Coronavirus - Macro Investment Aspects Only

[dealtn]

It is not just me, the Vix remains high indicating that lots of derivative protection is being bought due to the uncertainties.

High prices, in general by themselves, don't mean "lots" of things are being bought.

Ferraris have high prices, so do diamonds etc.

Prices are determined by both demand and supply, and also reflect the underlying costs, and values of things.

If you are looking at the price of something that has as one of its inputs "volatility", and predicted volatility is in some way based on (recent) historic volatility, then it won't be a surprise that if it has recently been volatile (and that's in both directions) it will currently be pricier.

This will be the case regardless of how much buying (and selling) is going on.

[odysseus2000]

It is not just me, the Vix remains high indicating that lots of derivative protection is being bought due to the uncertainties.

High prices, in general by themselves, don't mean "lots" of things are being bought.

Ferraris have high prices, so do diamonds etc.

Prices are determined by both demand and supply, and also reflect the underlying costs, and values of things.

If you are looking at the price of something that has as one of its inputs "volatility", and predicted volatility is in some way based on (recent) historic volatility, then it won't be a surprise that if it has recently been volatile (and that's in both directions) it will currently be pricier.

This will be the case regardless of how much buying (and selling) is going on.

Don't understand this at all.

The vix represents the price for protection that market players are willing to pay and this price changes with how much fear and uncertainty there is in the market.

It is not like a high priced entity, the price of Ferraris is not changed to measure the fear in anything.

Currently the Vix is high, so market players are uncertain and fearful of losing profits on the ordinary and are protecting positions with derivatives and the folk who write the derivatives are jacking up the price to make sure the risk they take is worth their while.

Once we get to a boring market with much more certainty the vix will decline just as it has from every other major crisis, but the question is when will we get a boring market.

Regards,

[dealtn]

It is not just me, the Vix remains high indicating that lots of derivative protection is being bought due to the uncertainties.

High prices, in general by themselves, don't mean "lots" of things are being bought.

Ferraris have high prices, so do diamonds etc.

Prices are determined by both demand and supply, and also reflect the underlying costs, and values of things.

If you are looking at the price of something that has as one of its inputs "volatility", and predicted volatility is in some way based on (recent) historic volatility, then it won't be a surprise that if it has recently been volatile (and that's in both directions) it will currently be pricier.

This will be the case regardless of how much buying (and selling) is going on.

Don't understand this at all.

The vix represents the price for protection that market players are willing to pay and this price changes with how much fear and uncertainty there is in the market.

It is not like a high priced entity, the price of Ferraris is not changed to measure the fear in anything.

Currently the Vix is high, so market players are uncertain and fearful of losing profits on the ordinary and are protecting positions with derivatives and the folk who write the derivatives are jacking up the price to make sure the risk they take is worth their while.

Once we get to a boring market with much more certainty the vix will decline just as it has from every other major crisis, but the question is when will we get a boring market.

Regards,

Price and volume are completely different things!

Just because the price is high doesn't mean "lots of derivative protection is being bought"

[odysseus2000]

Anyone interested in the Vix can read the white paper here:

http://www.cboe.com/micro/vix/vixwhite.pdf

The calculation is complex but it is important to note, page 6:

One important note: as volatility rises and falls, the strike price range of options with non-zero bids tends to expand and contract. As a result, the number of options used in the VIX Index calculation may vary from month-to-month, day-to-day and possibly, even minute-to-minute.

Only options with non-zero bids are used in the calculation of the Vix and as this notes, when volatility rises more options are employed by market participants, this predominantly means more folk with common stock, like fund managers etc are protecting their positions with derivatives.

Regards,

[redsturgeon]

Moderator Message:
Discussions about VIX are off topic here.

[GoSeigen]

Anyone interested in the Vix can read the white paper here:

http://www.cboe.com/micro/vix/vixwhite.pdf

The calculation is complex but it is important to note, page 6:

One important note: as volatility rises and falls, the strike price range of options with non-zero bids tends to expand and contract. As a result, the number of options used in the VIX Index calculation may vary from month-to-month, day-to-day and possibly, even minute-to-minute.

