If you were involved in markets in 2020 at all, you know how harrowing it’s been. These are unprecedented times, and as I’ve said before: money always makes the first move. 

Quarter Two will likely shape the next few years. Here’s a list of what we may experience:

• GDP reports will be materializing all over the world, 
• The curves of virus growth will become clearer whether they are flattening or still growing at extreme rates, 
• Money flows will either continue to run into cash and bonds or shift their way towards commodities and hard assets, 
• Real-estate panic will begin to be realized and selling pressure will likely originate from overleveraged homebuyers and landlords, 
• And Bitcoin’s block reward will halve itself in May, effectively cutting the supply of the digital commodity in half.

The SP500 and Dow Jones indices are now a clean 20% off the lows. This amazing rally leaves the question for many: “Is it over yet?”

The 2 trillion dollar CARES relief act certainly gives us some breathing room; here’s how it’s distributed:

Now, before any claims are made, let’s look objectively at facts and historical figures.

First, let’s begin with a chart I made September 9th, 2019.

(The red boxes were designed to indicate the varying severity of the recession that was brooding.)

Here’s today, March 31st. And many people claim the market can’t be predicted.

Issues:

1. My first issue with the stock market is that it hit my first target in the first four weeks. The average recession lasts about 11 months or 48 weeks, making the odds of us being in a “minor recession” diminish greatly.
2. The Federal Reserve managed to fire off all of its shots in the first 2 weeks of economic downturn. For example, lowering interest rates to 0, funding trillion-dollar overnight lending to credit markets, and agreeing to purchase billions of mortgages and treasuries were all massive interventions indicative of a much greater problem.
3. The stock market was not the only asset dropping. This correction has been a massive exodus to USD, what seemed to be the only safe haven in this current environment.
4. We spent the entire GDP of Italy on one stimulus package. Yes, two trillion dollars injected into the US economy. Is this desperation or proactiveness?
5. The 10% fractional reserve requirement for banks was removed. Banks can yet again lend money they don’t even have to other banks, to you, and to the world. This stinks of necrotic economic conditions.
6. Historical unemployment numbers are creating a labor shock. This is a bottom-up problem adding to a recession that is less easily fixed, but the first measures ($1,200 to Americans in need via CARES Act) have already been put in place. How sustainable is this though?
7. The price of oil has crashed due to Saudi Arabian oversupply and price wars against Russia. This has put destructive levels of stress on oil companies. A barrel of oil is now the same price as a large pizza delivery.
8. I’ve heard many rumors of a large European bank (my best guess is Deutsche Bank) going under and needing a bailout.
9. Simultaneously, Europe is going through a credit and banking crisis that is similar to 2008 crash in the US, which is only exacerbating the severity of this current crash.
10. To put things in perspective, this is the fastest stock market crash ever. 
11. Another two trillion to infrastructure? Oh my. Donald “FDR” Trump.

Why the rally?

The market is rallying because the government’s measures to stave off a financial crisis have been truly legendary.

Worried about corporate debt?

Don’t worry, the Fed has pumped trillions of dollars in loans into the financial system so companies can pay their old debts with new debt.

Worried about household mortgages?

Don’t worry, many people who lost their jobs will make more money on unemployment, thanks to Congress’s stimulus package.

Worried about commercial mortgages?

Don’t worry, small businesses get free money to pay their rent, and banks are giving out rent holidays.

Worried that business closures might last too long?

Don’t worry, Trump has promised to lift lockdowns by the end of April.

In short, the efforts to keep the debt bubble from popping have been so Herculean that at this point, it’s hard to see how they could fail. It’s like that scene in The Big Short when the shorters realize they’ve “bought into a rigged game,” and CDOs might not be allowed to fail. Only the efforts to keep debt from failing this time around have been far larger and have come far faster than in 2008. The US government may have been a month too late to contain coronavirus, but they acted a lot faster to contain the failure of bad loans. In many ways, the market rally is justified in that much of the uncertainty has evaporated. Markets hate uncertainty. 

Unfortunately, this may be some of the most uncertain times we’ve experienced in a very long time.

I think it’s likely that the local bottom has been put in and markets will be allowed to cool off for a bit, perhaps by way of a slower grind upwards, but where will that leave us? It seems very unlikely things will go back to normal quickly, and even more unlikely that the market will be able to sustain these higher levels as the swathes of unemployment, small business bankruptcies, and bank pressures begin to weigh in.

Critical areas are best viewed on the SPX and DOW.

The critical areas to look at are 2700-2800 on SPX, and 23000-25000 on DJI. There is an abundance of confluence around these areas, including a 50% retracement of the move, the ‘levies’ or 200 simple and exponential moving averages, and the most important (especially to me): the point of control.

The point of control, or POC, is the price region where the greatest amount of volume took place, which evidently indicates where the average position is. The market remains long-term bearish as long as we remain below the POC of 2720 (SPX) and 24800 (DJI). Sellers will likely be around this area, and it’s where I would sell my long term equity holdings as well, as there is no point in fighting the big guys.

Long Term Implications:

GDP is certainly going to be massively damaged by this event. The coronavirus outbreak has created massive global economic disruptions and has broken the knees of many key businesses, at least temporarily. The speculation revolves around how quickly this problem can be solved, and how much damage can be done before it is. Goldman Sachs predicts a large disruption in GDP growth in Q2, followed by a conservative recovery. Is it possible? Certainly. It’s also possible that recovery takes much longer, and damages to the market and the economy will continue. What needs to be understood is that this is uncharted territory. There is very little history to support the current conditions, and we’re in a world we’ve never been before.

The money printer goes brrrrrr!

LF Performance Amongst Turmoil:

My original goal was to create a relatively uncorrelated vehicle that could capture the volatility of Bitcoin without suffering the massive drawdowns that the digital asset often undergoes. While not perfect (and returns have certainly diminished in this unfavorable market), the algorithm managed to print another positive month despite the massive 50% drawdown on BTC and traditional markets. In a following article I’ll be discussing more about Bitcoin’s relation to traditional markets and where its place may be at the end of this crisis. I’m greatly relieved Laissez Faire didn’t take a bigger hit from this, as this was definitely a real “test” for it.

As for the stock market, I’ll end with one final question. Where do you think we are on this chart?