(idk title is bad this is more like a placeholder)

Disclaimer: this is a personal opinion, a speculation about things to come, and is not meant to be investment or financial advice.

(The website version is quite unpolished. Please refer to the PDF version as it contains graphics and footnotes. Link)

It might seem hard to understate the economic effects of the current pandemic, but I worry that the lack of caution is exactly what’s happening. In just the past few months, we witnessed numerous worrying signs that defied all historical trends, whether it is the speed of the stock market drop , the negative oil prices, or the levels of death and unemployment in the US and around the world. Particularly in the United States, all this has been magnified by the negligence of the current administration with little signs of any interest in actually tackling the problem. This is extremely concerning especially since the world often looks to this country for leadership in times of crisis.

And that is only what we’ve seen.

I worry that we are heading into a global macroeconomic crisis that one could describe as the perfect storm with the United States in the center - a storm that has been long overdue, and more severely fueled by the ongoing pandemic. While it may be tempting to describe the coming storm as unprecedented, the reality is this happened in a long-forgotten time with the Great Depression. Call it the Great Coronavirus Depression if you must. In the next few sections, I will lay out short and near term trends, how they compare to past depressions, why I believe it is likely to be of similar magnitude as the Great Depression, and finally, how I am protecting myself in all this beyond staying inside and wearing masks.

Longest period without recession and the risks ahead

Ever since the Great Depression, the United States has consistently faced a recession every one to ten years. While recessions have become much less frequently in the past decades, the current time period until March was the longest streak of growth ever for both the economy and the stock market. We could either interpret this record as recessions are a thing of the past thanks to recent advancements in monetary policy, or that one is just around the corner. While the officials of the current administration might disagree, I’d say the recession was coming even without the pandemic. Distributions and Bankruptcies

Inequality in the United States has grown tremendously over the past few decades.

It is important to examine the semantics of the past decade of growth. While the economy has been growing tremendously on paper, there is little to celebrate for the common person with years of stagnant wage growth and rising living costs. The only real growth seems to be in inequality with wealth further concentrated into the hands of the rich. This is because this growth has been largely fueled by stimulus designed to benefit the wealthy. Other than the symbolic Trump checks that can’t even afford a month’s rent in many cities, all of the stimulus like tax cuts or bailouts have mostly been directed at largely corporations and their already-wealthy shareholders.

The magnitude of job loss is unprecedented

While inequality might seem like a political issue, its economic impact will soon become a reality. Even before the pandemic, consumer credit, and household debt were already at an all time high. Coupled with the unprecedented levels of unemployment, in the short term, this means reduced consumption, which affects immediate revenues of consumer-oriented companies, and in the mid term, possibly translate into waves of consumer bankruptcy, setting a ripple first to financial services companies, and finally banks. We’ve already seen bankruptcies in retail declared by household names like J.Crew, and there are already early signs of consumer-facing financial services in positions of weakness. If you compare the performance of stocks between companies, you might find that companies with higher exposure to consumer loans, like Ally Financial for auto loans, and Capital One, Synchrony Financial for credit cards, have been underperforming against the entire market and even its peers.

Time to Reopen

Even if the economy survives the bankruptcy onslaught, it will also take time for economies to re-open. On the demand side, it takes time for consumers to regain confidence in actually spending money and more importantly, going outside. Any reopening without actual treatment or vaccine will likely result in a second a second wave of infections and deaths. This is precisely what happened with the Spanish Flu of 1918, where premature re-openings led to a second, sometimes more severe, wave of deaths that would have otherwise been avoidable.

Even when demand does recover, it will also take time for supply chains to re-establish themselves. With decades of globalization, most supply chains now depend on trades between many different countries. These trades rely on people communicating with one another, be physically present to negotiate deals if not to inspect and collaborate on production. With many travel restrictions in place, this is currently impossible. Even if restrictions were lifted by one country, it would require other countries to also be confident in travels to/from that country for travels to fully resume. Should this behavior play out, the time when travels finally have the potential to resume to pre-pandemic volumes is not just when the last country is free of the virus, but free long enough for all other countries to recognize its safety. That will surely take time, as vaccines take at least a year to develop, and more time to produce and distribute. This actually makes airlines in an extremely fragile position . I will get back to this later.

