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Authored by Edward Peter Stringham via The American Institute for Economic research,

Michael Levitt is Professor of computer science and structural biology at Stanford Medical School and winner of the 2013 Nobel Prize in chemistry.

He has been a close observer of the pandemic and the response from the outset through its movement to Europe, the U.K., and the U.S.. Last month, speaking to the Unherd podcast and youtube channel, he offered some compelling thoughts and observers, and a striking conclusion. 

Below is a transcript of the parts I found most relevant. 

Q: So you noticed that the curve was less of an exponential curve than we might have feared, in those early days?

A: In some ways there was never any exponential growth from the minute I looked at it, there were never any two days that had exactly the same growth rate — and they were getting slow…of course you could have non exponential growth where every single day they’re getting more than exponential — but the growth was always sub-exponential. So that’s the first step. 

Q: [In the UK] we talk endlessly about the R-rate — the reproduction rate — and apparently that began very high, maybe as high as 3, and … [we’ve now] got it down below 1 in the UK. Intuitively, if there’s a high reproduction rate, you should see that exponential curve just going up and up.

A: Well no, wait, okay. The R-0, which is very popular, is in some ways a faulty number. Let me explain why. The rate of growth doesn’t depend on R-0. It depends on R-0 and the time you are infectious. So if you are twice as long infectious and have half the R-0 you’ll get exactly the same growth rate. This is sort of intuitive, but it’s not explained, and therefore it seems to me that I would say at the present time R-0 became important because of a lot of movies — it was very popular — talked about R-0.

Epidemiologists talk about R-0 but, looking at all the mathematics, you have to specify the time infectious at the same time to have any meaning. The other problem is that R-0 decreases — we don’t know why R-0 decreases. It could be social distancing, it could be prior immunity, it could be hidden cases.

Q: You’ve been observing the shapes of these curves and how the R-0 number tends to come down and the curve tends to flatten in some kind of natural way regardless of intervention. Is that what you are observing?

A: We don’t know. I think the big test is going to be Sweden. Sweden is practicing a level of social distancing that is keeping children in schools, keeping people at work. They are obviously having more deaths in countries like Israel or Austria that are practicing very very strict social distancing but I think it is not a crazy policy. The reason I felt that social distancing was unimportant is practicing very very strict social distancing, but I think it is not a crazy policy. 

The reason I felt that social distancing was unimportant is that I had two examples in China to start with and then we had the additional examples. The first one was South Korea (yeah), and Iran, and Italy. The beginning of all the epidemics showing a slowing down, and it was very hard for me to believe that those three countries could practice social-distancing as well as China. China was amazing, especially outside Hubei, in that they had no additional outbreaks. People left Hubei, they were very carefully tracked, had to wear face masks all the time, had to take their temperatures all the time, and there were no further outbreaks. 

So this did not happen in either in South Korea or in Italy or in Iran. Now, two months later something else suggests that social distancing might not be important, and that is that the total number of deaths we’re seeing in New York City, in parts of England, in parts of France, in northern Italy — all seem to stop at about the same direction of the population so are they all practicing equally good social distancing? I don’t think so. 

The problem I think is outbreaks occurring in different regions. I think social distancing that stops people moving from London to Manchester is probably a really good idea. My feeling is that in London, and in New York City, all the people who got infected, all got infected before anybody noticed. There’s no way that the infection grew so quickly in New York City without the infection spreading very quickly. So one of the key things is to stop people, who know that they’re sick, from infecting the others. Here again, China has three very, very important advantages that are not high-tech that don’t involve security tracking of telephones. 

What they involve is, number one, the tradition in China for years, of wearing a face mask when you’re sick. As soon as the coronavirus started everybody wore a face mask. It doesn’t have to be a hygienic face mask it just has to be a face covering to stop you spraying saliva, micro droplets of saliva on somebody you talk to. The second thing in China is that because they were so scared of the SARS epidemic in most airports, stations where you pay tolls et cetera, there are thermometers. Infrared thermometers that that measure your temperature. So having your temperature measured at every single store entrance — either with a handheld thermometer or with something mounted on the wall — is something completely standard in China. And the third thing is that almost all payments in China are made not using a credit card, so in some senses it is very much easier there to practice social distancing. Of course, in addition they know where people are.

Q: What’s your view of the lockdown policy that so many European countries and states in America have introduced?

A: I think it is a huge mistake. I think we need smart lockdowns. If we were to do this again, we would probably insist on face masks, hand sanitizers, and some kind of payment that did not involve touching right from the very beginning. This would slow down new outbreaks and I think that for example they found as I understand, that children, even if they’re infected, never infect adults, so why do we not have children at school? Why do we not have people working? England, France, Italy, Sweden, Belgium, Holland, are all reaching levels of saturation that are going to be very, very close to herd immunity — So that’s a good thing. I think the policy of herd immunity is the right policy. I think Britain was on exactly the right track — before they were fed wrong numbers and they made a huge mistake.

