Tired of Covid-19; thinking about the next “regime”

I think I’m done reading about covid-19 (other than safety informational stuff). The same things are being rehashed and we can’t forget that nobody actually knows what they’re talking about. I’m also bored hearing about how the market sucks; it’s the worst kept secret this side of Hillary Clinton’s email server.

So I figure it’s time to think ahead, to what the world, or at least the investment world, will look like when all this is behind us. Bear markets aren’t just corrections, valuation adjustments, etc. They often relate to structural excesses and shocks that, even when aggregate numbers get better later on, ultimately change the world. So what might a post covid-19 recovery and/or bull market look like?

Disinflation, such a pronounced feature of the economy since 1982 that people hardly even talk about it, may be dead for a generation or so. We see the pathetic efforts top prod the Fed into acting and finally, the realization, that the Fed is done. It has no ammo. No more weapons. The accelerator has been floored and the engine is flooded. We’re going to have to pull our old Keynesian books out of storage and possibly even digitize them (Not sure anyone read any since digitization was invented) and apply heavy fiscal stimulus. Just look at all the commerce that’s vaporizing, paychecks that will be missed, rent bills that can’t be paid, etc., etc., etc., etc. Nobody impacted gives a sh** about the discount rate. The economy needs cash and the govt printing presses will need to be cranked up. The only mystery is how much economic pain we’ll need to feel before the geniuses who hog the public pulpits figure that out.

This will be inflationary . . . Any nobody will care, or if anyone complains, expect the 21st century equivalent of tarring and feathering. That means we’re REALLY REALLY REALLY not going to get to meaningfully negative interest rates (aside from those fees with fancy labels) and that the 35-year downtrend in interest rats now looks much more likely to convert to an uptrend rather than stay flat (the best case scenario until recently).

When I started in this business, a P/E of 8 or so was considered pretty respectable and 12-15 was nosebleed territory. Expect valuations to eventually start a long multi-year and possibly multi-decade march back in that direction.

That may get to 180-degrees opposite of the world that p123 has lived in since its existence, and more importantly, the world depicted in p123’s backtest database. Sop take a look at your best sims. Are you itching for the market to recover so you could crank those models up again? Be careful. Understand WHY you got those 45-degree plus up-trending 1999-2020 equity curves and inquire into how much the model benefitted from the 35-year bull market in interest rates and P/Es.

You can still use backtesting, but you really need to restructure your understanding of how to interpret the results you see. Test showing positive alpha may signify models that may now need to be abandoned. Maybe you want to see negative backtested alpha for a while (until enough time passes for a new regime’s worth of data to get into the backtest database). I’m not saying it will turn out quite this simplistically. But that possibility is a much higher-probability scenario than is the one where the super 1999-2020 equity curve actually reflects what you’re likely to see (this latter scenario is a zero probability scenario). Oh . . . And please abandon that stupid R-word (robustness). That’s just a bunch of ego-crazed folks who thought the results they showed came from their modeling genius and didn’t realize that it due to Uncle Fed flooring it for nearly 40 years — anyone can show the apperance of robustness when the world goes that long without seeing a change in relevant conditions.)

You’ll need to be owning shares of companies that can grow earnings (and not just wait for the Fed to pump P/Es on earnings streams that go nowhere), and that grow earnings by growing sales (and not simply by laying people off, a 35-year long management tool that unless abandoned will most likely lead to President Oscanio-Cortez (who will be old enough to run starting in 2024).