Dissonance with the immediate reality

So we’ve outlined the short term risks, and even if these risks were mitigated, the mid term concern of difficulties of actually reopening the economy. At this point, you might ask why are people talking about a V-shaped recovery? Why has the stock market been rebounding? Why are stock valuation comparable to around the same time last year, when we were all going outside, performing economic activities like eating out, watching movies, and shopping without any worry of an existential threat to humanity? Momentous exuberance, and conflict of interest.

Momentous Exuberance

Habits stick. While it is standard disclaimer in the investment world is that “past performance does not guarantee future results”, the past decade of exuberant growth across most indices have almost made the idea that “stocks always go up” seem like a fact rather than an opinion. It’s an especially alluring idea in this world of negligible interest rates, where the only way to protect one’s savings against inflation is stocks, as both savings account and bonds offer rates below inflation, while high yield bonds come with their own associated risks.

But changes in human behavior usually lag behind reality, as new habits take time to form. Take something like brand loyalty, the average consumer may not tell the difference between two detergent products (and there may not even be much difference), but convincing your grandparents to change the detergent “that has always cleaned well” will likely be an uphill battle. When the average person can buy stocks at almost any point in the past decade and look like a stock whiz, it becomes challenging to argue against the conventional wisdom that “stocks always go up”.

At this point you might argue that if you look at the entire history of the stock market, sure, there have been crashes here and there, but eventually they always go back up. I’m not arguing against the long term view of the stock market, after all, it’s undeniable that even despite the Great Depression having happened, we are at unprecedented levels of prosperity. The more important question is how long these recoveries take for crashes? Six years for the most recent subprime crisis, and 30 years for the Great Depression. Personally, I don’t have that kind of patience.

S&P 500 between 1929 and 1960. It really wasn’t until 1959 that the index recovered to pre-crash heights.

Conflict of Interest

So does that mean we should defer to professional opinions as we can’t trust our own intuitions based on past momentum? If you look at a lot of recent opinions on the stock market, there is a lot of noise about how stocks are undervalued, that one should buy on the dip, and expect V-shaped recovery to come. And then bought people did, in droves en masse that took down trading platforms like Robinhood . What is happening?

My thinking is that there is a conspiracy for institutional investors (banks, hedge funds) to dump shares on retail investors (you, me, those trying to retire with 401ks), as they realize there is a real recession coming, and they want an out to mitigate the losses from March. Over the past weekend, Warren Buffet announced that he is sitting on a record sum of cash after offloading not just some but all of his airline stocks. In an interview with one of the co-CEOs of Robinhood, it was revealed that they are seeing record signups of individuals depositing hundreds of thousands of dollars, buying up airline stocks. Why airlines you might ask? My belief is that it is a relatively simple business to grasp for the average consumer, which makes it an easy idea to sell: “call your broker, open an account, for airline stocks are cheap right now!”. Indeed, many airlines are sitting at 20-30% of their valuation from their pre-pandemic heights, but what they are not saying is the immense difficulty for them to actually return to previous traffic volumes, as countries remain vigilant, business cut expenses, and individuals reducing travel plans either due to health or financial concerns.

Again, this conspiracy is something that happened before, both in the most recent subprime mortgage crisis, and in the Great Depression. In The Big Short (please watch this movie), which is about the recent subprime mortgage crisis, there was a scene where the default rates for subprime mortgages were going up, and yet securities backed by the same mortgages are going up despite the defaults. Not only that, the insurance premiums against defaults were also going up. This means there’re are actually two groups of investors betting against the mortgage market going in opposite directions, and the fact that the insurances (swaps) are much less accessible to the average investors, my guess is that institutional investors were buying these insurances and at the same time selling their failing mortgage securities to retail investors, causing pricing increase in both fronts.

