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So the market happened…

Today, the market dropped 13%, just in case you were unaware. What does this mean for you? Well, it means you’re much poorer than you were a few days ago. Okay. That’s probably not what you wanted to hear. However, the exogenous threat of the Coronavirus is most likely a temporary threat to equity prices. The market is already predicting this depression in equity prices is temporary. Long term future contracts are still trading at a premium implying the market is predicting a quick recovery from the economic slowdown. However, considering the slow response by the U.S. government and other European nations, to the Coronavirus, there is a nontrivial chance this crisis becomes an extended crisis.

You might be asking: “What is the Federal Reserve doing?” Well, the Fed is over here printing money. They announced an emergency rate cut to zero percent, joining other major central banks, and have said they will purchase $500 billion in treasuries and $200 billion in mortgage-backed securities. All of this will help later… maybe… only when the Coronavirus and the pandemic of fear are contained.

So what are my ill-fated projections for the future? I believe the markets will continue their slide. Economic activity in the United States is coming to a standstill and there seems to be no shortage of bad news. I also believe that global economic activity will decline for a couple of quarters. While the speculators among us are freaking out, the investors are probably considering the long term ramifications of the crisis and might see these pull-backs as a buying opportunity. However, even with a 13% decline in equity prices, the market is still overpriced from a historical perspective. Although in the era of low-interest rates these higher Price-to-Earnings ratios are the new norm and therefore these huge dips warrant a buying opportunity for many securities. Also, I believe the heightened volatility the markets are displaying is symptomatic of the increase in algorithmic traders. These computer algorithms account for a huge proportion of daily trading volumes and seem to all be pushing downwards.

The “Black Swan” by Nassim Nicholas Taleb, suggests that most algorithms use a gaussian or standard distribution in their calculations for risk. Considering this exogenous shock if probably too many standard deviations from the mean to even be included in their measurement of risk, these volatile trading days are probably reflective of those poor models. I believe that these little dips are minor over the next decade and probably do not warrant any cognitive capacity on your part. Therefore if you don’t need money for the next decade just do not look at your 401(k) and you should be fine.

On a side note it seems clear who’s going to win the 2020 election now. With the economy being the only positive thing for Trump, it seems inevitable that Joe Biden will become our next president. Perhaps this is a little too early for such declarations, but if I’m right, you heard it here first.

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