I see the standout winners as Germany and Sweden. They didn’t practice too much lock down, they got enough people sick to get some herd immunity. The standout  losers are countries like Austria, Australia, Israel that actually had very very strict lockdowns but didn’t have many cases. So they have damaged their economies, caused massive social damage, damaged the educational year of their children, but not obtained any herd immunity.  

I think in many ways the European countries are fine. They didn’t need to have lockdown but they have all reached a high enough level of infection not to have to worry about further future attacks of coronavirus. The United States seems to be heading that way, they’re certainly that way in New York City but they still have a long way to go 

Q: What you’re saying is that, you believe success — as we are currently measuring it which is as few cases as possible and as small a spread of the virus as possible — is actually failure?

A: I think if you really control your epidemic, for example, California, it’s now had lockdowns for six weeks, and wants another four weeks, they have so far less than a hundred deaths, that means they don’t have more (let’s say a hundred thousand) in people, that is not enough to give them significant herd immunity. They didn’t need to do all that lock down. 

The lockdown is particularly hurtful in countries that don’t have good social infrastructure, countries like the United States and Israel. Many, many people have been really really hurt — especially young people. You know I think that everybody panicked — they were fed incorrect numbers by epidemiologists and you know this I think led to led to a situation. 

There is no doubt in my mind that when we come to look back on this, the damage done by lockdowns will exceed any saving of lives by a huge factor. One very easy way to see this is, and again I am getting into a sensitive territory here, but economists have a very simple way of looking at death. They don’t count people. They come to the conclusion that if you’re 20 and you die that’s a greater loss than if you’re 85 and you die. It’s a hard issue, but in some ways are we valuing the potential future life of the 20 year old? Are we valuing the loss of more senior persons by what’s called daily disability-adjusted life years. Basically if somebody is in their 80s, has Alzheimer’s disease, and then dies from pneumonia (perhaps due to corona) that is less of a loss than if a 15 year old is riding his motorcycle bike and gets run over. This is an important way of looking at death.

It’s also you know, right now, the number of excess deaths is around 130,000 up to yesterday, [May 1st]. This is for all of Europe, for a population of around 330 million people. So an excess of 100,000 for this whole year, is actually not that much. In some of the worst flu epidemics we get to those kinds of numbers — sometimes it’s a bit more, sometimes a little bit less. 

Now, I’m not saying flu is like coronavirus, I’m just simply saying that the burden of death of flu is like coronavirus. Especially when we correct for the fact that people who die from coronavirus are older on average than people who died from flu. Flu kills young people, it kills two or three times more people under 65 than does coronavirus. If we put those facts into the situation we find that the burden of death from coronavirus and Phillip Shaw will, in Europe, where we have good numbers in less than that of a very flu. 

Another factor which has not been considered are all the cancer patients who aren’t being treated, or all the heart cardiology patients who aren’t being treated. I’ve got estimates of tens of thousands of people who are basically going to be dying because of lack of that treatment — and generally again the age group who die of cancer are younger than the age group who die of coronavirus. 

There’s one very easy way to sort of summarize coronavirus. I put an article in the medium by the pretty famous British statistician Sir David Spiegelhalter of Cambridge [University] and he had said that the numbers coming from Ferguson suggested that we had to lose about one year of people. It turns out that I immediately wrote an article in the same medium and replied to him, saying that in fact the answer was actually one month, not one year. So basically my feeling is, and it’s being supported by the numbers, is that the amount of excess death you need to reach saturation, I’m not going to call it herd immunity, where the virus by itself stops, is on the order of four weeks of excess. Now to give you some idea in the European area where there is good monitoring, by a website called EuroMoMo, run out of Denmark, which covers about 300 million people. Every week in Europe in that area there’s around 50,000 natural deaths. So in four weeks there will be about 200,000 extra deaths in that year — and it looks like coronavirus in Europe where it’s no doubt that it’s the most severely hit area in the world — we’ll probably reach around 200,000 or 4 weeks worth. 

Q: So what happens if what you’re saying is there’s a sort of statistical observation which is around four weeks of excess death and then the pandemic seems to peter out, or begin to flatten out. What does that mean policy-wise for these European countries then?

A: If we could protect the old people perfectly, then the death rates would be very, very low. So for example in Europe there were about 140,000 excess deaths in the last nine weeks. The number of those excess deaths who are younger than 65 is about 10%. So basically 13,000 of 130,000 deaths are actually under 65 years old and if we had simply been able to protect elderly people then the death rate would have been much much less. But the key thing is to have as much infection for as little possible death and also do whatever you can to keep the hospitals full but not overflowing. It’s a difficult calculation and the trouble is that in Sweden there’s no political concerns. 