Only options with non-zero bids are used in the calculation of the Vix and as this notes, when volatility rises more options are employed by market participants, this predominantly means more folk with common stock, like fund managers etc are protecting their positions with derivatives.

This is sophistry. When Ody originally wrote that a lot of protection is being bought, he did not mean that the variety of strikes being held had expanded. He literally meant scared people were opening puts (or other defensive positions) at greater volumes than previously and he linked that "buying" volume to the price rises.

dealtn's point is quite correct: rising prices to not indicate a large volume of trading, merely that the value of the item has risen. I think it's worth noting, though, that the effect of the price of X rising is that in aggregate X becomes a larger proportion of assets held by the entire market relative to anything whose price has not risen. So in this sense it does indeed look like X is being "bought".

Discussions about VIX are off topic here.

This is an investment discussion board, and implied volatility of assets is very much on topic especially in the context of a worldwide market crash induced by coronavirus! Perhaps RS meant the detailed side discussion about volume vs price is OT for the thread?


GS

[tikunetih]

I think we can now talk of depression rather than recession.

I recall reading that your investment portfolio was 100% in cash.

Does that really involve all your financial assets being encashed? If so that's an extreme portfolio position to adopt. No, or almost no, professional fund managers of any type (hedgies included) would ever adopt such a stance.

My experience is that absolutist portfolio allocations (whether that be 100% cash / net short or 100% invested / leveraged long) almost inevitably colour your outlook to some degree or other.

Despite the very best efforts it becomes difficult to avoiding succumbing to some degree of confirmation bias, and in the worst cases can really blind your judgement.

Also, it can become quite psychologically hard to materially shift from such an extreme portfolio, particularly when your current stance has served you so well just recently. Recency bias doing its thang. So, if you've been 100% equities, or leveraged, during a strong bull market it can become very difficult to begin selling in large size even as the backdrop clearly starts to deteriorate and the investment thesis goes kaput. Or, if fully encashed after a very sharp decline, or if you were cashed up prior to the decline as you were and thus sidestepped drawdowns, it can require a lot of mental strength to again expose your capital to the volatility you've stepped away from, or in your case entirely avoided.

Typically what happens is that investors in the two positions I've described prove slow to make material portfolio changes. For example, those balls-deep in their 100% equity positions might sell just a few during the earlier stages of a large decline, proving very slow to respond to the deteriorating environment, and if they do end up selling in size only do so once prices have fallen much lower. Similarly, those all in cash often don't end up deploying that much of it near to market lows, and often retain (very) significant cash balances during subsequent recoveries, eventually deploying the rest of the cash either at much higher prices or never deploying it at all.

In the latter case I've described, it's not uncommon to find such an investor becoming something of a permabear, with an imbalanced view that has them always looking for and overweighting pessimistic narratives in order to justify their investment stance. Perhaps they eventually take refuge in some doomer goldbug newsletter that has them buying cr@ppy Canadian miners promoted by the newsletter writers. There's a whole bunch of these services still around from the last bust who "successfully" managed to keep their customers out of one of the strongest equities bull markets on record. Nice work!

I'm not suggesting this is you today. You may be completely right in your current positioning, and you may have a superb long term track record of flipping your portfolio from "fully invested" (whatever that might mean for you) to "fully out". Understand I'm not having a pop.

But even if that is the case, I would exercise caution and be doubly or triply aware of the risk of confirmation bias when in such an absolutist portfolio position, because you are human and that's what happens unless you remain incredibly disciplined about remaining open to a broad range of outcomes. I'd spend most of my time relentlessly searching not for things that confirmed me to be right in my portfolio but looking for things that might show I was wrong. And, I'd probably buy a small (long) position, risking just a very modest amount of capital, just to see how or whether or to what extent having a stake in a more optimistic outcome served to change your own outlook, hopes and expectations of the future.

[redsturgeon]

I think we can now talk of depression rather than recession.

