reserve. So now you try to map out tomorrow's path. Virus cases are spiking again, US elections are coming soon, more small businesses are becoming bankrupt, the 10 year T-bill is decreasing, the Feds can't support the economy forever, a bubble is becoming larger in the credit and equity markets, a vaccine may be discovered soon, businesses and individuals may get more stimulus funding... As you can see, there is no right answer to what will happen. Something I have learned to do is to stick to YOUR process if you are confident enough in your understanding of current conditions and if you can take on the risk. But be careful in not being too emotional about your lack of understanding because nobody knows what will happen. There is a lot happening behind the curtain.

Dear Reader,

​The Market.

• Easing deals with liquidity and debt squeezes.
• 15% of auto loans are in forbearance.
• To decrease the Fed's balance sheet, the Feds need to sell dollar-denominated debt abroad.
• Capitalism needs to work for the majority of people.
• Tesla's short interest is currently $19.2 billion. 
• The US spent the most for the economic programs to fight COVID-19. (Graphic 1)
• Asset prices have been unable to keep up with broad money supply growth.
• Anything bad for President Trump is bad for the stock market. The Street likes Trump.
• Cash is the least safe investment- it has a negative real yield return.
• When the new regime begins, banks will outperform the rest of the market and value will beat growth. (Graphic 2)
• The bond market gives grounds for dollar weakness with US bond yields falling. (Graphic 3)

Current Risks.

• Delay of virus vaccine or a longer process in creating the vaccine
• 10-year Treasury yield continuing to fall
• More small-business bankruptcies + more companies becoming zombie companies

Current Questions.

• What is the simple narrative for the valuation of the market?
• Will there be a wealth tax?

Things We Have Learned Recently.

• Start from the bottom and work your way up.
• Hire the best people you can.
• Your identity is what you've committed yourself to.
• The future is not shaped by people who don't really believe in the future.
• No art, however minor, demands less than total dedication if you want to excel in it.
• The standard human condition is ignorant and stupid. 
• Eliminate your miscognitions.
• Life isn't so much about learning new information after a certain point. It's more about remembering and forgetting the right things at the right time.
• Knowledge is easily acquired. Wisdom is hard to attain.
• We are here to do something useful.
• Changing behavior is incredibly difficult.
• Compounding is the eighth wonder of the world.

Reflation.In the past, we have talked about inflation, deflation, fiscal policy, and monetary policy to better understand the cyclical economy. Now rather than look at the individual factors, we will look at the whole picture. The United States and the world are in a period of reflation. Reflation is when central banks and governments provide monetary and fiscal stimulus to spur economic activity and inflation. This often occurs in response to a recession or to deflation. From a monetary standpoint, relegation begins when the Fed lowers interest rates and takes steps to expand the money supply, which we have seen occur on a large scale. From a fiscal policy perspective, reflation occurs after the government allocated funds or lowers taxes. We have seen this occur with the SBA loans. 
The steps taken to weaken the impact of a recession can lead to inflation. Inflation is much more preferable than deflation and is often a sign of strong economic demand. This means that demand sensitive stocks like consumer discretionaries, industrials, materials, and energy may outperform. Individual investors may also buy into high beta stocks and keep cash on hand to take advantage of any favorable opportunities.