Category: Downturn

Choppy seas ahead

April 15th, 2020

The US is well into its third week of shutdown. Despite 16 million Americans currently unemployed and out of work, the stock market has gone up this past month. Just take a look at $VTSAX from March 16th through April 15th below.

Source: Yahoo! Finance

Truly, markets are irrational.

One potential reason for the rise is the injection of $2.3 trillion from the Feds into various programs. Thus far, other actions from the Fed include:

  • Emergency rate cuts
  • Lowered amount of capital banks must have on hand
  • Propped up repo markets
  • Announced a credit program for businesses and consumers
  • Announced a program to buy junk bonds
  • Announced a program to buy bonds from states

It also appears in the past few weeks it seems overall fear has somewhat subsided for the time being. I’ll use the rates for T-Bills as a metric since people typically flock to these assets as they’re a perceived safe haven.

  • March 25th, 2020: -0.04%
  • April 13th, 2020: 0.16%

But, this rise in the price of stocks could be a direct response to the amount of money the Fed has injected into the market. Where else would all this newly printed money go, if not into assets?

Things don’t looks so good for Americans or the US economy in the short- to medium-term.

Outdated software making it difficult to distribute checks:

  • In Colorado, tens of thousands of recently unemployed have faced severe issues with filing for unemployment due to outdated technology.

New claims for unemployment are rising at historic rates (16,780,000 unemployed) and continue to rise:

  • March 21st: 3.2 million new claims filed
  • March 28th: 6.86 million new claims filed
  • April 4th figures: 6.6 million new claims filed

Today, 10% of Americans are unemployed. Beyond the scope off the immediate job losses for those employed in the the restaurants, bars, and service industry, more furloughs are incoming:

Tenants are going to be more and more strapped.

  • Colorado Sun covered a study that proposed there are about 450,000 renters at risk. Many are piling up late feeds because they weren’t able to make all of April’s rent. More are facing eviction when stay at home orders lift on May 1st.

Its these types of figures that lead me to believe the “V-shaped recovery” many hope for (and that the Fed is betting on) may not happen. The longer quarantine’s remain in effect, the longer businesses will have no customers and people will have no jobs.

I hope we don’t get to a point where there’s blood in the streets.

Everyone has a plan until they get punched in the mouth.

March 21st, 2020

In his most recent newsletter, Pomp wrote about fear, uncertainty, and doubt in retail investors. I will not lie and say I am not un-phased – so far, my net worth has dropped 26.8% in the past month.

However, having a plan before the markets took a downturn has helped immensely. I have thought about timing the market and pulling my funds out, but have not done so, as it is not part of the plan. The plan was always to ride the wave. We’re in this for the long haul.

Generally, my investment thesis has been serving me well, just as it has been for the past five years.

Dollar-cost average a portion of every paycheck into the market, make the maximum contributions the Roth IRA every year (VTSAX, VTIAX, and VGSLX), and never touch the funds (other than to rebalance once or twice a year).

Boglehead-like investment thesis.

We’re a week into quarantine, and I’ve spent a lot of time looking at numbers and charts. So, what do I wish I had done for this downturn?

Gold

I’m still not convinced of holding gold, but for this black swan event, it certainly would’ve helped to maintain the value of the portfolio. But, on a long-time frame, the total US stock market index will outperform gold – VTSAX returns dividends, and has historically risen at a higher rate.

However, I may explore the potential of allocating 5% or less of my portfolio to gold in the future. At this point, it feels like gold has a premium, as the value of the US dollar is much higher, and any other asset I’d convert to gold would be doing so at a loss as well.

Outcome: Potentially buy gold once markets return.

Put options

I watched the Big Short but never quite figured out how I could short a shit show. It wasn’t until stumbling on Wall Street Bets and its degenerate gamblers that it clicked. Here’s how the retail investor can make a bet on upcoming catastrophes: call and put options.

On Friday the 6th, President Trump hosted a press event that was scheduled to begin at 3:00 p.m., an hour before the NYSE closing bells. He was 30 minutes late to the event, and when he spoke, the market rose 10% in the final 30 minutes of trading. (Years in crypto would lend one to think this was just a pump; one with no real value or merit.)

I was tempted to sell all my funds and ride the downturn for the next month, but my investment thesis says that it is not an option.

What would’ve been ideal would be having opened an options account with Vanguard. I’ve got the Robinhood application, but many who used Robinhood on the days of the most massive market drops faced issues with selling their calls on the app and missed out on big wins. It appeared that institutions (like Charles Schwab, and Vanguard) had a better ability to handle the activity.

I don’t know how options trading works. But, if I did, I would’ve won on that bet that Monday the market tanked 10%.

VIX

In 2016/2017, I recognized that the market was very stable. Instead, I picked up on the signal from a podcast, and examined the current situation. The podcast mentioned VIX, a non-equity index option that uses the CBOE Volatility Index as its underlying asset.

I remember thinking, “this would be a good time to buy VIX.” I knew there’d be volatility and strife in the markets at some point in my investing career, and this would’ve been a very valuable time to have held a correlating fund.

But, I didn’t go down the rabbit hole and learn how to invest (or bet) with the asset.

In the future, I should have a little more conviction with some of my intuitions. (I also recall thinking it’d be an excellent idea to buy BNB in 2018 when it was only $2. The exchange was very obviously growing exponentially.)

Since I can’t go back in time and buy VIX, or convert all my holdings to cash, or short the market with put bets, I’ll keep doing what I was doing in the past few years.

I’ll keep dollar-cost averaging into VTSAX, VTIAX, VGSLX, and Bitcoin.

I’ll likely buy BTC when there are sharp decreases.

Other than that, sit on my hands and learn about these things I wish I knew a year ago.

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