Drawdown Delerium: Bezos Warns “Markets Teach, The Lessons Can Be Painful”
Just how bad was it?
The Nasdaq’s 13% plunge in April was its biggest monthly drop since Lehman’s collapse in 2008.
That is the 12th worst month ever. To be the worst month ever you have to beat October 1987 that has a 27% decline. The poster-child of this bear, ARK Innovation, actually managed to (-28% in April).
The S&P 500 slipped -9.60% in April, marking its worst month since the COVID-19 shock in March 2020 (-12%). And as The Market Ear details, tech was not even the worst drag. The most significant sector drivers were: Consumer Discretionary (-2.28% drag), Communication Services (-1.96% drag) and Information Technology (-1.33% drag).
And the S&P is now suffering its worst start to a year since the start of World War 2!!
Is the worst start to a year since 1939 a buying opportunity? The 4 other “top 5 worst starts” all then rallied 13-28% for the remainder of the year.
But it’s even worse under the surface of the headline indices, with 45% of stocks down over 50%, 22% of stocks down over 75%, and 5% of stocks down over 90%…
So to answer the question we posed at the start – it’s bad, really bad.
But there’s no ‘capitulation’ yet… “Closer but not yet real capitulation which tends to come with readings of -2.5 or worse. just not enough stocks that are 20-40% off of highs as “good” groups not yet corrected…staples, utes, energy, materials come to mind”
An entire generation of entrepreneurs & tech investors built their entire perspectives on valuation during the second half of a 13-year amazing bull market run.
The “unlearning” process could be painful, surprising, & unsettling to many. I anticipate denial.
Some thoughts:
Previous “all-time” highs are completely irrelevant. It’s not “cheap” because it is down 70%. Forget those prices happened.
Valuation multiples are always a hack proxy. Dangerous to use. If you insist, 10X should be considered AMAZING and an upper limit. Over that silly.
You may be shocked to learn that people want to value your company on FCF and earnings. Facebook trades at 14X GAAP EPS, & is growing 23%. What earnings multiple are you assuming?
Revenue & earnings QUALITY matter.
And, with AMZN facing its biggest drawdown since 2009…
…none other than Jeff Bezos had some thoughts on the shitshow that’s evolving, echoing Bill Gurley’s comments:
“Bill is without doubt one of the smartest people I know and always worth listening to.
Most people dramatically underestimate the remarkableness of this bull run.
Such things are unstoppable … until they aren’t.
Markets teach. The lessons can be painful.“
Which, roughly translated means – I got mine, you should all brace!
Alter denounces free speech as basically a white man’s “obsession.”
What is most striking about the column is Alter’s apparent confusion over why anyone like Musk would even care about the free speech of others. She suggests that Musk is actually immoral for spending money to restore free speech rather than on social welfare or justice issues.
She suggests that supporting free speech is some disgusting extravagance like buying Fabergé eggs.
“Why does Musk care so much about this? Why would a guy who has pushed the boundaries of electric-vehicle manufacturing and plumbed the limits of commercial space flight care about who can say what on Twitter?”
The answer, not surprisingly, is about race and privilege. Alter cites Jason Goldman, who was an early figure shaping the Twitter censorship policies before he joined the Obama administration. Goldman declared, “free speech has become an obsession of the mostly white, male members of the tech elite” who “would rather go back to the way things were.”
Alter also cites professor of communication at Stanford University Fred Turner who explains that free speech is just “a dominant obsession with the most elite… [and] seems to be much more of an obsession among men.”
In arguing in favor of censorship, Alter engages in a heavy use of historical revisionism, claiming that
“‘free speech’ in the 21st century means something very different than it did in the 18th, when the Founders enshrined it in the Constitution. The right to say what you want without being imprisoned is not the same as the right to broadcast disinformation to millions of people on a corporate platform. This nuance seems to be lost on some techno-wizards who see any restriction as the enemy of innovation.”
It is also lost on me.
Censorship has always been based on the notion that the underlying speech was false or harmful. Calling it “disinformation” does not materially change the motivation or the impact. What Alter calls a “Tech Bro obsession” was the obsession of the Framers.
Alter is confusing free speech values with the rationale for the First Amendment. For years, anti-free-speech figures have dismissed free speech objections to social media censorship by stressing that the First Amendment applies only to the government, not private companies. The distinction was always a dishonest effort to evade the implications of speech controls, whether implemented by the government or corporations.
The First Amendment was never the exclusive definition of free speech. Free speech is viewed by many of us as a human right; the First Amendment only deals with one source for limiting it. Free speech can be undermined by private corporations as well as government agencies. This threat is even greater when politicians openly use corporations to achieve indirectly what they cannot achieve directly.