We’re seeing this dissonance literally today. Within 24 hours at the time of writing (May 7, 2020) of this section, the government just announced yet more individuals, 3.16 million of them were seeking unemployment, even beating the already pessimistic estimates of 3 million. Neel Kashkari of the Federal Reserve Bank of Minneapolis even warns that this number may underestimate the full impact as individuals give up on job searching. Across the Atlantic, EU’s largest economy Germany saw almost a complete halt of its automobile exports, and its manufacturing index dropped by 15.6%, below the 10% expectation. The market typically reacts to bad news with drops, but on this very day, both the American and the German stock markets were up. In fact, NASDAQ just turned positive for the year.

To me, this recent rebound is very much an artificial one, meant only to temporary prop up asset prices so institutional investors can cut losses. Again, this type of rebound happens in every crash. We often talk about the Great Depression having started on the day when the stock market saw a historical double digit dip on Black Thursday of October 28, 1929, then just went down from there. What is often omitted from the story was that there was actually significant recovery up until April, before going down in the way we now know. While I don’t believe there’s an intentional omission of this detail in history, it does make the storytelling much more nuanced.

A friend working in finance in Hong Kong actually tells me there’s an industry-insider term for this: 逃命波, or the self-preservation escape wave in Chinese. It is my hope is there will be more than bankers who can benefit from this self-preservation.

My own interests

It would be hypocritical for me to talk about conflict of interest without revealing my own. First, I very much have much to gain should my predictions come true, as I’ve financially positioned myself to bet against the economy. In a later section, I will disclose my holdings in detail at the time of writing (May 6, 2020), and I welcome any inquiries into them. As I have much to gain, this piece might be interpreted as my attempt to influence the market in my favor. While I welcome such assumptions about my influence and the wealth of those around me, I don’t believe my humble status will actually be able to influence the market in such a magnitude.

So why am I here for? If you are around the same age as me, our parents are likely retiring or already retired. Their main financial support will come from 401(k) and other retirement savings. Should these predictions play out, we are talking about losses of unprecedented magnitude, like potentially 60-80% or more. The thought of our generation having to support the one above while many of us are still crippled in debt gave me an acid reflux just spelling it out. It is my humble hope that we can avoid this fate by re-visiting these underlying assumptions about the economy and make appropriate adjustments. I am writing this not to serve financial advice but as a piece of personal opinion, as I am not licensed nor inclined to give out investment advice.

(There is also a small vendetta realizing the gains of financial institutions surviving through the bailouts will be funded by our collective losses, as is what happened in 2008.) My positions

My holdings are broken into three categories: short (65%), gold (15%), and cash (20%). I will explain what each means and my reasoning behind them starting from the most straight forward. Again, I am sharing this information to only reveal my potential conflict in interest, and again, this writing is not meant to be financial/investment advice and should not be treated as such.

Cash

Cash is just cash. One dollar today also means one dollar tomorrow at least in terms of face value. Some cash may live in savings accounts, generating whatever megar interests banks still offer, which is generally close to nothing these days. Short term Treasury bonds fall into this category.

Bonds

Bonds are structured loans made from the investor to another entity, say a corporation, a municipality, or the government at large. Due to bankruptcy risks, I am not holding any bonds with the exception of Treasury bonds. Particularly, I hold Series EE savings bonds offered by the Treasury, which are guaranteed to at least double within 20 years, but also considered Series I Savings Bonds that are specifically designed to protect against inflation.

Gold

The idea of holding gold might sound surprising decades after the abolition of the Gold Standard. But in times of financial crisis, gold has the potential to outperform other asset classes, sometimes even going up as stocks go down. This is a trend that can be seen in past downturns, including the most recent one in 2008. While past returns do not guarantee future results, I’m still counting on gold’s ability to retain value. Just to note, while the idea of me hoarding gold bars in my house sounds comical, I am realistically holding funds that are backed by gold.