This is why I’ve been telling people to learn about companies. Fk Python and all the other bullsh features people have been clamoring for. That crap is not going to make a nickel for you going forward. Learn how to critically read 10-Ks and 10-Qs, IR presentations and conference call transcripts well enough to be able to articulate in p123 syntax, the kinds of companies you want to be owning. It your new models test with good alpha from 1999 to 2000, you may have screwed up and ,may need to go back to the drawing board. Some thoughts: sales growth strong enough to produce enough growth in pretax to offset possible corporate tax increases (the Trump cut will likely be remembered as a landmark that helped mark the end of the old regime), sales growth strong enough to offset potentially diminishing margins. Strong balance sheets . . . Enough cash flow to support de-leveraging could become a plus. (Stock buybacks, long loved, may turn toxic not by act of congress but by mandate of new-regime equity investors — even Cliff Asness may decide he wants to see secondary equity offerings.) Obviously, you’ll have to watch the business world and stay alert to new products, services and business models that cater to the way society is evolving — this sort of thing always needs to be done. You may also want to think in terms of real estate (REITs — so long as you stick with the right sectors; I favor residential and healthcare for starters), and still-relevant commodities (old energy likely being kicked to the curb permanently. Even gold — I actually picked up a smidgen of GLD (an entry level dabble), not as a market hedge but thinking ahead to possible future inflation. Obviously, demographics being what they are And us getting caught with our patriotic pants down in terms of medical preparedness, I gotta figure healthcare needs to be owned. Tech goes without saying, but make sure your focused on new tech — don’t keep obsessing on the same old stuff.

I should mention that this isn’t deep analysis; its just thinking aloud while while whiling away the pandemic . . . Kinda like the pilgrims who gathered while seeking shelter back in the black death era (hint: another thing you could do if you get sick of talking about the bear market, read Cantebury Tales, hilarious stuff, but get a modern translation that accompanies the original).

Thinking about the market’s future is not an event; it’s a process, and for me, this is early-stage process. I don’t care if you agree or disagree. Nobody knows and eventually, Father Time will reveal the answers. What I do care about is that you start your own process. Pull your minds out of the 1982-2020 regime and work your way to how you’ll do things in 2020-whenever. Don’t expect new models/strategies overnight. This is a process.

Good post. Bear fatigue setting in for sure. It’s great to start looking to the next phase. You mention investors won’t care about discounting. Are you referring to less emphasis on future cash flows and more on the here and now?


I agree, this could be inflationary!

…which will lead to lower PE’s for most sectors, but not for all sectors.
Lets step back a step.

The last 11 we had moderate inflation and moderate growth. As you can see in the picture above, this favours stocks and they print relative high PEs in that environment and growth stocks outperform.

So, when inflation hits, those PE’s contract down to below 10 as Marco stated.

But not for all sectors, e.g. the stuff that was out of favour in the last 11 Years will be in favour again: Comodities, Natural Resources (Gold, Oil etc.)

Read the first Market Wizzards book, it is full of traders who made fortunes in comodities / real assets trading (more on the future side though).

But here it comes, if inflation hits, the PE’s of companies (Miners, Oil etc.) with real assets go up AND most important, they do not go up
lineary, they go up almost exponentially (like we saw in miners from 2003 - 2008)

So how am I positioned with a my factors:

Value → only outperforms if inflation and GDP goes up at the same time

small caps → only outperforms if inflation and GDP goes up at the same time, but small cap real assets, comodities stuff should do very well

Momentum → Great factor to catch beaten down “real asset rich” companies

Industry Momentum → even better factor to catch the non linear trend

Quality → probably not such a good factor, bc beaten down “real asset rich” companies might not have a great balance sheet now and it might
take to much time to improve for the modell to bite

Best Regards


The virus has given everyone a stress test and a glimpse into the future for when more permanent and deeper global chaos event happens. We are now 20% into this current Century, and it has been remarkably safe and stable in comparison to the ones that came before it. We’re now getting a wake up call.

One thing I absolutely see happening is US companies rethinking their supply chain risks and moving a lot of them back domestically (or at least to Mexico). We’re starting to see a lot of products that have hit the market since the GFC crisis are worthless. Bitcoin has absolutely nosedived. There is probably a place for the technology in the world, but it’s not a hedge against a global market meltdown. A lot of illiquid assets have been bundled together and put into an ETF wrapper, and those are proven absolutely worthless and will need to be re-evaluated on the other side of this.

I didn’t say that.

A text search of my post led me to my having said nobody will care about the discount rate. I was a bit too stream of consciousness and slipped into jargon. The “discount rate” is one of a variety of interest rates used within the banking system that is often the watch point for Fed policy. I should have just said “interest rates.”

The market’s tendency to discount expectations about the future is ever unchanging. What changes are the expectations and how high or low a hurdle we use in order to translate future dollars to current dollars.