The trouble is is that in Israel and I know as well in the United States, everything is political and therefore nobody could say something like this. They would say, “Ah, but you are not valuing death — the thing that should have been done is for the media to stress to people that everyday somebody dies. These people are essentially in the same age band, and they die from Corona and other comorbidities, other diseases. 

I’ve become a huge fan of Twitter. I’d never used twitter before and for me Twitter is the best discussion forum I had seen since I was a student at the Cambridge Laboratory of Natural Biology. Which is a 26 Nobel Prize winning lab. The best lab in the world. The Twitter discussion is phenomenal and I’m getting documents from Italy showing that many of the Covid deaths were either dead before they were tested or else they had up to three other conditions. There is nothing wrong with this, people die for all sorts of reasons, but the news should be stressing this and maybe they should be counting it as a 0.1 Covid death. 

Countries seem to be racing to have as many Covid deaths as they could, and this is a huge mistake. In the flu season no one cares about these people. I mean, the total number of Covid deaths in Europe will be very similar to a severe flu season, and you know, this is serious. Flu is a serious disease. Maybe we should just shut down the economy during the flu season. I mean people should have been made to understand it. Unfortunately I think in Britain they started out wanting to go for herd immunity without too much lockdown, there was then a scary paper — which is likely to be retracted — which influenced Italy as well where basically it was claimed they were — [Interviewer interrupts]

Q: I know you had some specific queries about Neil Ferguson’s paper; we had him on the show last week. So, what did you think he got wrong in those models and predictions?

A: His work was on modelling, and around the 10th of February he had his first paper (that I saw) and in there he was getting a case fatality ratio of around 15%, whereas all my observations were saying that it was around three or four percent. So I was suspicious: I looked at the paper very carefully and in a footnote to a table it said “assuming exponential growth for six days at fifteen percent a day.” Now, I had looked at China, and never, ever seen exponential growth that wasn’t decaying rapidly so I was suspicious. My numbers were 10% of the numbers that Ferguson had obtained. I pointed this out, in a reply in the medium — which was out there, it’s clear nobody has ever seen it but it’s there, and I didn’t hide it it just didn’t get any likes and this said that it was much more like one month than one year and have an exchange with Spiegelhalta and Ferguson, where I tried to show my case. 

But all I was doing was just simple proportionality using exactly the same profile of — different ages have different death rates, so there’s a profile saying that people over 80 have a certain fraction of the disk [deaths] people between 17 and 80 have a different fraction — just using that data… and simply saying we want the number of deaths that occurred on the Diamond Princess to be the same number that we found which was 7 or 8. If you do that, and then you apply that proportionality to Britain and the USA, you find that for Britain the half a million drops to about 50,000 and in the United States the two million drops to 200,000. Essentially a year dropping to a month.

Q: And so the the argument that is made here is that whether you believe the infection fatality rate is point three percent or whether you believe it’s point eight percent there is still a big chunk of the population, the majority population who hasn’t had been exposed to the disease or hasn’t had it and therefore if we just let it rip there will be many many tens possibly even further hundreds according to Professor Ferguson of thousands of deaths and that’s why it’s politically totally not an option to be at do anything other than follow this ultra cautious approach.What do you say to that?

A: The World Health Organization, and epidemiologists in general, can only go wrong if they give [politicians] a number smaller. If I said it’s going to be 1 billion deaths from coronavirus and it’s, “oh, you guys have done what I’ve said and there’s only gonna be a hundred thousands,” that is considered good policy. They overestimated bird flu by a factor of a hundred, or ten thousand in The Guardian. The Guardian wrote about this. Ebola was overestimated by a factor of 100 I think. They see their role as scaring people into doing something. I can understand that and there’s something to be said for it. If you could practice lock down with zero economic costs, and zero social costs — let’s do it. But the trouble is that those costs are huge, we’re gonna have fatalities from hospitals being closed down, additional children in trauma, businesses damaged — maybe less so in the UK because of the compensation policy — but certainly massive economic damage in the USA and in Israel, and in other countries. So you need to balance both of these things.

That is what I don’t think is responsible. In my work if I say a number is too small and I’m wrong or a number is too big and I’m wrong, both of those errors are the same. If I’m 10 percent too high or 10 percent too low that is okay. It seems that being a factor of a thousand too high is perfectly okay in epidemiology, but being a factor of three too low, is too low. 

Q: I’m trying to think about what this means for the UK and for these countries that are trying to work out what to do next.Is your view then having looked at the numbers that if we had not implemented lockdown we would have seen a fall off anyway is that a fair summary?

