Weird swings show a global financial system in trouble
• Coronavirus fears led to markets plummeting but typical safe havens and gold also slipped
Last week was an unsettling week on global financial markets, and not just because the US stock market fell sharply enough to bring a decade-plus bull market to an end, but because, as the New York Times, put it: “Something weird is happening on Wall Street.” Underneath the headline numbers were a series of movements that did not really make sense when lined up against one another.
On a day when major economic disruptions resulting from the coronavirus pandemic appeared to become more likely, and might have been expected to make typical market safe havens more popular, many of the safe havens fell instead on Wednesday. That included bonds of all sorts, and gold.
And there were reports from trading desks that many assets that are normally liquid were freezing up, with securities not trading widely.
“They amount to signs — not definitive, but worrying — that something is breaking down in the workings of the financial system, even if it’s not totally clear what that is just yet,” Neil Irwin concluded.
Most investors are undoubtedly trying to figure out how much worse this thing is going to get. Which is an impossible question to answer because not only do we have no clue about the way the upcoming months will shake out, but we don’t even know how bad things are right now. Even basic things such as numbers and definitions are being called into question. For now, coronavirus data still has the potential to mislead. The rise in the incidence of testing alone is likely to create the appearance of a rise in the occurrence of the virus.
As Joon Yun explains at worth.com in an analogy to the 1800s gold rush, “Just because gold diggers discover more and more gold in the Sierras doesn’t mean gold is spreading.
“What is spreading is the word about gold, which attracts more gold diggers, who discover more gold, forming a self-reinforcing frenzy.
“The prevalence of coronavirus, of course, is more dynamic. Unlike gold, it does spread,” says Yun. “But unlike gold, it disappears when a patient gets better, which we know has been happening in the vast majority of cases so far. What we don’t know is the true prevalence, and how endemic it has been this season — it could be in the millions for Americans already — because we weren’t looking for it until this particular story entered our collective consciousness in recent weeks.” If all of this feels a bit
that’s because it is. As Yun says: “If Sars CoV-2 turns out to be just a Kafkaesque guest who has been among us for the 2019 to 2020 flu season, then at some point the reported ‘incidence growth’ of coronavirus will stall and fall — thereby releasing the spellbound public from selfcaptivity and other forms of quarantine. Before we know it everyone will be saying, ‘I knew it,’ and this horror story about the plague of the century could fade into a vague memory as if it never happened.”
Unfortunately, even this dream scenario will not prevent the waves of panic that are going to roil the markets in the weeks ahead. There is a feeling — not entirely unfounded — that “this time it’s different ”— that this outbreak could reach truly disastrous proportions.
NEXT GLOBAL RECESSION
Worth.com asked Universa’s Mark Spitznagel if coronavirus was going to lead the world into its next global recession. To which he replied, “Is this the crash? I don’t know. But I don’t need to understand everything about the world. I don’t need to understand pandemics, geopolitics, how risky the banking system is.
“It’s not about claiming to have figured it all out and then putting out this brilliant strategy — it’s really about payoffs.”
After starting his career as a futures trader in Chicago, Spitznagel went on to partner with Nassim Taleb in 1999 and founded Universa on his own in 2007, with the express purpose of starting a fund that would perform capably during periods of market stability but vastly outperform during financial crises. According to Worth, in 2007/2008 Universa posted returns of over 100%, and during a short-lived market rout in August 2015 made $1bn in a single week.
“We’re like bonds and gold only in the sense that we are a risk mitigation strategy and therefore you should compare Universa to other risk mitigation strategies,” says Spitznagel. “But we go about it in very, very different ways. What’s unique is that we have what I call a very explosive downside payoff. We deliver extreme crash bang for the buck, and that’s what sets us apart from virtually any other risk mitigation strategy. We’re like gold on steroids.”
The obvious question is, how does he do that? Unfortunately, Spitznagel won’t say. What he will say is that he would never want some retail investor or even a professional to try these strategies — as they would “rue the day” they did so. “I’m doing people a favour by not telling them [what we do],” he says.
Which, for some reason, brings to mind the warning issued in February by the Securities & Exchange Commission’s office of investor education and advocacy for investors to be alert to the potential for coronavirusrelated investment scams at this time.
JUST BECAUSE GOLD DIGGERS DISCOVER MORE AND MORE GOLD IN THE SIERRAS DOESN’T MEAN GOLD IS SPREADING
WHAT’S UNIQUE IS THAT WE HAVE WHAT I CALL A VERY EXPLOSIVE DOWNSIDE PAYOFF