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From Bubble To Bust

Mar. 01, 2020 12:29 PM ETS&P 500 Index (SP500)SPY, QQQ, VXX261 Comments
The Heisenberg profile picture
The Heisenberg


  • A legion of investors accustomed to uninterrupted gains just witnessed one of the worst weeks for US equities since World War II.
  • In terms of rapidity, the selloff was unprecedented.
  • COVID-19 was the proximate cause, but one accelerant was systematic flows.
  • Here is a Heisenberg postmortem.

I suppose this goes without saying, but there's still a palpable sense of incredulity among many market participants about what, exactly, happened last week.

A long time ago (in a galaxy far, far away), I mentioned that despite readers' insistence on branding me with this or that "bear" label, history will show that, when push comes to shove, I will in fact be one of the few people not panicking when things get dicey.

It's true that I have some rudimentary Photoshop skills which I employ in the service of creating compelling banner images for some of my various musings elsewhere, and it's also true that, during times like these, one cannot reasonably be expected to avoid indulging in some hyperbole when it comes to choosing titles for posts.

But, flashy visuals and headlines aside, anyone who has followed the substance of the dozens upon dozens of missives I penned during this week's high drama will tell you that my analysis has been the very definition of trenchant.

I would argue that, when things are happening that the general investing public does not fully understand, there is no better cure for panic than trenchant analysis. People fear what they don't understand. My work this week helped folks understand how it is that US equities managed to fall from record highs into correction territory in the space of just six days.

Obviously, the proximate cause of the consternation is the coronavirus, and the headlines in that regard got materially worse on Friday evening and Saturday morning. The US, for example, reported its first death from the virus in Washington State.

You can peruse your favorite mainstream media outlet for the latest, but here's a visual (log scale) which was current through noon Saturday, to the best of my data collection abilities:

This article was written by

The Heisenberg profile picture
Perhaps more than any other time in the last six decades, the fate of markets is inextricably intertwined with the ebb and flow of geopolitics. It's become increasingly clear that one simply cannot fully comprehend market movements without a thorough understanding of concurrent political outcomes. Drawing on extensive experience in both politics and finance, Heisenberg will help demystify a world in which investors can no longer hope to conceptualize of markets as existing in anything that even approximates a vacuum.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (261)

Masterpiece of analysis
Price war between Saudi and Russian oil companies.
3.6% home mortgage rates.
What bust?
Fuld Kronasson profile picture
That exactly describes the bust @breadnbowl Oil is headed to between US$20-30 per barrel. When issued US Treasury Bills are trading at around 75 basis points, down 100 basis points from last week.

Can't wait for the weekend Tweets from Mar-a-Lago saying it is contained and everything is perfect.
DKB2 profile picture
Regarding your graph, "25 fastest-occurring corrections", I would foot note the enforced market shut down following 11 Sep 2001 is not included; but in all probability would have scored top drop.
Sept 10 S&P 500 opened @ 1086
Sept 21 Low was 945

5 Trading days duration

We were already well into .com bubble selloff in 2001, so that skews things a bit
i am extremely curious abt why etfs may not necessarily be a good vehicle for investing? any link or so for me to understand why so? i have a large share of my investments in etfs. would love to hear the other side of the story please! thanks alot
Well į give you two reasons
1. ETFs takes management fee.. they shave off 0.5 to 1 percent a year... with current valuations half of generated value of many companies you are often giving away (depending on ETF). Even if it is a bit lower over time it compounds to a massive amount of money. Compare any ETF to underlying index over course of 10 years and you will see.
2. Short term you know nothing, long term you no nothing... market is perfectly priced or not... but you can fine tune your portfolio to what you need and what you believe in... hence companies you hate or don’t believe in you do not buy... companies that you love the products or philosophy you do... you want income you check dividends... you want social responsibility you buy that... you might do great picks you might do horrible picks but whatever you do, if your portfolio is large enough you WILL outperform an ETF just because of the management fees
Fuld Kronasson profile picture
Actually ETF fees rarely approach 1% @civas666 The largest ETFs assess fees between 10 and 25 basis points. A pittance for the flexibility offered. Remember ETFs pay dividends, indices merely report historical price action.
well really depends on etf, i do not know etfs cheaper than 0.25 but event then

over course of 30 years, you are giving away 7.5 percent (that is assuming spot did not move)

1 0.25
2 0.500625
3 0.751876563
4 1.003756254
5 1.256265645
6 1.509406309
7 1.763179824
8 2.017587774
9 2.272631743
10 2.528313323
11 2.784634106
12 3.041595691
13 3.299199681
14 3.55744768
15 3.816341299
16 4.075882152
17 4.336071858
18 4.596912037
19 4.858404317
20 5.120550328
21 5.383351704
22 5.646810083
23 5.910927108
24 6.175704426
25 6.441143687
26 6.707246546
27 6.974014663
28 7.2414497
29 7.509553324
30 7.778327207