Key free speech figures practiced what they preached in challenged friends and foes alike. After playing a critical role with our independence, Thomas Paine did nothing but irritate the Framers with his words, including John Adams, who called him a “crapulous mass.”
Yet, free speech was a defining value for the framers (despite Adams’ later attacks on the right). It was viewed as the very growth plate of democracy. As Benjamin Franklin stated in a letter on July 9, 1722: “Without Freedom of Thought, there can be no such thing as Wisdom; and no such thing as public liberty, without Freedom of Speech.”
The same anti-free speech voices were heard back then as citizens were told to fear free speech. It viewed as a Siren’s call for tyranny. Franklin stated:
“In those wretched countries where a man cannot call his tongue his own, he can scarce call anything his own. Whoever would overthrow the liberty of a nation must begin by subduing the freeness of speech; a thing terrible to publick traytors.”
Yet, Alter assures readers that this is just due to a lack of knowledge by Musk and a misunderstanding of why censorship is a natural and good thing:
“Tech titans often have a different understanding of speech than the rest of the world because most trained as engineers, not as writers or readers, and a lack of a humanities education might make them less attuned to the social and political nuances of speech.”
It appears that Alter’s humanities education in college allows her to see “nuances” that escape the rest of us, including some of us who are not “trained as engineers.”
Indeed, James Madison warned us to be more on guard against such nuanced arguments:
“There are more instances of the abridgment of the freedom of the people by gradual and silent encroachments of those in power than by violent and sudden usurpations.”
As Time, the Washington Post, the New York Times, and other media outlets align themselves with the anti-free speech movement, it is more important than ever for citizens fight for this essential right. There is nothing nuanced in either this movement or its implications for this country.
Biden Jokes About Low Approval Ratings At Correspondents’ Dinner, Says “Some Guy Named Brandon” Is Having A Really Good Year
Amid a star-studded coterie of $350-per-seat-paying celebrities, President Biden poked fun at himself (and was roasted by others) at the revived White House Correspondents’ Dinner as DC’s biggest annual party returned after two years of COVID-19 restrictions.
With remarks from a sitting president for the first time since 2016, Biden commented that “This is the first time the president attended this dinner in six years. It’s understandable, we had a horrible plague – followed by two years of COVID.”
“Just imagine if my predecessor came to this dinner this year. Now that would have been a real coup if that occurred,” he added.
As Biden took to the stage he began with some self-reflection:
“Special thanks to the 42 percent of you that actually applauded,” going to mock the reporters present, adding:
“I’m really excited to be here tonight with the only group of Americans with a lower approval rating than I have.”
After joking about his own approval rating and age, Biden took some shots at his Republican colleagues.
“I’m not really here to roast the GOP, that’s not really my style. Besides, there’s nothing I can say about the GOP that Kevin McCarthy hasn’t already put on tape,”
And then the tone turned back to self-deprecating humor once again (at least this confirms he is aware enough to know this is going on?)
“But Republicans seem to support one fella – some guy named Brandon,” he joked about conservatives’ “Let’s Go Brandon” rally cry, to cheers.
“He’s having a really good year, and I’m happy for him.”
Watch President Biden’s full remarks below:
Following Biden’s comments, “The Daily Show” host Trevor Noah provided the ‘comic relief’ for the evening, roasting the president on inflation, his inability to pass his agenda, and his handling of the withdrawal from Afghanistan:
“You know, sir, can I just say, I think everyone will agree it’s nice to one again have a president who’s not afraid to come to the White House Correspondents’ Dinner and hear jokes about himself? I’ll be honest. I’ll be honest. If you didn’t come I totally would’ve understood. Because these people have been so hard on you, which I don’t get. I really don’t. You know, I think ever since you’ve come into office, things are really looking up. Gas is up. Rent is up. Food is up. Everything.
…
And as you all know, President Biden’s lack of a filter does get him into hot water sometimes. You know, last month he caused a huge international incident, saying that Vladimir Putin should be removed from power. It was very, very upsetting to Russia. Yeah, until someone explained to them that none of the stuff Biden wants actually gets done.”
While initially appearing to praise Biden for giving voice to underrepresented groups, stating that “no president in my memory has given more marginalized groups opportunities,” Noah, delivered the following punchline:
“I’m talking about women, the LGBTQ community, the Taliban. The list goes on and on.”
Noah concluded with one of the funnier lines of the evening, by saying,
“Please be careful leaving tonight. We all know this administration doesn’t handle evacuations well.”
