For those of you who are newer readers, a Brief is when I have a bunch of things to talk about, none of which are long enough for a full post so I throw them all together in to one long entry.

Every W Begins as a V

Think about if for a second. Start to draw a W. Stop halfway. It looks like you’re going to draw a V, right? In the same way, most of the market has moved to the idea that we are having a V shaped recovery. But what if it’s really a W?

The V argument is simple. We’re having positive economic surprises so, of course, they will continue especially with the Fed operating at full power.

The W argument however is actually more obvious. It’s the “duh” argument, as in, follow human nature. People were sick of being cooped up and had found money (from stimulus checks, unemployment, or both). Most people don’t have the discipline to save said money, especially when they are anxious to do something “normal”.

So they spend it…on trampolines, fire pits, RVs, finishing the basement, you name it.

Soon, the windfall is spent and the disposable income meter is on empty. There are no more government checks coming. Jobs come back slower than expected. People start to freak out. They finally begin to pinch pennies. This is good for their balance sheet, but bad for retail sales and GDP.

Basically, we are in the eye of the hurricane and everyone is acting like that means the storm ended. That’s not how hurricanes work. It’s likely not how the virus works either.

This Is Not the Second Wave

Remember when we took extreme measures to flatten the curve? You know, so we could push cases from March and April into the summer to manage hospital capacity? That’s what these flare ups are in the red states – the back part of the flattened curve. It was completely expected and predictable.

A second wave, if it comes (it likely will) is 3-6 months away. It is called a wave because it will bring with it another peak, not another spike.

Summary: spikes are the extended tail of the first wave. A second wave is a repeat (or near repeat) of March.

When Prices Go Down, People Consume More

One of the other major drivers of the market besides the Fed has been the growth of retail trading. Why has retail trading taken off? Because the price went to zero!

Do you remember the last time we had a large retail component to the market? That’s right, the late 90s. What happened then? Online trading was invented. Commissions went down like 80% or so. Demand boomed.

Now, there is an interesting philosophical debate to be had here. Normally, we consider expanding access to a good as “democratizing it”. If we are talking about the price of a computer or a car, that is a net positive to society.

However, some goods aren’t just good. They also bring risk. Nobody would suggest lowering gun prices to near zero to improve access because it would make it easier for irresponsible people to use them.

Trading stocks is a risk. Not everyone should do it! Bringing the cost down too far actually increases danger, not so much to the market, but to individuals who get wiped out. And if you think this is all theoretical, you might want to read the story about the young man who killed himself after a bad Robin Hood experience.

There needs to be some type of suitability test for stock trading. Just like professional traders need to get certifications, there could be some basic test for individual traders in order to get free commissions. If you can’t pass the test, you either have a limit to the number of trades per year or you have to pay some sort of account fee.

The NBA Should Have Listened To Me

I was previously skeptical of the NBA’s plan to restart the season in a tourist trap like Vegas or Orlando. Now that cases have spiked in both locations, it’s fairly obvious it is going to be a big logistical challenge to keep the players and coaches safe.

My suggestion was to hold the restart in Kansas, specifically at the University of Kansas as there are adequate basketball facilities and sufficient housing while students were away for the summer. Kansas is in the bottom third of states in cases and deaths. They have similar active cases in the state to Orlando alone. Move the bubble to Kansas!

Baseball Returns – Sell the News!

Stocks often run up into a positive news event and then sell off when it is finally announced. MLB climbed a wall of worry about the season being cancelled to finally announce an agreement. My call is this is “peak baseball”.

MLB is a multi year short. In addition to the secular pressure of losing the younger generation because the games take too long, MLB is heading into an awful list of headlines over the next two years.

First, it is unknowable whether they can play 60 games this year due to the virus. Even if they can, the postseason (where most of the revenue is made) has high odds of meeting up with the second wave (the actual one). If there is no postseason, the owners take gigantic losses and there is that much more pressure on the 21 season.

But let’s say everything goes (relatively) smoothly. 2021 is still a total crapshoot. If there is no vaccine by next spring, there will not be fans at the games, at least not in full. This means revenue will again be challenged forcing another confrontation between owners and players over salary reductions.

But wait, there’s more! Before we even get to 2021, we have to go through a root canal of an offseason. You think players were upset the past few years about the lack of free agency spending? Wait for this winter!

What are owners going to offer free agents when they have no idea what their revenues are going forward? It is going to be ugly. There will be collusion lawsuits, bad faith lawsuits, arbitrations over the CBA, you name it.

In fact, it will get so ugly you might think that the players will go on strike except…guess what? 2021 is the last year of the CBA. Which means there will be a strike (or lockout) in 2022. The players are only getting partially paid this year and with the prospect of no revenue in 22, they can’t afford a pre-emptive strike next year.

They will play next year, but they will play angry and we might not see baseball for a long time again afterwards.

Buy The Pence Calls

I’ve had this trade on for nine months now. I said then buy options on Bloomberg and Pence for President. Pence was 80-1 at the time and remains so. (Bloomberg went from 200-1 to 8-1 where I sold half and bought Biden at 8-1 who is now under 1:1).

At 80-1, that means it’s roughly 40-1 he becomes the nominee. How would this happen? Trump goes to too many rallies, gets covid, and has to drop out. Do you think that is more than a 2.5% chance? If so, Pence calls are cheap.

The other way this happens is Trump decides it’s better to drop out then lose and hands Pence the nomination. The more he gets down in the polls, the better the chances he takes the escape pod.

One might think there’s no chance of this, but I’m pretty sure Trump has a post Presidential plan and it’s better to lead the Resistance at Trump News having not officially lost and being able to argue about how he would have won if he tried.

Jeff Ubben Is No Martyr

Some of you may be asking “who is Jeff Ubben”? Ubben runs – well, ran – an activist investment firm called ValueAct. If the name sounds familiar, you may remember them as the investor behind the Willis merger with Towers.

Last week Ubben departed ValueAct to start an ESG themed investment partnership. Now, one’s first instinct might be to say he’s likely being a front runner. Like many investors, he doesn’t have actual convictions, he just follows whatever style is working.

Another reaction might be more cynical. As I have written before, much of the popularity of ESG is a result of marketing efforts by asset managers who have watched their traditional products hemorrhage flows.

ESG has several marketing merits:
a) it takes years to figure out if it actually produces better returns or not
b) there is a significant group of investors who are willing to gamble that the returns will be better – or better yet, don’t even care – which drives meaningful inflows
c) these investors are insensitive to fees so the profit margin on ESG funds is far greater than other products.

Ubben I’m sure is aware of these trends, as well as the pressure on fees for activist investors, especially if performance is only middling, so he is chasing the “hard market”.

But rather than slink out the back door and hope nobody noticed what he was up to, he decided to draw attention to himself by denouncing capitalism in an interview with the FT.

Companies, as governed today, with investors asking for more current returns and more buybacks and so forth, aren’t working for society or nature,” he commented. Translation: capitalism = bad!

Then, he went one step further invoking the patron saint of billionaire haters Liz Warren!

Finance is, like, done. Everybody’s bought everybody else with low-cost debt. Everybody’s maximized their margin. They’ve bought all their shares back . . . There’s nothing there. Every industry has about three players. Elizabeth Warren is right.”

So the real question here is does Ubben actually believe what he said or was it a marketing tactic to draw attention to his new venture and create interest among the ESG fund peddlers?

Either way, he is not some holy warrior leading the battle for stakeholders. He’s just another guy trying to make a buck who shrewdly used Senator Warren to help him raise funds.