A: We could have had smart lockdown. Sweden, for example, doesn’t allow gatherings of more than 50 people. I think a football game would be a really bad idea right now, because people shout and therefore spray saliva on everyone around them, and they could infect a lot of people. But you know Sweden is doing fine, their deaths again are very localized to nursing homes, like they are in England — it’s the same profile.

I think that you know again it’s Sweden so all the evidence suggests that. So my contradiction is the following: Britain, if they had done nothing would have had reported deaths. Now remember there’s a difference of reported death, my numbers are all reported. This would have four weeks of additional reported death when the numbers actually came in from what were the real axis death. My guess is they would be less than that so it would not have been double. It wasn’t in the month but maybe one and three quarters or so on. So that is my feeling — we’re seeing this in Europe we will know the answer in three or four weeks time. We will know for all of Europe exactly what the excess death of coronavirus was, right now it’s a hundred and thirty seven thousand.

Q: Do you find when you’ve been making these points — in the media that you received a lot of backlash? Do you think there’s a lot of political pressure, as an academic and as an academic you know they’re one of your colleagues in Stanford dr. Ioannidis has also put out studies that seem to become skeptical and has received a lot of political blowback.

A: I went on CNN once when he was CNN Vicky Anderson out of London. I appeared on Fox News a couple of times basically said this is all just common sense because I appeared on Fox News CNN wouldn’t have me anymore. So basically I have had very clear of things. I had one article in the Los Angeles Times which did great but since I was not saying things that were too extreme none of the East Coast newspapers wanted me, they quoted me, but they wouldn’t have me. What’s disconcerting is, a few of my academic colleagues — even relatives — were very upset with me. Because in my earlier writing I published a report, the medium report from the 22nd of March but on the 13th or 14th of March I distributed a 19 page report,and three academics got very upset with me. I think they were totally panicked, and they felt that if anyone thought this was true they wouldn’t lock down as tightly as they should, I’m in fact friends with all the people again, there are no hard feelings. 

Q: Let me leave you with one final question: what’s your prognosis, what do you think is now gonna happen with this… what happens next?

A: There will be a reckoning. Maybe countries will start to see that they need governments that are not necessarily great in rhetoric, but actually thinking and doing. I often go back and think about what Socrates said 2,400 years ago: use your common sense instead of listening to the rhetoric of leaders. We have become very influenced by [rhetoric] that. I think this is another foul-up on the part of the baby boomers. 

I am a real baby-boomer, I was born in 1947, and I think we’ve really screwed up. We cause pollution, we allowed the world’s population to increase three-fold, we’ve caused the problems of global warming, we’ve left your generation with a real mess in order to save a really small number of very old people. If I was a young person now, I would say, “now you guys are gonna pay for this.” 

We have my family whatsapp and very early on I said this is a virus being designed to get rid of the baby boomers. You know I don’t know, I think my wife thinks this is going to be a take it to the streets thing,and we’re gonna have the young people on the street saying you guys have really screwed up it’s time to go. And I always joke with her, saying well at least I’ve made lots of friends among the young people, I’ll be okay. 

But quite frankly you know I’ve had a great life, and I must say this to all the young faces in front of me. I have a grandson who’s 17. I’d much rather have young people live for a very long time. That said I do have a mother who’s a hundred and five years old living in London with my brother, she’s in lockdown and I talk to her by whatsapp every single day on FaceTime, and she’s fine. She still uses her phone and so on so you know these differences but…

You guys should get out there and do something don’t accept this anymore we screwed up too much 

Here’s one for what’s left of fans of the Efficient Market Hypothesis: having stampeded into Hertz stock as it was plunging over the past three months, one would expect this bizarre BTFDing to end after the auto rental giant filed for bankruptcy. After all, with the company set to equitize billions in debt, there will be zero left for existing equityholders.

One would be wrong: not only has the retail stampede of Robin Hood traders into bankrupt HTZ not moderated, but in the week since the company sought bankruptcy protection, the number of Robinhood holders of the worthless stock has increased by a 50%, hitting a record high 60K according to Robin Track.

And while one can, in theory, explain this ludicrous and relentless euphoria to the perpetual BTFD “strategy” spawned by central banks, which now step in every single time there is a modest market pullback, at this point one just has to sit back and laugh at the idiocy that Powell’s “market” has become.

Or maybe retail investors will have the last laugh after all, as Powell will one day shock the algos and the veteran Robinhood millennial traders, and announce it will buy Hertz stock. After all, as we first reported last weekend, it already owns defaulted HTZ bonds via the various junk ETFs it has been buying in recent weeks. At this point, Powell may as well go all in.

The U.S. Customs and Border Protection’s (CBP) General Atomics MQ-9 Reaper military surveillance drone is back in the skies on Monday afternoon. 

