Morning Note: The Proverbial “What If” Question

European equities are enjoying a strong rally this morning on the prospects for a stimulus package that of course involves some serious lending, but also some serious granting (of some $500 billion) to member countries. Thing is, The Netherlands, Denmark, Austria and Sweden aren’t that enthused about backstopping weaker states. Interesting that Germany, the usual hardliner, doesn’t make the list of dissenters.

Asia was mixed overnight, but there was zero ambiguity about Japanese equities; they rallied hard on PM Abe’s declaration “I will defend the Japanese economy at any cost.” That pretty much echoes Japan’s posture for the past couple of decades. There’s a reason the term “Japanification” is used to describe economies where intervention has stifled growth/progress; it’s used in place of “zombification.”

Here’s from my last night log entry:

“Japan: $296 billion aid package, on top of already passed stimulus: Abe says “I will defend the Japanese economy at any cost.” Raises employment adjustment subsidies for small and mid-sized companies. If companies furlough vs laying off, the govt will cover 100% of the employee “leave allowances” of 8,330 yen/person currently, under next supplement it goes to 15,000 yen/person between April and September. Cash handouts for furloughed workers of small/mid-sized companies who don’t receive employer leave allowances, and covering portion of rent, etc., for companies who have suffered “massive revenue loss”, aid to schools, and so on…”

While, absolutely, present times call for extreme measures, Japan — and, increasingly, much of the world — has virtually zero business-risk tolerance, and very high tolerance for moral hazard-risk. 

U.S. equities are all over the place this morning, up as I type. Unemployment claims were north of 2.1 million, while continuing claims dropped to 21 million. Hard to believe I’m even typing such numbers. 

I’m thinking of that proverbial “if I told you” question: I.e., “If I told you, say a year ago, that in late-may this year U.S. jobless claims would print over 2 million, what do expect the stock market would do?” Of course intuitively you’d answer “TANK!” 

Well, sure, but considering how stocks love stimulus, as long as “the market” believes that the Fed is locked and loaded and the jobs numbers come as no big surprise, there’s a good chance stocks would actually rally on such horrifying news. 

Of course the question for the thoughtful investor would be: “Would you want to play in stocks unhedged under such circumstances?” I suspect I don’t need to answer that one for you. Right?

Top performers this morning, in order: Utilities, Healthcare, Eurozone, Asia Pacific, Staples, Silver and Gold… That (save for the foreign exposure) is not the growthiest look. However, it does coincidentally represent the top holdings in our current core mix, capturing ~49% of our overall exposure. 

The VIX (S&P 500 Volatility Index) is up 2.5% and VXN (Nasdaq Vol Index) is up 2.9% as I type. I.e., today could be a doozy (in either direction)…


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