Social distancing and short selling
This feels like the big one
Two weeks ago I wrote about prepping for coronavirus, and how what we buy in times of crisis reveals about us. I think it was a reasonable look at human psychology, on an individual level; recently, I’ve focused more on how governments and power structures respond.
One quote from that newsletter:
However, I know that no matter how good my healthcare is or how well prepared I am, diseases spread through the lowest common denominator. Many Americans, and especially those of lower-income and/or with worse health insurance situations, don’t have the luxury of choosing to work from home or take paid sick leave. All your preparation will be for naught if the deli worker is sick, or if the waiter or bartender is, and so on. Healthcare for all is a moral decision rule, and even if you are acting purely in your own selfish interests, you should want everyone around you to be healthy, just so you are also healthy.
The absolute most important takeaway is just “social distancing,” or more simply, “don’t fucking go outside.” You can carry diseases and infect others without being symptomatic yourself -- it’s not “don’t go outside if you feel sick,” it’s “don’t go outside at all.” Additionally, any serious young infection means a hospital bed taken away from someone who had a higher likelihood of getting the disease.
The TLDR for the rest of the newsletter:
Trump’s decision-making is based on the current S&P 500 price level, rather than how average Americans perceive the economy or how public health experts measure the spread of the disease.
The government should act more decisively to enact social distancing now.
The short selling will continue until public health improves.
“Government”
Bread and circuses.
Silicon Valley loves to talk about “data-driven decision making,” which is a great and completely vacuous philosophy. Where does your data come from, how do you choose the right set of data to use, what is the right metric, etc etc. Or to put it another way, “there are three kinds of lies: lies, damned lies, and statistics.” Being a senior data person basically requires constantly questioning your assumptions, which might be why we’re all so neurotic.
The best approach to actually utilizing data-driven decision making I’ve come up with, then, is to set a set of metrics and goals that will not change (essentially pre-registering your results) and to outline the pros and cons of the metrics. This allows us to pick a set of metrics that we are accountable to, rather than the metrics which looked the best halfway through the quarter, while still allowing us flexibility in understanding if the metrics are no longer applicable because things changed. Pre-registration is particularly important, at both the per-quarter and per-experiment level, otherwise you can just rerun experiments until you get a green number.
So what metric should the government use to judge their coronavirus response efforts? Public health people seem to mostly say “number of new cases,” which is the derivative of total cases. China and South Korea are good examples: they have lots of cases, but not that many new infections, so we could say that they are past the worst of it and in better shape than other countries where new infections are growing exponentially. Both of those countries enacted strong and coordinated responses: China had strict cordon sanitaire with total shutdowns; Korea did mass testing combined with their existing universal health coverage and encouraged social distancing.
England and America are clearly not taking the same approaches. My best summary:
England: lock down old people; don’t lock down young people, let them get sick now, hope that they’ll survive. Basically every public health person thinks that this policy is suicide.
America: payroll tax cuts, sick leave to 20% of workers, bailouts for the “very great” cruise industry, the President threatening the Senate minority leader and Federal Reserve chair, trying to monopolize a coronavirus drug, literal thoughts and prayers.
These approaches aim to minimize short-term disruption to the economy, which some guys best known for being a Theranos simp, say is more dangerous than the virus (citation needed!). The tradeoff is that these policies will almost certainly kill more people in the long run, which is worse for the long run economy, outside of the funeral parlor industry. If people aren’t alive, they don’t spend money, this isn’t rocket science.
It’s pretty clear that Trump views his stakeholders as stock owners and his OKR as what the Dow Jones closes at.
Absolutely cursed image, on so many levels. The Dow Jones average, a completely nonsensical index, is not actually a good measure of the economy for typical Americans. For rich people, who have lots of public equity investments, sure; the median American can’t cover a $1000 emergency, the stock market is basically irrelevant to them. Also, unrelated, Gilead’s coronavirus treatment drug is supposed to cost $1000, according to RBC analysts.
I guess it makes sense that Trump relates to and understands this random number and thinks that everyone else has exactly the same values (see also: rich people can’t build social networks). A recent survey lists about 65% of registered voters with fewer than $50k in the markets and around 35% without any invested.
Economic prosperity for Americans is undeniably a good outcome to aim for, but the Dow is not the right measurement for it, especially if you consider average Americans, as well as the long-term economy.
“Markets”
The short-selling will continue until public health improves.
The current situation really presents a real-life trolley problem for lots of small businesses. If you close, it’s good for public health and the health of your employees. But you’ll also lose income and possibly have to lay off workers, who will also lose desperately needed income. Almost 3/4 of the survey respondents also say that they do not expect their workplace to close:
With linear thinking, it’s easy to imagine that there is only pure crisis, that every SMB owner faces a Sophie’s choice, and we are doomed. But -- there’s a way out: massive government fiscal stimulus. Cover the businesses with 0% interest loans, and cover the workers with direct cash payments. I want prepaid debit cards in the mail tomorrow. The government can borrow at basically 0% interest from the capital markets, just do it! Greg Mankiw agrees, David Brooks and Claudia Sahm agree, Ro Khanna and Tim Ryan basically agree.
Unfortunately, I don’t think that massive stimulus will happen soon. Republicans and Democrats have united on means-testing all aid programs and the programs they have put the most weight behind, e.g. payroll tax cuts or pushing back tax deadlines, don’t really help if you need cash today rather than later. Like, the current bill is fine as a first step, and I don’t think anyone believes it’s a silver bullet, but it’s also pretty discouraging that politicians are thinking extremely small and in the box in a time of unprecedented crisis.
Americans are split on party lines about the severity of the crisis:
Sixty-eight percent of Democratic voters are worried that an immediate family member might catch the coronavirus, compared with just 40 percent of Republicans who agree.
Fifty-six percent of Democrats believe their day-to-day lives will change in a major way in the future, versus only 26 percent of Republicans who think that.
And 79 percent of Democrats say that the worst is yet to come, versus just 40 percent of Republicans who hold the same opinion.
This divide is why I’m staying short the market: I don’t think that the true disaster that coronavirus will inflict upon America and the world, absent drastic governmental measures now, has been realized by enough people. In particular, investment bankers are trained to believe in systems and institutions (the Ivy League, fraternities, Goldman, the Fed, Centurion Lounges, etc) and that the systems will solve things, so stonks will always go up. The reality is that our systems are absolutely not prepared to deal, the demand shocks are going to be basically unprecedented, people will die, and the stonks will not go up.
Everything about the financial markets this week screamed black swan: treasuries, stocks, gold, bitcoin all went down together, blowing up risk parity strategies (which, admittedly, I did invest in). The Fed offered up $1.5 trillion in repo operations, and stocks went up, for about 15 minutes. The Fed also cut rates last week, and similarly stocks went up for about 15 minutes. Basically, the systems worked, until they didn’t, and we need a drastic change in approach.
In a twisted way, short selling the market right now could be a patriotic and noble act: the more short pressure there is in the market, the lower prices go and the more Trump has to react. As we’ve seen, he only cares about these superficial numbers, so let’s hope they go even lower and provoke a real response.
Obviously I am being facetious, buying put options from my bedroom is not at all comparable to being a medical first responder. But I will stand by this: the worse the stock market (not the economy!) gets, the more likely the federal government will finally release the “shock and awe” fiscal stimulus we need.