Watch Noah’s full remarks below:
No masks were in sight anywhere, so it will be interesting to see just how big a ‘super-spreader’ event this will be compared to the widespread infection following the Gridiron Club dinner earlier in the month.
Today is May Day. Since 2007, I have advocated using this date as an international Victims of Communism Day. I outlined the rationale for this proposal (which was not my original idea) in my very first post on the subject:
May Day began as a holiday for socialists and labor union activists, not just communists. But over time, the date was taken over by the Soviet Union and other communist regimes and used as a propaganda tool to prop up their [authority]. I suggest that we instead use it as a day to commemorate those regimes’ millions of victims. The authoritative Black Book of Communism estimates the total at 80 to 100 million dead, greater than that caused by all other twentieth century tyrannies combined. We appropriately have a Holocaust Memorial Day. It is equally appropriate to commemorate the victims of the twentieth century’s other great totalitarian tyranny. And May Day is the most fitting day to do so….
Our comparative neglect of communist crimes has serious costs. Victims of Communism Day can serve the dual purpose of appropriately commemorating the millions of victims, and diminishing the likelihood that such atrocities will recur. Just as Holocaust Memorial Day and other similar events promote awareness of the dangers of racism, anti-Semitism, and radical nationalism, so Victims of Communism Day can increase awareness of the dangers of left-wing forms of totalitarianism, and government domination of the economy and civil society.
While communism is most closely associated with Russia, where the first communist regime was established, it had comparably horrendous effects in other nations around the world. The highest death toll for a communist regime was not in Russia, but in China. Mao Zedong’s Great Leap Forward was likely the biggest episode of mass murder in the entire history of the world.
November 7, 2017 was the 100th anniversary of the Bolshevik seizure of power in Russia, which led to the establishment of the first-ever communist regime. On that day, I put up a post outlining some of the lessons to be learned from a century of experience with communism. The post explains why the lion’s share of the horrors perpetrated by communist regimes were intrinsic elements of the system. For the most part, they cannot be ascribed to circumstantial factors, such as flawed individual leaders, peculiarities of Russian and Chinese culture, or the absence of democracy. The latter probably did make the situation worse than it might have been otherwise. But, for reasons I explained in the same post, some form of dictatorship or oligarchy is probably inevitable in a socialist economic system in which the government controls all or nearly all of the economy.
While the influence of communist ideology has declined since its mid-twentieth century peak, it is far from dead. Largely unreformed communist regimes remain in power in Cuba and North Korea. In Venezuela, the Marxist government’s socialist policies have resulted in political repression, the starvation of children, and a massive refugee crisis – the biggest in the history of the Western hemisphere. The regime continues to hold on to power by means of repression, despite growing international and domestic opposition.
In Russia, the authoritarian regime of former KGB Colonel Vladimir Putin has embarked on a wholesale whitewashing of communism’s historical record. Putin’s brutal and indefensible invasion of Ukraine probably owes more to Russian nationalist ideology than communism. But it is nonetheless fed in part by his desire to recapture the supposed power and glory of the Soviet Union, and his long-held belief that the collapse of the USSR was “”the greatest geopolitical catastrophe of the century.”
In China, the Communist Party remains in power (albeit after having abandoned many of its previous socialist economic policies), and has recently become less tolerant of criticism of the mass murders of the Mao era (part of a more general turn towards greater repression).
Perhaps worst of all its recent atrocities, China’s horrific repression of the Uighur minority is reminiscent of similar policies under Mao and Stalin, though it has not – yet? – reached the level of actual mass murder. But imprisoning over 1 million people in horrific concentration camps is more than bad enough.
In a 2012 post, I explained why May 1 is a better date for Victims of Communism Day than the available alternatives, such as November 7 (the anniversary of the Bolshevik seizure of power in Russia) and August 23 (the anniversary of the Nazi-Soviet Pact). I also addressed various possible objections to using May Day, including claims that the date should be reserved for the celebration of labor unions.
But, as explained in my 2013 Victims of Communism Day post, I would be happy to support a different date if it turns out to be easier to build a consensus around it. If another date is chosen, I would prefer November 7; not out of any desire to diminish the significance of communist atrocities in other nations, but because it marks the establishment of the very first communist regime. November 7 has in fact been declared Victims of Communism Memorial Day by three state legislatures. Then-president Trump issued similar declarations in 2017 and 2018 (though he did not have the authority to make it a permanent national holiday through executive action alone).