I recall reading that your investment portfolio was 100% in cash.

Does that really involve all your financial assets being encashed? If so that's an extreme portfolio position to adopt. No, or almost no, professional fund managers of any type (hedgies included) would ever adopt such a stance.

My experience is that absolutist portfolio allocations (whether that be 100% cash / net short or 100% invested / leveraged long) almost inevitably colour your outlook to some degree or other.

Despite the very best efforts it becomes difficult to avoiding succumbing to some degree of confirmation bias, and in the worst cases can really blind your judgement.

Also, it can become quite psychologically hard to materially shift from such an extreme portfolio, particularly when your current stance has served you so well just recently. Recency bias doing its thang. So, if you've been 100% equities, or leveraged, during a strong bull market it can become very difficult to begin selling in large size even as the backdrop clearly starts to deteriorate and the investment thesis goes kaput. Or, if fully encashed after a very sharp decline, or if you were cashed up prior to the decline as you were and thus sidestepped drawdowns, it can require a lot of mental strength to again expose your capital to the volatility you've stepped away from, or in your case entirely avoided.

Typically what happens is that investors in the two positions I've described prove slow to make material portfolio changes. For example, those balls-deep in their 100% equity positions might sell just a few during the earlier stages of a large decline, proving very slow to respond to the deteriorating environment, and if they do end up selling in size only do so once prices have fallen much lower. Similarly, those all in cash often don't end up deploying that much of it near to market lows, and often retain (very) significant cash balances during subsequent recoveries, eventually deploying the rest of the cash either at much higher prices or never deploying it at all.

In the latter case I've described, it's not uncommon to find such an investor becoming something of a permabear, with an imbalanced view that has them always looking for and overweighting pessimistic narratives in order to justify their investment stance. Perhaps they eventually take refuge in some doomer goldbug newsletter that has them buying cr@ppy Canadian miners promoted by the newsletter writers. There's a whole bunch of these services still around from the last bust who "successfully" managed to keep their customers out of one of the strongest equities bull markets on record. Nice work!

I'm not suggesting this is you today. You may be completely right in your current positioning, and you may have a superb long term track record of flipping your portfolio from "fully invested" (whatever that might mean for you) to "fully out". Understand I'm not having a pop.

But even if that is the case, I would exercise caution and be doubly or triply aware of the risk of confirmation bias when in such an absolutist portfolio position, because you are human and that's what happens unless you remain incredibly disciplined about remaining open to a broad range of outcomes. I'd spend most of my time relentlessly searching not for things that confirmed me to be right in my portfolio but looking for things that might show I was wrong. And, I'd probably buy a small (long) position, risking just a very modest amount of capital, just to see how or whether or to what extent having a stake in a more optimistic outcome served to change your own outlook, hopes and expectations of the future.

I would not argue with any of that.
Thanks
John

[GoSeigen]

My experience is that absolutist portfolio allocations (whether that be 100% cash / net short or 100% invested / leveraged long) almost inevitably colour your outlook to some degree or other.

Despite the very best efforts it becomes difficult to avoiding succumbing to some degree of confirmation bias, and in the worst cases can really blind your judgement.

[...]

One of the best investing posts we've seen on TLF for a long time. Thank you tikunetih.

GS

[TUK020]

My experience is that absolutist portfolio allocations (whether that be 100% cash / net short or 100% invested / leveraged long) almost inevitably colour your outlook to some degree or other.

Despite the very best efforts it becomes difficult to avoiding succumbing to some degree of confirmation bias, and in the worst cases can really blind your judgement.

[...]

One of the best investing posts we've seen on TLF for a long time. Thank you tikunetih.

GS

Agreed
tuk020 (...balls deep in equities...)

[odysseus2000]

Moderator Message:
RS Please do not repost the post about your German friend's advice. This is well known fake news.

[Midsmartin]

I can imagine a best and worst case scenario, (plus an infinite number in between!). Of course, there is really no way of telling which way we are heading yet.

