Investing essays during crisis

Musings of an investor during a crisis

Insurance

1. Insurance is cheap before the crisis (Gold prices)
2. Once the crisis is clear, insurance becomes expensive (gold prices shot up)
3. Insurance is not free. Insurance can be a drag on portfolio performance during good times. Hence asset allocation and rebalancing is important.

Range of outcomes

During this covid crisis, the absolute range of outcomes still says vast

Negative outcome

1. The reopening of the economy can cause a huge second wave, leading us to close back again. That could be devastating for the economy. The Fed may have prevented a short term collapse, but the medium term uncertainty remains. Also that could lead to much more long lasting permanent damage in the economy. At this point, markets are probably pricing in a lost quarter. The crisis started in America in March when cities started to shut down. Hence, Q1 results were not really hampered. But the lockdown effect will be visible in Q2. Market is hoping that the economy opens up and by Q3, results start trending back to normal and we have a great Q4 like last year. I think that is what is baked into the prices and we have already seen a swift recovery from 35% lows. 
2. However, if the reopening is hampered by a huge second wave of the virus, the market would start pricing in more than a quarter and up to a year of lost revenue. Things would be interesting when the market starts to price between outcomes like
1. A quarter of lost revenue
2. Multiple quarters of lost revenue
3. Multiple years of continued revenue compression due to more permanent damage caused by a second wave 

Positive outcome

1. There is a possibility of a vaccine by the end of the year and several companies are already pre-scaling production in anticipating. This would definitely be the fastest vaccine ever
2. However, if it were to happen, it would be easy to say "long human ingenuity" or this is what you expect to happen if the whole world gets behind one common goal
3. Don't fight the FED. The Fed has done all that is their in its power to remove tail risks
4. American capitalism may have changed forever. With the Fed buying high yield bonds, we may be entering an era of Government Sponsored Enterprises. 

Both the positive and the negative outcomes are equally likely. At this point, it remains hard to say which one is more likely vs the other and in what timeline. The FED continues to mitigate tail risks in the short term. 

Sectors impacted 

1. Travel
2. Hospitality
3. Airlines
4. Cruises
5. Retail stores
6. Malls real estates
7. Oil

Sectors at the risk of contagion

1. Commercial real estates
2. Hospital industry
3. Mortgage banks
4. Junk Bonds

Commentary on Big Tech

1. The economy continues to migrate from atoms to bits
2. Big Tech stock prices indicate that
3. Silicon valley housing prices still correlated with big basket of tech stocks
4. User behaviors that would pan out in the next 5 years have been expedited within a span on 2 months
5. However, more short term revenue may be hit if the more companies get hit (ads could be more vulnerable than cloud revenue followed by retail)