Here is the live air map via Radar Box showing CBP-104 flying at 20,000 feet altitude near Minot, North Dakota, with an unknown destination. 

CBP-104 was first brought to our attention on Friday morning (May 29) after Radar Box spotted the surveillance drone spying on protesters in Minneapolis. The drone circled the city more than once as it gathered intelligence for the federal government about the ongoing social unrest on the ground. 

Read: “U.S. Gov’t Now Flying MQ-9 Reaper Drone Over Minneapolis As Riots Worsen.”

This is what the MQ-9 Reaper looks like. 

More info on the MQ-9:

At the moment, the destination of CBP-104 is unknown. The drone has a range of 1,100 miles and could easily fly reconnaissance missions across metros in the Midwest and West that are currently experiencing unrest.

With a military drone in the skies, and about 5,000 National Guard soldiers activated in 15 states and Washington, D.C. — it appears the federal government is gearing up for an extended period of social unrest.

For BofA’s Benjamin Bowler, the past two months have been rough. The bank’s head of derivatives research has been skeptical throughout the recent 35% surge in the S&P, urging clients to fade the rally or simply to ignore it, as highlighted in recent posts:

• The Higher Stocks Rise, The More Fragile The Market Becomes
• “Fade The Rip”: BofA Warns “Bear Market Far From Over Unless We Escape A Recession”
• Here Is The One Indicator That Convinced BofA Another Market Crash Is Coming

To be sure Bowler is not alone, because as the latest BofA Fund Manager Survey showed, a sizable majority (68%) of investors still believe this is a bear market which would make this a bear market rally (arguably one of the fastest on record) despite the S&P crossing the psychologically important 3,000 level and breaking above what historical analogs suggest as bear-rally peaks.

As such, in his latest note the BofA strategist writes that “the pain trade is clearly up”, which reinforced by weak fundamentals (BofA economists downgraded their global growth forecasts again last week following a worsening projection by the IMF earlier in May), means that “the risk is getting forced into chasing a reflexive bubble in a late-stage bear-market rally.”

The liquidity easing provided by policymakers is likely helping to create a disconnect between fundamentals and asset prices, as investors are forced deeper into the risk spectrum. The staggering differential in performance between the market leaders (that have been perceived to be high quality stocks) and the rest of the market, suggests ‘beaten down’ names have plenty of upside room if markets continue marching higher.

Yet refusing to capitulate and join the momentum-chasing crowd (for now), Bowler observes that “markets are able to overshoot historical bear-rally peaks highlights the strength of the post-GFC learned response to ignore fundamentals and not fight policy makers.” However, as he cautions, “hoping that either fundamentals will improve at record speed, or that they simply don’t matter is a real risk, given markets’ inability to decouple from recessions in the last 90 years.”

Hence, in his view the key to trading these markets is risk mitigation – “hedging the pain trade without fully capitulating to the “this time is different” narrative.” To do this, one needs to find the cheapest sources of asymmetry, as despite vols coming down near record speed in this wave of optimism, options purchased outright are still not cheap.

So how does Bowler propose hedging the continued pain trade meltup? Below he lists some of the cheaper hedges that he was encountered in recent weeks:

Too early to own upside in ‘Covid-19’ losers; rent instead

To start, Bowler recommends that investors use options to rent (“rather than own”) upside on the most beaten-down stocks. From a vol perspective, both volatility and upside skew remain elevated on average across single stocks . Hence, we prefer screening for call spread candidates on stocks that are perceived as being ‘Covid-19 losers’, with relatively lower vol, and flat call skew.

Screen for cheap call spreads on beaten-down S&P stocks

Among names in the S&P with liquid option markets (avg. daily notional options volume over the past one month in excess of $5mn), we narrow down the universe based on:

• Beaten-down industries: Among the 64 industries in the S&P 500, we select only names that belong to industries with the worst performance since 19-Feb (when the S&P peaked). Specifically, we adjust industries’ performance by the trailing 3m realized vol as of 19-Feb, and identify those industries where the vol-adjusted performance is less than or equal to -25.0 (bottom quartile of vol-adjusted performance across all industries).
• Benign long vol carry: We select only names where the 1yr %-ile of the 2m ATMf implied vs. 10-day realized vol ratio is less than 25% (quartile with the best carry).

For the resulting subset of names that satisfy the criteria set above, we rank based on the average of the following:

• Flat call skew: Names with the lowest 1yr %-ile of call skew, as measured by the 5-day moving average of the implied vol spread between 2m ATMf and 25d call implied vol (normalized by 2m ATMf implied vol).
• Beaten down names: Names that suffered the worst vol-adjusted performance since 19-Feb (the volatility measure used to adjust performance is the 3m trailing realized vol as of 19-Feb).