Best:
The virus might fade away. Perhaps due to a combination of evolving to be less dangerous, growing herd immunity, discovery of helpful drug treatments, and a better understanding of how to effectively slow its spread. Plus vaccines are on the way, and early release of them to (eg) medical staff could be a big boost to everyone. In this scenario I see the future looking distinctly more hopeful within 6 months. We will know vastly more about epidemiology, basic biology of the virus, treatments and some preliminary vaccine trial results by then. Testing and health services will have ramped up to handle large numbers of patients. Lockdowns can relax to preserve a functioning economy and society. Perhaps countries will be learning that they have to co-operate and co-ordinate to deal with a global problem.

Worst:
Treatments will be expensive or ineffective. Vaccines take a long time, and, possibly may never materialise, or not be very effective. Maybe immunity is not retained for very long after infection either. We will have to learn to live with the virus as we do with 'flu. We realise that it can't be eradicated, particularly from densely populated parts of developing nations, and places that believe vaccinations to be an evil western conspiracy. This will take time and much anguish for everyone as we realise that lockdowns MUST be relaxed to avoid collapse, even though it'll be very difficult for health services. What if it's politically impossible to relax lockdowns enough to prevent financial and economic disaster until it's too late? Will bi-partisan brexit politics turn to bi-partisan pro- or anti-lockdown?

---

So far, I have been amazed at the speed at which science has studied the virus, despite the usual need to apply many months ahead for grant applications before you can start anything. Some data is being shared publically instead of being kept secret. We have 40 or even 60 vaccine projects in progress. For all their failures, governments show that when they really have to, they can take huge actions at great speed (if only climate change were treated the same). So there are reasons for optimism, but it's still all quite scary isn't it?

[Itsallaguess]

For all their failures, governments show that when they really have to, they can take huge actions at great speed (if only climate change were treated the same).

So there are reasons for optimism, but it's still all quite scary isn't it?

The big issue and ongoing risk thst I can see being much more difficult to manage going forward are likely to be the international flights and other cross-border transport.

I can just about get my head around how a locked-down country gets to a very small number of sporadic pockets cropping up within their own borders, by following extreme social-contact protocols, but where different countries are managing less well than those further ahead on the ramp-down side of the curve, opening clear routes back up into and out of those areas seems to present a clear risk of a rapid reinjection of the virus again.

Does that possibly lead to some countries remaining off the list for re-connection on those travel-routes, until such time as they prove their safety?

Regarding Italy and Spain, it will be fascinating to see how quickly they can drop down their 'Daily new cases' curve, as this seems to be a clear driver into any removal of their lock-down protocols, and is likey to give the UK an idea of the number of weeks we should prepare to live in this current situation ourselves, being as we are some days behind those two countries on the infection curves...

Eight more weeks has been mentioned recently for the UK, and that doesn't seem too far-fetched to me, although I'll be over the moon if it's much less...

Cheers,

Itsallaguess

[redsturgeon]

I can imagine a best and worst case scenario, (plus an infinite number in between!). Of course, there is really no way of telling which way we are heading yet.

Best:
The virus might fade away. Perhaps due to a combination of evolving to be less dangerous, growing herd immunity, discovery of helpful drug treatments, and a better understanding of how to effectively slow its spread. Plus vaccines are on the way, and early release of them to (eg) medical staff could be a big boost to everyone. In this scenario I see the future looking distinctly more hopeful within 6 months. We will know vastly more about epidemiology, basic biology of the virus, treatments and some preliminary vaccine trial results by then. Testing and health services will have ramped up to handle large numbers of patients. Lockdowns can relax to preserve a functioning economy and society. Perhaps countries will be learning that they have to co-operate and co-ordinate to deal with a global problem.

Worst:
Treatments will be expensive or ineffective. Vaccines take a long time, and, possibly may never materialise, or not be very effective. Maybe immunity is not retained for very long after infection either. We will have to learn to live with the virus as we do with 'flu. We realise that it can't be eradicated, particularly from densely populated parts of developing nations, and places that believe vaccinations to be an evil western conspiracy. This will take time and much anguish for everyone as we realise that lockdowns MUST be relaxed to avoid collapse, even though it'll be very difficult for health services. What if it's politically impossible to relax lockdowns enough to prevent financial and economic disaster until it's too late? Will bi-partisan brexit politics turn to bi-partisan pro- or anti-lockdown?