The word “discount” is pretty versatile and gets used in quite a lot of different contexts, too many, perhaps. Sigh . . .

Yes, all sectors.

P/E reflects a combination of the expected risk-free rate of return, the expected risk premium associated with the asset class, and the expected asset-specific risk premium associated with the individual asset.

If overall interest rates rise, that hits the first element and pushes P/Es down across the board. (That’s the reverse of what’s been going on for the past nearly 40 yers.)

All the sector-to-sector differences impact the other two components of P/E and will influence how one set of P/Es compares to others in the context of the new overall lower regime.

I can’t comment on the chart because I don’t know how it ws put together. In retrospect, I suppose a statistician can throw any calculation onto anything, including a P/E onto a commodity (I can envision how I might do that.) Practically, though, P/E is not a metric typically associated with commodities.

P/E is associated with shares of commodity-producing companies but we can’t make automatic assumptions about how their P/Es will act in an inflationary environment. Share prices will likely rise, but if earnings rise faster, as could well happen when they sell output at higher prices, their P/Es could actually shrink — and make them screaming buy for investors who discount even more inflation and earnings growth ahead. But these things can be messy as production costs and output volume (reserves, changes in reserves) are lso part of the picture.

However all that may shake out, the only sure thing is that if the 10 year treasury yields 5%, P/Es for everything will be a heck of a lot lower than they would be if the 10Y yields 1%.

This is important. The sector comparison is useful for stock selection. But be careful about missing the potential impact of market-wide adjustments to P/E. Having had 40 years of just one regime, most traders, investors, quants, etc. were not active or even alive long enough to have had exposure to anything else . . . and given what we (at least those inside companies like p123 that have to negotiate data contracts) know, many, perhaps most, probably can’t afford to pay for data that will give clear pictures of any regime other than the only one most have lived through.

Really, any time you read any study or look at any chart or table (even one’s own) you need to go in with a presumption that it’s no longer relevant and hold onto that presumption until that author (even if the author is one’s self) shows you why it cn be useful even in a regime that’s 180-degrees opposite the only one most have ever known.

I still think Jeff has a great question. Of course, I am probably not perfectly understanding how his use of discounting.

In the context of the discounted dividend model, people are selling just to raise cash. Discounting–in the DDM sense–out the window.

I think this a point Marc has made before including in 2008.



That’s a really interesting question. To some degree, it was already under way due to issues of quality control and transportation reliability/cost.

Then again, how far can we go de-globalizing without also slamming the revenue side of the equation?

This is why life is never boring.


Yes, especially since the US is now net energy independent after the shale revolution. Most of Asia gets their energy from the middle east, and how comfortable are US companies having their supply chains exposed to assumed stability in the region going forward? Iran and Saudi seem to be itching for a fight. If the ripple effects of this crisis trigger a world wide recession, how stable is a China when their economy is propped up on staggering amounts of debt. Companies might just deem it’s better to eat higher labor costs of domestic manufacturing in exchange for stability (or better yet, let Mexico build it and bring it in through Texas via the newly signed NAFTA 2.0)

First step will be getting medical and pharmaceutical manufacturing back on shore…

Is a weakening US Dollar necessary for inflation to occur? I legitimately asking out of ignorance, as I’m not an economist and I have no background on the subject. I have to say, I don’t see the US Dollar weakening anytime soon. What other currency is replacing it? The EU is now a collective export economy, and they are already talking about a new batch of fiscal stimulus after this week’s events. The dollar just has to be the tallest short person on the global stage to strengthen.

Really? I think when the dust settles down, China and South Korea will appear as the safest countries to have upstream supply chains. Based on numbers they are the best at coping with Covid-19. People are more disciplined. Except at the very beginning, their governments made fast decisions that would have been impossible in a western country. Unless a miraculous clinical trial comes out, the peak of fear will happen when all male baby boomers (the heaviest dollar-weighted investing demographic group) will realize they may have to play Russian roulette. That is what numbers tell, but few people take it seriously. It is still virtual panic, not yet real fear. Personally I still hope a miracle from clincal studies, for human reasons before economic reasons.

This is likely to be worse in West than in Asia all around. We were less prepared, and we’re less disciplined – at government and individual levels. 100% agree with that piece.