If spot moves, that it naturally doe, lets say average conservative 4 percent

Year Stock Fund
1 100 100
2 102 101.745
3 104.04 103.5204503
4 106.1208 105.3268821
5 108.243216 107.1648362
6 110.4080803 109.0348626
7 112.6162419 110.9375209
8 114.8685668 112.8733807
9 117.1659381 114.8430212
10 119.5092569 116.8470319
11 121.899442 118.8860126
12 124.3374308 120.9605735
13 126.8241795 123.0713355
14 129.360663 125.2189303
15 131.9478763 127.4040007
16 134.5868338 129.6272005
17 137.2785705 131.8891951
18 140.0241419 134.1906616
19 142.8246248 136.5322886
20 145.6811173 138.9147771
21 148.5947396 141.3388399
22 151.5666344 143.8052027
23 154.5979671 146.3146035
24 157.6899264 148.8677933
25 160.8437249 151.4655363
26 164.0605994 154.1086099
27 167.3418114 156.7978051
28 170.6886477 159.5339268
29 174.1024206 162.3177939
30 177.584469 165.1502394

so from initial investment you are losing 12 whole percentage points

i do think it is too expenisve, they do not know hwat is going to happen in 30 years, and no matter how smart they are they wont beat that
Paul Warner profile picture
Today is Monday, March 2 and we've been "exposed" to Coronavirus hysteria for about 3-4 weeks. So far in the US, we've had 100 cases and 6 deaths, all (I believe) from older folks who were already medically compromised. According to the CDC, in all of 2019, there were 15 million cases of flu in the US, 150,000 hospitalizations and 8,200 deaths. My take is that yes, we need to take this seriously and I believe the Administration is doing just that. But I lay the severity of our panic and hysteria at the feet of the anti-Administration (and anti-American) MSM and those democrats who have been referring to our problem as the "Trump Coronavirus" and "Trump's Katrina." So to keep things in perspective, thank the "fake news" media -- ABC, NBC, CBS -- for this (fairly significant) pull back of a somewhat overvalued stock market. It is the MSM, in pursuit of higher ratings and political manipulation, that is hell-bent to sow panic and hysteria into our lives at the expense of honest, unbiased reporting. As Edgar Allen Poe once said: "Believe half of what you see and none of what you hear."
We have a bottleneck in terms of testing kits.

Last number I heard was 600 tested over the weekend. If we tested larger number of people, I'm guessing the number would be closer to 1000's of Americans having Covid-19.
Fuld Kronasson profile picture
Very true @JakerTrade but some in your country choose to believe in the curative powers of a MAGA cap. The attendees at future Trump rallies will put that faith to the ultimate test.
March 2, 2021
"According to the CDC, in all of 2020, there were 15 million cases of COVID-19 in the US, 1.5 million hospitalizations and 82000 deaths."
I_Am_The_Walrus profile picture
Unjustified panic selling appears to be over?

Traders should sue the MSM for their corona-hoax, causing panic losses - do it quickly before Trump and Sandmann get it all.
Author: Thanks for this article. Much of it I am not experienced enough to understand, but I will re-read it over the next several days and hope that the "light" sinks in.
Professional regards.
GSL @ Seattle
user50295553 profile picture

"Volatility is the toggle switch on which all of this turns. On the market-making side, many business models were "calibrated during the years of low volatility" (to quote Kolanovic's 2018 "Risks of Market 'Uberization'" note). Volatility is inversely correlated with market depth. The thinner the market, the more price impact a given sell flow will have. The larger the swings, the more likely it is that key levels associated with CTA trend models will be breached, leading to more mechanical selling."
For years I used to be able to trade with some degree of protection using -5% sell stops. Then computers came on the scene and a stop was a guarantee of a loss – often followed by a close above my stop price.
I'm not playing taps for the bull yet. I'm waiting for the central banks to make their stand. We're up big so far...dead cat or something more?
CNBC is saying that 75 basis points is baked into March 100%.

I am no fed expert, but I find that hard to believe they will drop that fast when it's a supply chain / pandemic issue that is underlying. Unless there are other things going on below the surface general public.
This is the real test for central banks. Can they levitate asset prices in the face of something that's not economic or financial...and likely will be accelerating still when the FED meets? I can believe they could drop it that fast if the US becomes Italy or South Korea in this outbreak...given the rate of spread, we will be in that ballpark fairly soon.
The chain saws come out. A wave of cuts. Will it work?
DWD Investing profile picture
@The Heisenberg

"one cannot reasonably be expected to avoid indulging in some hyperbole when it comes to choosing titles for posts."