---

So far, I have been amazed at the speed at which science has studied the virus, despite the usual need to apply many months ahead for grant applications before you can start anything. Some data is being shared publically instead of being kept secret. We have 40 or even 60 vaccine projects in progress. For all their failures, governments show that when they really have to, they can take huge actions at great speed (if only climate change were treated the same). So there are reasons for optimism, but it's still all quite scary isn't it?

In fact from a scientific POV your best scenario is by far the most probable. I see most of what you list in that scenario as above 90% probability, that's just the way coronaviruses work. This one is new but we get new ones appearing all the time and new flu viruses and they follow a similar pattern.

The issue for me though is that an early epidemiological win which will most probably happen within the year does not necessarily translate to business as usual very quickly from an economic standpoint.

John

[zico]

For those interested in modelling the likely UK effects of coronavirus, I've posted on the Science board (which is purely about modelling and estimations).
Link is below for those interested. I'd appreciate comments and thoughts on the model, as I can run various scenarios on it.
It's a pretty simple model, assuming a 10-day lag between %growth in new cases and deaths, but I think it should give reasonable ball-park results.

viewtopic.php?f=83&t=22737

[odysseus2000]

There is no historical event that I know of that has lead to large numbers of people being locked down around the world and people not wanting to or being able to participate in social activities that funded many business and the countries of the world. During the Great Depression the unemployment rate was around 25%. The US now has a the fastest rise in unemployment claims ever recorded:

https://www.theguardian.com/business/20 ... us-economy

There are about 155 million employed people in the US, so the current rate is 9.9/155 = 6%, but the NYT estimates the real rate is over 13%:

https://www.nytimes.com/2020/04/03/upsh ... ssion.html

Regarding Corona virus, as far as I can tell there is no evidence that humans have a long history of exposure to Corona virus that were
were first identified in the 1960’s:

https://journals.lww.com/pidj/fulltext/ ... us.12.aspx

Whether they existed before or are a new evolutionary virus development is unclear to me, but I find no historical pandemics that have in retrospect been classified as Corona, there is no suggestion that Spanish flu (SF) (killing over 24 million) was a corona virus:

https://www.france24.com/en/20200320-ho ... panish-flu

The dna of the SF has now been decoded and there are suggestions that a flu epidemic in 1889 was a pre-cursor to the Spanish flu that left people who had this flu with some resistance to the 1918 out break. SF killed predominantly people who were not alive in 1889. Whether the previous Corona epidemics, SARS etc, are inferring immunity to some who had them at a mild level seems possible with the majority who didn’t, having no immunity.

Things can change quickly, but with out some advance it seems impossible for airlines, coach firms, theatres, plane makers, service business, real estate …et al. to escape commercial bankruptcy. Each of these industries supports many others such as restaurants, insurers, banks, clothing, diy, miners and processors of steel aluminium etc, etc. We are rapidly moving into an economic condition that is worse than the Great Depression.

I do not see how the current economic system can function if all of these business are bankrupt and that means that the pension industry that relies on continuing contributions and State benefits and State employment which rely on taxation can also not function.

To continue it seems we have two economic options:

1) Some new economic system (Helicopter drop?) will have to be quickly prepared and if the lockdowns are not removed, implemented in the short term. Whether this will preserve shareholder equity or not would have to be decided.

2) Lock downs will have to be abandoned and we return to the previous economic system with all the risks for serious loss of life implied. This has historically been the policy adopted.

If you think I am wrong, please explain why.

Regards,

[dealtn]

There is no historical event that I know of that has lead to large numbers of people being locked down around the world and people not wanting to or being able to participate in social activities that funded many business and the countries of the world....