If this approach continues to spread, I would be happy to switch to November 7, even though May 1 would be still more appropriate. For that reason, I have adopted the practice of also commemorating the victims of communism on November 7.
I am also more than willing to endorse almost any other date that could command broad support. Unless and until that happens, however, May 1 will continue to be Victims of Communism Day at the Volokh Conspiracy.
The Diesel Market Is Soaring, And Gasoline Prices Will Catch Up This Summer
By Ryan Fitzmaurice, senior commodity strategist of Rabobank
Summary
Oil prices recovered firmly above $100 per barrel this week despite the strict and ongoing lock-downs conditions in China and a very strong US Dollar
The push for lower carbon fuels has resulted in higher prices at the pump
The diesel market has been soaring recently but gasoline prices could catch up this summer
Driving season
It was a choppy week for oil markets, but as it stands, prices are heading into May with positive momentum. Oil prices recovered back above their respective 20-day moving averages this week despite the ongoing Chinese lock-downs and a very strong US Dollar. On that note, the very restrictive measures in Chinese megacity Shanghai have been in place for more than a month now and have even spread to other key cities.
At the same time, the US Dollar index has soared to multi-decade highs. So considering the world’s largest oil importer is effectively shut-down coupled with the currency pressures, the recent strength in oil is notable. This speaks to the tightness of global oil supplies and the likelihood of further downside in Russian oil production, as the West pushes away Russian imports. It also signals that oil prices may be finding good support ahead of the fast approaching high-demand summer months.
As such, we are viewing the supply-side dynamics as more impactful and long-lasting while the Chinese lock-downs are temporary in nature. Further to that end, the inevitable easing of these strict measures in China could unleash significant pent up demand in the coming weeks and months.
We are also less than five weeks away from the US Memorial Day holiday, which is the unofficial start of the summer driving season in the US. Importantly, it has really been diesel markets that have taken leadership of the petroleum complex in recent weeks as the fundamental story becomes increasingly more bullish for finished fuels.
In fact, spot diesel prices have already soared to all-time highs in many key locations and that comes despite the drop in crude oil prices since the start of the war in Ukraine. On the contrary, diesel prices have charged higher to new highs as shortages develop, and this has led to sharply higher crack spreads and record backwardation in the forward curves.
In our view, the tightness in refined products is likely to persist for months if not years, and any unplanned outages this summer could send gasoline prices soaring with diesel.
Oil refining dynamics
As many are aware, the refining sector is the lifeblood of crude oil demand and the primary source of the finished fuels we all consume on a regular basis. As such, it is a key industry to understand, and especially for those actively trading in global energy markets, whether it be for hedging or speculative purposes.
To that end, US earnings season is upon us and with that analysts and traders are afforded a glimpse into the inner workings of the oil refining industry during the quarterly earnings calls and provided a general outlook for trends in finished fuels. This week we heard from some of the largest US refiners and there were clear themes throughout:
Fuel demand is robust and expected to hit record levels this summer
Finished fuels supply is tight given the capacity reduction that occurred early in the pandemic
Stockpiles of distillate fuels are extremely low in key regions and will be hard to replenish
Carbon credits and bio-fuel blending requirements are increasing prices at the pump
The sky-high cost of natural gas in Europe is increasing refining costs of hydrocracking diesel
US refiners are maximizing diesel yields relative to gasoline to capture the wide spread
The loss of Russian secondary feedstock will be a key issue impacting product yields In our view, these industry trends are valuable nuggets of information and signal that the US refining industry is gearing up for record demand this summer but with much less capacity than before the pandemic. This lack of capacity is also apparent when looking at the extremely attractive diesel margins of late. This dynamic has led to refiners maximizing diesel production at the expense of gasoline given the spread between the two fuels has collapsed to historic levels.
In fact, the gasoline-diesel spread has shifted tremendously, with diesel commanding a significant premium since the start of the war in Ukraine. However, this historically wide spread could narrow as we enter driving season and the reason has to do with the last theme above, the loss of Russian feedstock such as Vacuum Gasoil (VGO). This feedstock is typically processed by key US refineries and is used to fill secondary processing units such as hydrocrackers that increase the yield of finished fuels. This loss of Russian VGO will now force refiners to decide on whether incremental barrels are processed into diesel via a hydrocracker or gasoline via a cat-cracker (FCC). This competition could result in mean reversion in the notoriously volatile gasoline-diesel spread, with gasoline gaining ground to ensure refiners produce sufficient gasoline supplies.