Names in Table 2 are ordered according to their ranking across ‘flat call skew’ and ‘vol-adjusted performance’ (the two rightmost columns in the table). The top five candidates to buy call spreads on are Delta Air Lines (DAL), Wells Fargo (WFC), United Airlines (UAL), MGM Resorts International (MGM), and Aflac (AFL).

* * *

Hedge the “pain trade” for almost zero-cost with VIX put ratios

As Bowler noted on previous occasions, the VIX has been decaying at a particularly rapid pace relative to history following its March 2020 peak. This mean reversion of volatility has only gained steam in recent days, as seen from Chart 10, with the VIX now trading between levels implied by the fastest (1987 crash) and (the average of the) 5-fastest vol retracements witnessed since 1986. BofA argues that this rapid vol decay as the flip side of a similarly aggressive equity market rally – one that has overshot historical bear-rally analogs and highlights the strength of the post-GFC learned response to ignore fundamentals and not fight policy makers.

Bowler then focuses on how to hedge the “pain trade” of higher equities/lower vol using VIX put structures with low upfront premium and small, defined max loss in a secondary vol shock. To this end, VIX put ratios look interesting, for example the VIX Jul 26/23 1×2 put ratio (+1x 26, -2x 23), which costs ~0.1v (ref. 30.5 on the Jul VIX future), as:

• The trade is profitable at July expiry if the VIX settles between 20 and 26, and achieves its max payout of 3v at the midpoint of what the fastest and 5-fastest decay paths in Chart 10 imply (i.e., [29+17]/2=23, see Chart 11 for the expiry P&L).
• If VIX futures remain sticky near current levels (and in line with the 5-fastest historical decays), the passage of time should benefit the trade. For example, the same structure for June expiry costs ~0.45v today (at mids), with the June VIX future at 29.70, illustrating the potential positive carry if the status quo persists.
• In a secondary vol spike, losses are limited to the low upfront premium of 0.1v.
• The risk to the trade is a 1987-style vol crush, taking the VIX to 17 by July expiry. However, Bowler remains skeptical that volatility in a severe fundamental shock like today’s can sustain the pace of decay seen in the highly technical 1987 crash.

Cheap hedges for a policy-fueled pain trade higher in US equities

As Bowler reminds us, “it was only three months ago that US assets were delivering one of their most impressive concurrent rallies in recorded history, with an average annualized Sharpe of 4.23 at the time, in the 98th percentile since 1982.” Much has obviously changed in the last three months, but the core thesis is still surprisingly valid today and helps explain the strong rally in US equities since the March bottom.

The BofA strategist rationalized then that the remarkable performance was mostly due to (i) an asymmetrically dovish Fed (arguably more so today, particularly relative to other CBs and governments), and (ii) the relative strength of the US economy (still true today and likely to remain so barring a second virus wave, due to less severe lockdowns). Breaking this dynamic required a rebound in global growth or an idiosyncratic event in the US, neither of which has happened.

The crucial common thread that has allowed these themes to persist has been the ability for the US to deliver a much larger (monetary and fiscal) stimulus package, making its financial market again the beneficiary of the world’s flows (the US was the most and only overweight region in the May Fund Manager Survey). However, this also means that continued outperformance of US equities likely requires continued CB support. A major risk therefore, Bowler warns, “is the formation of a US equity bubble as fundamentals take a backseat to investors’ need to allocate capital to what’s arguably the safest risk asset left.”

To get cheap, risk-limited exposure to a policy-fueled melt-up in US equities, BofA recommended two weeks ago QQQ calls contingent on 10Y yields not rising. That trade still works as bond/equity correlation remains near its most negative since 2012 (Chart 16) and the narrative around yield curve control (which may add downward pressure to yields) is gaining strength. A more vanilla trade in the same spirit is to partially fund QQQ calls by selling TLT puts, taking advantage of the recent drop in the QQQ/TLT vol ratio to its 2-year average (Chart 17).

• Trade #1: Buy QQQ Sep 240 calls (104.8%) contingent on 10Y CMS < 70bps for 1.58% (55% disc. to vanilla, ref. 229.04 & 0.71% fwd)
• Trade #2: Buy $1 notional of QQQ Sep 240 calls, sell $1 notional of TLT Sep 155 calls for ~1.8% (ref. 229.04 & 163.33)

* * *

Hedging Asian risks

Finally, Bowler analyzes recent developments and dynamics in the Asia autocalls market to flag vol dynamics that re-enable one of his favorite tail hedges (e.g. for investors wanting to hedge a substantial escalation of political tensions in Hong Kong). The autocall market in Asia has slowed down sharply amid the crisis. In April, only US$1.9 Bn notional of Korean autocalls were issued; down 71% from pre-crisis (Chart 22). At the same time, index-linked Uridashi issuance in Japan fell 81%. BofA highlights the following:

Here, issuance is expected to remain low in May-Jun as many existing autocallables look unlikely to knock out. A majority of notes in Korea depend on the 6-month performance of the SX5E, which is currently -19% (typically, autocalls require a 6-month performance better than -10% in order to knock out). Low knock-out rates tend to limit new issuance as old notes would otherwise get rolled into new ones. Baskets that do not include SX5E (in April, ~25% of new issuance), however, may start knocking out as the worst 6-month performers, HSCEI or KOSPI2 – down 10% and -9%, respectively – are close to the knock-out barriers.

