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Tuesday, August 16, 2022


Hedging for Disaster – The Corona Crisis Continues

Futures went limit down again.

QE Infinity and $1.2Tn of stimulus wasn't enough, it seems.  Here's the problem – even if you give every man, woman and child in this country $2,000 a month ($600Bn) – where are they going to spend it?  

Even if the US is that generous (we're not), what about the rest of the World?  If every country doesn't do something similar, we're still looking at a global Recession.  Recessions end when people goo back to work and things start getting back to normal.  The problem is, there's no "normal" in sight at the moment. 

As I keep saying – you have to fix the crisis first – NOT the economy!

This is like firemen showing up at a house fire and painting the house while the fire rages on – who cares about that?  

Image result for federal throw money on the fire

As you can see from this 1934 cartoon, this isn't the first Government that's taken a crisis (the dust bowl at the time) and thrown money at it.  Money didn't stop the farms from failing and money didn't solve the bread lines or the cascading unemployment that ended up destroying the economy in the Great Depression.  The Trump Administration has been propping up the markets since 2017 and have already used all the Fed's firepower and put us $3Tn more in debt in 3 years of Trump and now, when we have an actual crisis – even $1.2Tn doesn't seem like enough to "fix" things.

Image result for bloomberg tv homeBloomberg reporters are reporting from their homes – how's that for inspiring confidence!?  As I noted this morning in an Alert to our Members:  

Sadly, we'll have to add more hedges today, in case 2,400 breaks down and we head for 1,800.  Fortunately, that's down 25% so up 50% on SDS, which is already at $34 so $51 would be the target and the SDS May $35 ($7.50)/50 ($4.50) bull call spread is just $3 and pays $15 so 400% upside potential means we can get $100,000 back for each $25,000 and we just sold $81,000 worth of short puts in the LTP which pays for $300,000 worth of protection.

Of course we don't need to take it all at once but 80 of those spreads for $24,000 pays $120,000 back at $50 and we certainly hope we lose the $24,000 but I'd rather have the insurance until things calm down.  If 2,250 fails, we add another layer (maybe June contracts) and another at 2,000 and, by the time you are adding at 2,000, the S&P is down 17% and that's 34% up on SDS to $45.56 and the May $24s ($10 in the money) are $12 so we'd already be able to cash in the original calls for $12 and leverage that to buy more long spreads, etc.  

And, of course we already have over $200,000 worth of FXP (our first virus hedge) SQQQ, and QQQ hedges that will kick in but we need to make sure we have at least $500K in the STP as another 20% down could wipe out the buying power of the $500,000 LTP.  In the very least, we'd have to buy back all our short puts (can't risk assignment) and then wait a very long time hoping our bull call spreads go back in the money.  

Is it survivable?  Of course it is – but that doesn't mean it will be pleasant.  

“I think the Fed is doing the right thing. But people are having margin calls,” said Alex Au, managing director at Alphalex Capital Management, a hedge fund based in Hong Kong. “There might be many forced sellings on the market as people unwind earlier positions.”

Investors who have used borrowed money to make bigger bets can face margin calls when holdings fall in value, forcing them either to stump up more cash or to sell their positions.

This is probably a fantastic opportunity to deploy cash but, as noted above, cash is in short supply and we can't be sure it's the bottom so we need to "waste" (hopefully) money on hedging if we intend to stick with long positions.  

One reason we can't wait is that there's a possibility (30%) they will close the markets – another reason people are cashing out in a panic.

Image result for hedgingSo it will be a busy day, expect to be adding hedges to all our portfolios this morning and we'll have a lot to talk about in today's Live Trading Webinar. 

 Meanwhile, I do expect progress on stimulus today so I still like (again) playing the S&P Futures (/ES) long OVER the 2,400 line – with TIGHT STOPS BELOW. I also like /NG long here ($1.65) also with tight stops and Copper (/HG) at $2.20 is also a good long – but tight stops below.  Better to take small losses and try again at the next support than ride the futures down! 

We are certainly trading below fair value for most stocks but that value assumes some kind of normality where people get up and go to work, school, etc…  As it stands now, people can't leave their homes, Las Vegas is closed, California is closed, New York is closed – probably the whole country next week so we have to rethink what commerce is in a country where no one goes out.

Let's say 80% of the people still get paid.  US payrolls are $6.5Tn or $500Bn a month and Bernie says give us $600Bn a month so – THANKS!  That's why Yang (and me!) is right that $1,000 a months for people over 18 (210M) would be a more realistic $210Bn a month or $2.5Tn a year, which is by no means a crazy number in a $20Tn GDP – a simple 10% VAT would take care of it and resdistribute the wealth from the people who spend to the people who don't have any money.  

In any case, if we do hand out $210Bn/month for the duration (seems to be the current plan in Congress) and 80% of $500Bn a month continues to be paid out – that's $610Bn – more than people are getting paid now! 

So there's no reason for the economy to collapse based on that, though I imagine that each month 10% less people will get regular paychecks as more and more businesses begin to shut down.  This was a trend in progress anyway as McKinsey says 39-73M Americans were going to lose their jobs to automation over the next 10 years anyway.  Think of the incentives companies have now to use robots instead of people!

Image result for universal basic income

Even with a Universal Income supplimenting wages, the real problem becomes SPENDING.  $500Bn a month only becomes a $20Tn GDP (there's other income besides wages, of course) due to the money multiplier effect, which is roughly 3.5x.  In other words, you get paid $5 and you give it to SBUX who pays the barista who goes to the supermarket to buy a whole pound of coffee for $8 (because they are not a sucker like you!) and the Supermarket pays the cashier who combines it with food stamps (because those wages suck) and they get a turkey, etc…  

So money moves through the economy and poor people spend whatever they get so they move money the best but, when you give money to rich people they put it in the bank (0x multiplier) or, even worse, they put it into an instrument that produces NOTHING and demands interest/rent, which sucks even more money out of the economy (-0.1x).  Since the rich have 100x more than the poor – that's a lot of sucking!

Image result for zombie apocalypseStill, unless we are heading into a real Zombie Apocalypse, where humanity is wiped out and replaced by a mindless hoard with no interest in food, fashion or fun – we will survive – even if surviving means locking ourselves in a bubble and shopping via Amazon drones with our Universal Basic Incomes.  

Even THAT would still have our GDP around $12Tn, down 40% from where it was but certainly not $0 – that's why a sell-off past these levels is silly and can't last – and that's the worst possible case – the actual case is probably quite a bit better than that – we just have to get through the next few months.  I made a similar case back in 2010, when stocks were still 50% off their 2008 highs at S&P 900:

The Worst-Case Scenario: Getting Real With Global GDP!

Be careful out there!  




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