...I do not see how the current economic system can function if all of these business are bankrupt and that means that the pension industry that relies on continuing contributions and State benefits and State employment which rely on taxation can also not function.

To continue it seems we have two economic options:

1) Some new economic system (Helicopter drop?) will have to be quickly prepared and if the lockdowns are not removed, implemented in the short term. Whether this will preserve shareholder equity or not would have to be decided.

2) Lock downs will have to be abandoned and we return to the previous economic system with all the risks for serious loss of life implied. This has historically been the policy adopted.

If you think I am wrong, please explain why.

Regards,

We have had a number of examples of wars that have effectively closed down societies, and economies, some where there was literal destruction of businesses (and homes, infrastructure, and sadly large numbers of people). Yet, we have rebuilt those businesses (and homes and infrastructure) such that successive decades have been more prosperous than those that came before.

There is nothing that I have seen that in itself suggests it won't be possible to do the same again.

The fact that scientific communities, for instance, are demonstrating the willingness and capacity to work together, gives much to hope about looking forward. It is very easy to assume and predict terrible "never before" outcomes, but I would be much less dismissive of man's ability to thrive, difficult though it might be at this time.

[johnhemming]

I thought I would spend some time trying to find original sources on the CBILs loan scheme.

I have this about the TFSME which effectively rewards banks for making more loans (and penalises them for reducing funds loaned)
https://www.bankofengland.co.uk/markets ... e-mar-2020

Bailey -> Sunak
https://assets.publishing.service.gov.u ... 70FECD.pdf

Sunak -> Bailey
https://assets.publishing.service.gov.u ... CFF_vF.pdf

Covid 19 - contingent liability note
https://assets.publishing.service.gov.u ... final_.pdf

The most recent variations in the parameters of CBIL
https://www.gov.uk/government/news/chan ... ms-in-need

[Itsallaguess]

To continue it seems we have two economic options:

1) Some new economic system (Helicopter drop?) will have to be quickly prepared and if the lockdowns are not removed, implemented in the short term. Whether this will preserve shareholder equity or not would have to be decided.

2) Lock downs will have to be abandoned and we return to the previous economic system with all the risks for serious loss of life implied. This has historically been the policy adopted.

I think your second option regarding 'lock-downs will have to be abandoned' might be a little too simplistic...

Certainly for the UK, it's important to remember that we've actually got two distinct 'parallel lock-downs' going on at once -

(a) - The most vulnerable in society have been told directly not to leave their homes at all for 12 weeks and to completely remove any direct social contact if at all possible.

(b) - The rest of us have been given 'don't leave home unless absolutely necessary' instructions (where clearly the word 'necessary' has different meanings to different people...)

Given that we know that 'Cohort (a)' are both the most likely to need hospitalisation if infected, and are the most likely to die from this virus as well, and they are also likely to be amongst the least economically active, then I think there's a possibility that once the medical side of things are much better prepared and organised, then walking back on the (b) lock-down for the 'less vulnerable to high medical risk / risk of death' cohort will both re-activate the economy in a very meaningful way, and at the same time still maintain the much higher level of protection for cohort (b), being the most vulnerable people...

In my scenario above, 'all the risks for serious loss of life' are not re-introduced, as we might still run or extend the more extreme lock-downs for the most vulnerable...

Cheers,

Itsallaguess

[redsturgeon]

I think it is probably worth considering what we consider "the economy" and what the recent valuations of the various stock markets around means for society as a whole.

Since the financial crash of a decade ago the two have IMHO decoupled in a way that has not happened in the past. We kept hearing particularly of how well the US economy was doing but it seemed to me for vast swathes of America they were not seeing the benefits of this.

If the economy as in people's jobs and meaningful wages recovers quickly then that will be great. If stock prices remain in the doldrums for a decade or so then I would be less worried.

John

Edit: Let me just clarify that last sentence...it seems a bit harsh now I read it. What I mean is if it does what over valued markets have done in the past ie. lose 60% or more off the top then takes a few year to recover to new highs that are based on increased profitability then I'd take that.