Long-dated HSCEI vols coming lower while Nikkei vols have been supported. HSCEI Dec-21 fixed strike put vols (strike close to 80%) are gradually normalising, having retraced ~75% of the March spike, trading ~3% above pre-crisis levels. The corresponding Nikkei vols have been more supported recently, trading ~5% above pre-crisis levels and close to unchanged since the end of March (Chart 28).

Rallying markets should keep vols supported in the near term. The Nikkei and the HSCEI are at similar distances from their respective peak vegas (peaks are -6% and -7% away, respectively; see Table 4). The relative proximity to peak vega creates an autocall-linked vol supply/demand asymmetry as 10% spot declines barely changes the outstanding vega while 10% rallies would decrease(*) vega by US$26 Mn and US$13 Mn, respectively, for Nikkei and HSCEI (Charts 23 and 24).

Tail hedge on HSCEI in case the Hong Kong tensions escalate

Risks in Hong Kong could rise further in the coming months; especially in case the US considers withdrawing the special status of Hong Kong that treats it differently from mainland China on trade, commerce and other areas. While such a withdrawal has been discussed for a while now, the recently souring relations between the US and China together with US lawmakers last year passing the Hong Kong Human Rights and Democracy Act of 2019, make these risks higher, in our view. Indeed, US Secretary of State, Mike Pompeo, said on Friday last week that bypassing HK’s LegCo “would be a death knell for the high degree of autonomy” (HK earns the special status as it maintains sufficient autonomy under the “one country, two systems” framework).

While tail hedges are not the “screaming buy” they were pre-crisis, long-dated HSCEI put vols have retraced a considerable amount of the March spike (Chart 28). Investors worried about substantial issues in Hong Kong in the months ahead should consider shorting HSCEI Dec-21 1×3 put ratios. Long 3x 7,000 strike and short 1x of the 9,200 strike costs HKD 52 (indic. ~0.5% of spot; vols 28.3/22.4, -7% delta, spot ref: 9,595) and could gain >10-to-1 in case of a sharp sell-off (e.g. ~25% drawdown or worse).

Authored by Jonathan Turley,

While many have condemned Antifa and similar groups for destroying Minneapolis and other cities, Minneapolis city council member for Ward 5 (and son of the Minnesota Attorney General Keith Ellison) Jeremiah Ellison tweeted Sunday that he is not among them. Indeed, he is declaring his support for Antifa.  Some of us have long opposed Antifa as a vehemently anti-free speech group.  Ellison does not seem to include free speech among his priorities for voters in Ward 5.

Ellison tweeted:

“I hereby declare, officially, my support for ANTIFA,” Ellison said. “Unless someone can prove to me ANTIFA is behind the burning of black and immigrant owned businesses in my ward, I’ll keep focusing on stopping the white power terrorist THE ARE ACTUALLY ATTACKING US!”

I hereby declare, officially, my support for ANTIFA

Unless someone can prove to me ANTIFA is behind the burning of black and immigrant owned businesses in my ward, I’ll keep focusing on stopping the white power terrorist THE ARE ACTUALLY ATTACKING US! https://t.co/m6jxtDYmTi

— Jeremiah Ellison (@jeremiah4north) May 31, 2020

We previously discussed Attorney General Keith Ellison’s past support for Antifa. I have been a long-standing critic of the group.  Keith Ellison recently made controversial statements about the Minneapolis police.

I have opposed the President’s declaration that Antifa will be designated a terrorist organization. However, it is baffling to see a city council member embracing this violent group as his own city is burned and looted.

Update (1425ET): The press conference has begun (20 mins late, as per usual) and the headlines (and tweets) are rolling in:

• GOVERNORS MUST ACT, DEPLOY NATIONAL GUARD AS FITS, MCENANY SAYS
• TRUMP IS DEMANDING ACTION TO PROTECT CITIZENS, MCENANY SAYS
• WHITE HOUSE SAYS THERE WILL BE ADDITIONAL ‘FEDERAL ASSETS’ DEPLOYED ACROSS NATION IN RESPONSE TO VIOLENT PROTESTS
• ‘WE’RE LOOKING AT EVERY TOOL IN THE FEDERAL TOOLKIT’
• WHITE HOUSE SAYS JUSTICE DEPARTMENT HAS ‘AMPLE EVIDENCE’ THAT ANTIFA BEHIND VIOLENCE AT PROTESTS
• UTILIZING NATIONAL GUARD WAS TOPIC OF CALL WITH GOVERNORS

Asked what the president is doing about the death of George Floyd, @PressSec replies there’s a federal civil rights investigation” but can’t allow antifa to carry out violence in its wake.