Short

In trading, shorting generally means gaining over the loss of the underlying securities. Almost any type of security from individual stocks, commodities, and even entire indexes can be shorted. The most basic mechanism of shorting is short-selling, which is to borrow a security, sell it, and hopefully by the time you are ready to return it, the value has already lowered so you can repay at a lower price. Other mechanisms of shorting include funds that focus on shorts, and options, which are contracts which give the owner the right to buy or sell a particular stock at a predetermined rate at a later time. For further information, I would consult with a professional and/or conduct more research as shorting is a complex and risky strategy.

I am currently shorting the overall market of a few countries that I think are most vulnerable, including the United States, and individual stocks in the aviation and transportation sectors using all the aforementioned tools. This is an extremely risky move that comes with an equivalently large payoff should it pan out. (If it doesn’t I’m on track to lose almost all my savings) Financial gains aside, I am hoping this would serve some vindication of my otherwise aberrant view of the world. Literally putting money where my mouth is, I suppose.

Long

Long is the opposite of short in both general vocabulary and in trading. Long is the practice of holding a particular security in hopes it would go up in value so it can be sold at a later date at a higher price. At the time of writing, the only long position I hold is gold.

Epilogue

One writes to seek validation, to be right. This author would actually love to be proven wrong, as being correct means the demise of the economy and the suffering of countless families. At this point, my opinion (not investment advice) that we are entering an era not unlike the Great Depression has concluded. I hope you find yourself sufficiently aware and informed. If not, feel free to reach out to me for questions, for it is my (potentially self-presumptions) duty to inform those around me.

Now if you care for staying around, I will now wildly speculate on what happens after this collapse, assuming there will be one. This is the part that gets more political and perhaps even delusional, as if the main body wasn’t wild enough.

There are three main events that soon followed the Great Depression that changed the world: 1. The New Deal 2. Rise of Facism 3. World War. It is not unlikely we will see some combination of all these events. Had the democratic primary happened a year later, we might have had a chance for a new era where the country believes in government once more with monetary policies to renew infrastructure with something like nationwide fiber and 5G (which definitely help spread the virus ffs). But as reality already defined all of our worst expectations, with a president full of Facist tendencies already installed, and a looming election where we get to pick between two men accused of sexual assaults (read: rapists), I doubt we will be so lucky. (Low turnout rates typically benefit Republicans, and with the ongoing pandemic, the governmental negligence against it, and the Supreme Court ruling against measures like extending mail-in ballot deadlines, low turnout might just be what we see.)

Early projections show the American economy might contract by 30% during Q2, which is around the same as America’s lead in GDP compared to China. Unlike America, China has been holding steadily despite being the first respondent to the crisis. In fact, they have already announced aggressive monetary policies focusing on infrastructure similar to the New Deal. It’s an odd twist of fate that “America First” is now putting America second.

Chinese citizens now roam freely in Wuhan. With their lives and even stock markets mostly recovered, they can confidently proceed with life knowing that their government is capable of handling the worse. This is worthy of jealousy.

That said, we must not mistake the fruits of decisive action as validation for authoritarianism, even though we likely will. America second might just be enough to rekindle its hawkish tendencies to challenge the newcomer, whether through pure emotional jealousy, or through the world’s losing confidence in America’s ability to return the record debt it has incurred over the many years, including all the loans that fueled the quantitative easing (read: printing cash) that has been used to artificially inflate the stock market.

“How did you go bankrupt?” Two ways. Gradually, then suddenly.”

My worry is that the American bankruptcy will not be limited to the economy, and that the bankruptcy will also be an ideological one. Again, Fascism was born out of the Great Depression with a declining Germany scapegoating Jews and other minorities, and I’m an Asian who brought the Chinese virus. Even if this dirty immigrant were to return to the land where I was born, it might soon become a battlefield between two great powers. As you can see, I have a reason or two to be scared.