One can reasonably be expected, but one chooses not to.
terryongarland profile picture
Why am I so sanguine about all this fear in the market..maybe because I have lived through so many crisis that ultimately get resolved..if we all aren't going to die from this virus, human resolve, spirit, and ..greed will prevail over fear..has so far.
hawkeyec profile picture
@The Heisenberg

Interesting how the ETF thing worked last week. For some time you have been saying that key ETFs have been acting as a kind of market currency to facilitate inter-institutional transactions. You have also been raising the question of what would happen if there was a high demand placed on this mechanism, asserting (rightly, I believe) that this practice could cause significant liquidity issues. This last week seems to have acted like a sort of stress test to see if an imbalance of flows would arise with a high volume of transactions. The mechanism, at least for the moment, seems to have passed the test as the net change (outflow) was only 2% of total transaction volume and less than 1% of the market loss. Billions of dollars pass in and out of banks every day, although net account balances generally change little. Seems the same sort of thing happened here, just with a different kind of currency. It does, however, also seem that the settling of giant balances of derivatives can cause large headaches in the market much more quickly than "back in the day," as it were. It strikes me that a really good AI model of the derivative landscape would be helpful it identifying trigger points where certain activities will cause an Excedrin Headache.
Windsun33 profile picture
The last stock in my portfolio took a nice 4% uptick this morning for a short time, so I sold all. I am now 100% cash. Stimulus or not, I think the global supply chain disruptions still has a long ways to go. Might start buying on another 10% drop from today's price.
I grabbed back into gold this morning and a few swing trades with portion of cash. Still not committal I don't have an opinion on how this Covid-19 will unfold, just see potential downside still significant, so trading with that in mind. I find it hard to believe we'll just rally back to pre-Covid-19 quickly under any circumstance.

Already closed SIG trade up just under 6 % as that was too easy a gain from the lows this morning.
The selloff merely proportionate to the irrational exuberance of the equity market....

My solid gold toilet increased in value....again...
JackWolf profile picture
I won't feel comfortable buying anything except maybe gold until the dow is at 20,000. Perhaps less, depending on developments.
well profile picture
same here, i haven't felt comfortable with buying anything for the past 5 years but was forced into it, even if the price didnt make sense, anyways expect resistance. I think even with this dip things are still too expensive and the real impact is unknown.
eventually this crisis will end but the cost is unknown at this point, but that will create opportunity to get into the markets again.
i think eventually the general population will have immunity, a vaccine, or it will need to stop from spreading. this will not happen overnight unfortunately. the problem is its impossible to stop it from spreading because people dont care and will continue to travel even with known risks, which is something you cant stop
I hope that you keep up the ETF discussion in future posts; definitely not a topic to be taken lightly.... these instruments have become ubiquitous and largely (entirely?) pooh-poohed as potential structural problems for markets.
Let's look at the bright side of the "virus." Good for environment: kills old people, casuses less pollution, does not affect wildlife like fish. Delivers cheap cruising and holidays for those with the money and nerves. The hubris coming from some parts needs to be tammed...and what better thing than a "virus." Ultimately the bugs may just win.
JackWolf profile picture
The second run of the 1918 virus targeted young adults. This thing is just beginning and its too soon to say who dies over the life course of the virus. But agree that the world is overpopulated and over-polluted.
user50295553 profile picture

As one of those "old people" I'm only too aware the bugs will ultimately win… since I'm planning on cremation I'll disappoint them and take one more shot at the environment as I leave ;-)
user50295553 profile picture
While I have been expecting and preparing for a major pullback by taking profits and switching to safer categories, it is still a shocker. We have witnessed the inflating of equities by all possible means for several years now and have had time to adjust for it.

During WW2 the Brits had an expression which we would do well to mimic these days…
"Keep calm and carry on." If they could do it with bombs exploding all around them, we should be able to survive an investing reversal.

The Heisenberg comments have been helpful to me.

If you are still young this is a good lesson to remember.
Billybob207 profile picture
Another great piece. Thanks for the perspectives.

The ETF discussion is quite interesting. My style is to use them occasionally to get in or out. Which supports your argument. If true on a scale grander than I can wrap my head around, it suggests crazy town volatility as the new normal.

MFs? I just buy small bits when opportunity knocks (soon) and never sell.

Individual stocks? I don't have the time or education to participate. I do know that if I buy 10, 8 or 9 might be successful and just 1 or 2 can bring the whole project to a waste of time and money - quickly. I respect those who have a good track record and can avoid those 1 or 2 killers. Many of us can use intuition and some research to pick winners. But most of us are not in a position to know when to sell. JMHO.

Thanks again for the good educational posts.
Thank you H. While I read many SA articles this is only my second comment. I find that since I learn much from articles and comments, I don't take a position of having knowledge. Thus there is no reason to be negative. As a result of your past articles, I went from 100% in equities to 65% around the first of Feb. As a retiree, it is reassuring that contributors like yourself take the time to pass on your knowledge and perspective. I now have the ability to continue staying on the sidelines or reinvest the cash over time at lower prices. Thanks again.
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