— Steve Herman (@W7VOA) June 1, 2020

* * *

Following reports that President Trump slammed the nation’s governors and mayors as “weak” before threatening to send in the National Guard to NYC during a video briefing from the situation room, White House Press Secretary Kayleigh McEnany will hold the administration’s first briefing since the weekend of unrest across the country.

Trump’s tweets purportedly calling for police to embrace more violent tactics have aggravated his critics, while many of his supporters largely stood by him as officials who started the weekend blaming white supremacists and “foreign influence” for the devastation in their cities eventually pleaded with “anarchists” and “violent hooligans” commingling with “peaceful demonstrators” for most of the violence.

JUST IN: President Trump unloads on the nation’s governors on a call, calls on them to step up enforcement: “You have to dominate, if you don’t dominate you’re wasting your time. They’re going to run over you, you’re going to look like a bunch of jerks. You have to dominate.”

— Ed O’Keefe (@edokeefe) June 1, 2020

Since taking over the WH press shop, McEnany has held several press conferences characterized by her combative stance toward the press.

We’re sure today’s will prove no exception:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At a moment major American cities are loosing hundreds of millions by the day in rampant destruction during nightly George Floyd protests, the man celebrated as the nation’s first black billionaire has called for trillions in ‘reparations’ for slavery.

“Wealth transfer is what’s needed,” 74-year old Robert Johnson, founder of Black Entertainment Television (BET) said in a CNBC interview Monday. “Think about this. Since 200-plus-years or so of slavery, labor taken with no compensation, is a wealth transfer. Denial of access to education, which is a primary driver of accumulation of income and wealth, is a wealth transfer.”

Though no longer on the Forbes billionaires list following the 2001 sale of BET to Viacom for a whopping nearly $3 billion, Johnson is currently estimated to be worth over $600 million. Perhaps this is why he wants to “go big” in terms of a figure: he said the US federal government should pay out $14 trillion in reparations, or “damages that are owed” as he put it.

He described what would in effect be the “affirmative action program of all time”:

“Damages is a normal factor in a capitalist society for when you have been deprived for certain rights,” he said. “If this money goes into pockets like the [coronavirus] stimulus checks… that money is going to return back to the economy” in the form of consumption. There will also be more black-owned businesses, he added.

Though not the first time he’s issued a provocative call for massive reparations for the historic evil of slavery in America, the timing comes at a moment events rapidly escalated from ‘peaceful protests’ last week to full-on riots and mass mayhem, where the purpose among some seems to be to unleash as much destruction and chaos as possible as fast as can be accomplished. 

“Now is the time to go big.” BET founder Robert Johnson calls for “full and complete” reparations for descendants of slaves. pic.twitter.com/6CoR51OIXL

— CNBC (@CNBC) June 1, 2020

We doubt federal authorities, or the majority of Congressional leaders, will seriously consider handing out ‘reparations payments’ anytime soon, considering buildings and entire city streets are on fire, as large-scale looting continues in a surge of “everything’s free! mentality, to the frustration of many activists. 

Even national monuments in D.C. are reportedly under threat by vandalizing mobs. And in some cities, both black-owned businesses as well as even civil rights-related sites and museums have not escaped unscathed. 

Proof that the looters don’t care about racial justice. They just vandalized the International Civil Rights Museum in Greensboro, NC. This is where the “Greensboro 4” started the desegregation movement in NC with a peaceful sit-in protest. See: https://t.co/nWaBg7aDZL pic.twitter.com/MbuMBcZDnB

— Jake Morphonios (@morphonios) June 1, 2020

And as a case in point of the contradictory and chaotic aims of the street demonstrations, a local NBC affiliate confirmed that in Greensboro, North Carolina the International Civil Rights Center and Museum was vandalized.

Meanwhile BET founder Johnson stressed further in the Monday interview:

“I’m talking about cash. We are a society based on wealth. That’s the foundation of capitalism.”

This also as following the first round of coronavirus stimulus check payments paid out directly to American by the IRS, a Democratic Congressional push for further and larger payments has been stalled. 

Some analysts have theorized that if the helicopter money dries up, people will further take to the streets. That could be a key element behind some of the chaotic mayhem being unleashed now.