China and South Korean markets are interesting investments in all this.

So I try not to be contrary anymore and did not comment on Frederic’s post. And Tom is basically always right so I have a rule not to make a fool of myself. But I respectfully wonder about this.

Do they really have more per-capita respirators? Understand that the only thing medicine actually has to treat this is IV fluids and a respirator when you can no longer breath.

Most of the list of medical treatments in the other thread treat inflammation and are available in the US for off-label use (e.g., Chloroquine). We will see if the medications used in China make a difference and whether we may learn from them and use the same ones.

I personally prefer that a person have the option of quarantining themselves. I do not always believe China’s GDP numbers or their corporate filings. I guess we can believe there self-assessment of how they handled this.

Honestly, if they had more N95 masks, had more test kits, more beds to supply IV fluids or more respirators I will stand corrected.

Is the WHO still saying the death rate was above 2% in China?

And I will say that South Korea will probably have done better than anyone when this is all over. So there are differences and the US will probably NOT be the winner in how this was handled. So I am open to the arguement.

But for now I am going to stick my neck out and wonder if China has more per-capita respirators: the bottom line for survival



I’m afraid I have to be rather bearish on South Korea and China because of demographics. They’re pretty damning, and in my mind inescapable. Unlike a virus, they won’t pass over. Ideally these demographic charts would be shaped as pyrmaids. A huge base at the bottom the gradually tapers off as you get to the end. Through massive urbanization and (and in China’s case a 1 child government policy ) policy, their demographics are very distorted. See those big bulges in the middle … these are the percentage of the people in their peak earning years and most capital rich. They’re also paying more taxes right now than they ever will. The first of them will start hitting retirement age soon, and they’ll stop working and stop paying taxes. Then a function of much smaller cohort have to suport them while still propping up their country’s GDP. You can’t produce more 19 year olds after the fact, the dye is cast.

US will be facing a bit of demographic squeeze themselves as the babyboomers move into retirement. There is a bit of a thining out when a smaller demo of Gen-Xers move into their peak earning and capital rich phases of their career, but it will be temporary as a glut of millenials are looming on the horizon. Once the millenials reach retirement age, things could get really bad … but that will be officially not my problem.

This is also the fact that both are basically export economies. This has generally worked in the post-Cold War era, because US Cold War alliances have patrolled the seas, protected trade routes and kept global trade open and flowing. But let’s examine the case that maybe we shouldn’t take that for granted going forward as old Cold War alliances drift into the sunset. Trump’s isolationist rhetoric and practices might have sped this up, but the US was already trending that way on both the right and the left (indeed Bernie might be even more isolationist). Which global powers have a deep sea navy to support their exports and imports cargos as they travel world wide? If the Iranians and Saudi’s get into a fight that freeze up global energy supplies, do you think any world industrial power will be able to just sit it out, sit on the sidelines and see what happens?

North Korea.JPG

Jim, I don’t know about respirators, but China has significantly more hospital beds per capita than the US, and without profitability constraints. I have also read an interview of a German WHO official who said Chinese were really good at keeping Covid patient alive and he was impressed they had more extracorporeal oxygenation machines than Germany.

I’ve seen other numbers for critical care beds…


I am open to the argument and we are only speculating about how the US will do at the peak of the problem. Maybe we can both report back with some numbers in a few months.

The only thing I can add to the discussion is that I have intubated people and managed people in the intensive care unit.

There are no Supermen, in any country. Intensive care nurses are special people and they actually do most of the work. They tend to be thorough and do a good job in the US. It is their thoroughness and not any special abilities that the physician may posses that makes the difference.

It is my belief that if you get into a US intensive care unit your care will be good.

Hence, my belief that it is a matter of whether the bed is available or not. I am okay with you having a belief about whether there will be enough beds available. I am willing to see what happens there.

Maybe the researchers will find that a specific antiviral is effective. But this treatment is less likely to have an effect in China where the epidemic is waning (I hope).

I don’t really know for sure now.



Jim, not really speculating, looking at numbers and hoping govts and people can learn from this at a minimal human cost. Disclosure: I am still long stocks, with some cash waiting to be invested.