I’ve re-written and delayed this piece for a while. Why? Partly I got busy. Mostly because “lessons learned“ exercises depend on being right about where you went wrong. I’m not trying to make excuses. I’m trying to avoid making the same mistakes again.
What I Got Right – Pandemic Trajectory, Shut-Downs, and an Impotent Fed
A year ago, a lot of people were expecting a temporary shut-down in the face of some pretty obvious evidence to the contrary. Jessica Lessin CEO of The Information wrote this today….
In a note to staff, I said the closure was in effect for several weeks or until further notice. Ha! What we didn’t know.
At least I didn’t make that mistake. By about March-May, I’d come to this forecast.
- The pandemic would be prolonged, involve long shut-downs, and not over for all of 2020.
- Mass unemployment for a very long time.
- Chaotic regional responses. Lack of sustained discipline: People wouldn’t take the virus seriously until it hit close to home. They would get lazy fast.
- The Affluent would do OK. The Non-Aflluent wouldn’t: People who could work from home would sail along reasonably well. Others would take a huge hit.
- The Fed couldn’t (and didn’t) have much impact: Popular narrative would like us to believe the Fed saved us. But it is pretty clear the Fed’s response had minimal impact beyond stabilizing markets in March-May (mostly via “animal spirits” psychology, not real dollar impact). We know most of that Fed money just round-tripped into the Fed system without ever hitting the real economy or the financial markets. The Fed did keep markets functioning. But the pandemic’s impacts in the real economy were largely beyond its reach. If you disagree, see “Upside Down Markets” link below. I won’t re-hash that here.
So a pretty decent forecast. Yay me! Then I drove myself into a ditch.
What I Got Wrong – US Elite Response (Politics) and Fiscal Stimulus:
I got a few big things wrong.
- Trading Excess Deaths to Minimize Capital Losses: I never imagined the US (elite-driven) policy response would amount to “lets accept 500,000 deaths to keep the shops open.” Strip away the rhetoric and we (OK “they”) chose to sacrifice lower-class lives to protect/preserve upper class Capital. Red states were the worst, with Georgia’s no-pretence-at-caring re-opening setting the tone. But the Blue states weren’t much better – a lot of performative lockdown theater and magical thinking/obfuscation.
A year later, we have done a remarkable job of preserving Wealth. Meekly accepting a few hundred thousand excess dead people as a cost of doing business.
I simply didn’t imagine that “we” (or really “they”) would make that choice. - Fiscal Stimulus Worked Vastly Better Than I Expected: The Fed’s monetary intervention didn’t do much. Congress’s fiscal intervention did all the heavy lifting and then some. The $600 unemployment benefit (especially) and $1,200 checks had a HUGE impact. I totally under-estimated that.
A particularly bitter pill given I’ve always professed faith in the impact of giving immediate cash to poor people with a high marginal propensity to spend. But I wildly under-weighted how powerful that impact really would be.
For more, take a read through the paper below. Those checks found their way through the economy and (eventually) into financial markets. Sparking the stock-market rally that I also totally missed. - Inequality is Worse Than I Thought or “The Little People Really Are Rounding Error vs the Top 15%-20%“: I knew income inequality was bad, but I didn’t understand just how bad. I thought millions of unemployed people would be a serious drag on the economy. But a huge whack at the bottom 80%-85% just didn’t stack up for much against the top 15%-20% who kept on (or amped up) spending. I knew the Affluent would do OK. But I didn’t really appreciate how much they dominate(d) the spending pie.
What I REALLY Got Wrong (Investing) – Too Much Macro Fear for Too Long. Too little Faith in my Secular Growth Theses.
I really screwed up the investment call: I sold out of everything in March. I can actually sort’ve justify that decision. I needed to preserve that capital and the downside scenario was arguably dire enough to warrant it. But I failed to buy back in the Summer as the stimulus rolled through the economy and the markets. That was just dumb pig-headedness. Two errors compounded.
- Over-Weighting My (Negative) Macro Outlook. Staying Wedded to It For Too Long: I can justify the dire macro scenario I was protecting myself against by selling in March-April-May 2020. I knew I was giving up some upside potential to protect against massive downside risk. Faced with that choice again, I’d probably make it the same way.
But I stuck with that negative macro scenario for way too long. I was working from a “2008-2009” playbook and missing that (gasp!) 2020 was nothing like the Financial Crisis. OK, I wasn’t alone in making that mistake, but I should have figured out the facts weren’t flowing my way sooner than I did. - Under-Weighting Secular (Tech) Trends and Their Acceleration In a Time of Stress: I run a concentrated Tech portfolio focused on secular multi-year growth stories. In March I had Cloudflare (NET), Atlassian (TEAM), Docusign (DOCU), Amazon (AMZN), and Infinera (INFN). INFN is “only” up 100%+. The others are up more like 300%-400%. Even worse, I knew it was a good COVID portfolio at the time. I just put too much weight on the macro risks and too little on the increasingly obvious acceleration of the secular trends driving those stocks. Especially as we rolled into June/July. I preserved my capital, but missed out on huge potential returns.
So where do I go from here? More to come on that. Short version is
- Don’t bet against the Biden stimulus. Giving money to working people drives a lot more growth than giving tax cuts to rich people. Why Republicans have been so dead-set against establishing that precedent. We are now repeating the fiscal experiment without the Fed “doing” anything new. A year from now, it is going to be much harder to ignore the impact of stimulus to the bottom of the income pyramid.
- Conviction Bets or Nothing. The market is not cheap and potentially over-valued. But Cloud is a secular trend strong enough to drive massive returns regardless of that the market does. Make concentrated bets. They seem higher risk. They will be higher volatility. But they are actually lower-risk. The potential returns are worth it, volatility be damned.
- Let those bets ride. Keeping fingers crossed we don’t get another 100 year flood in the next few years.