Looking Forward
Looking forward, we continue to see more upside risks than downside with respect to crude oil prices and view the increasing tightness in finished fuels as providing strong underlying support as we approach the driving season. Furthermore, the lack of spare refining capacity in the West will increase the sensitivity and price response should there be any major unplanned outages this summer while the loss of Russian VGO will likely cap refinery utilization rates.
Today is May Day. Since 2007, I have advocated using this date as an international Victims of Communism Day. I outlined the rationale for this proposal (which was not my original idea) in my very first post on the subject:
May Day began as a holiday for socialists and labor union activists, not just communists. But over time, the date was taken over by the Soviet Union and other communist regimes and used as a propaganda tool to prop up their [authority]. I suggest that we instead use it as a day to commemorate those regimes’ millions of victims. The authoritative Black Book of Communism estimates the total at 80 to 100 million dead, greater than that caused by all other twentieth century tyrannies combined. We appropriately have a Holocaust Memorial Day. It is equally appropriate to commemorate the victims of the twentieth century’s other great totalitarian tyranny. And May Day is the most fitting day to do so….
Our comparative neglect of communist crimes has serious costs. Victims of Communism Day can serve the dual purpose of appropriately commemorating the millions of victims, and diminishing the likelihood that such atrocities will recur. Just as Holocaust Memorial Day and other similar events promote awareness of the dangers of racism, anti-Semitism, and radical nationalism, so Victims of Communism Day can increase awareness of the dangers of left-wing forms of totalitarianism, and government domination of the economy and civil society.
While communism is most closely associated with Russia, where the first communist regime was established, it had comparably horrendous effects in other nations around the world. The highest death toll for a communist regime was not in Russia, but in China. Mao Zedong’s Great Leap Forward was likely the biggest episode of mass murder in the entire history of the world.
November 7, 2017 was the 100th anniversary of the Bolshevik seizure of power in Russia, which led to the establishment of the first-ever communist regime. On that day, I put up a post outlining some of the lessons to be learned from a century of experience with communism. The post explains why the lion’s share of the horrors perpetrated by communist regimes were intrinsic elements of the system. For the most part, they cannot be ascribed to circumstantial factors, such as flawed individual leaders, peculiarities of Russian and Chinese culture, or the absence of democracy. The latter probably did make the situation worse than it might have been otherwise. But, for reasons I explained in the same post, some form of dictatorship or oligarchy is probably inevitable in a socialist economic system in which the government controls all or nearly all of the economy.
While the influence of communist ideology has declined since its mid-twentieth century peak, it is far from dead. Largely unreformed communist regimes remain in power in Cuba and North Korea. In Venezuela, the Marxist government’s socialist policies have resulted in political repression, the starvation of children, and a massive refugee crisis – the biggest in the history of the Western hemisphere. The regime continues to hold on to power by means of repression, despite growing international and domestic opposition.
In Russia, the authoritarian regime of former KGB Colonel Vladimir Putin has embarked on a wholesale whitewashing of communism’s historical record. Putin’s brutal and indefensible invasion of Ukraine probably owes more to Russian nationalist ideology than communism. But it is nonetheless fed in part by his desire to recapture the supposed power and glory of the Soviet Union, and his long-held belief that the collapse of the USSR was “”the greatest geopolitical catastrophe of the century.”
In China, the Communist Party remains in power (albeit after having abandoned many of its previous socialist economic policies), and has recently become less tolerant of criticism of the mass murders of the Mao era (part of a more general turn towards greater repression).
Perhaps worst of all its recent atrocities, China’s horrific repression of the Uighur minority is reminiscent of similar policies under Mao and Stalin, though it has not – yet? – reached the level of actual mass murder. But imprisoning over 1 million people in horrific concentration camps is more than bad enough.
In a 2012 post, I explained why May 1 is a better date for Victims of Communism Day than the available alternatives, such as November 7 (the anniversary of the Bolshevik seizure of power in Russia) and August 23 (the anniversary of the Nazi-Soviet Pact). I also addressed various possible objections to using May Day, including claims that the date should be reserved for the celebration of labor unions.
But, as explained in my 2013 Victims of Communism Day post, I would be happy to support a different date if it turns out to be easier to build a consensus around it. If another date is chosen, I would prefer November 7; not out of any desire to diminish the significance of communist atrocities in other nations, but because it marks the establishment of the very first communist regime. November 7 has in fact been declared Victims of Communism Memorial Day by three state legislatures. Then-president Trump issued similar declarations in 2017 and 2018 (though he did not have the authority to make it a permanent national holiday through executive action alone).
If this approach continues to spread, I would be happy to switch to November 7, even though May 1 would be still more appropriate. For that reason, I have adopted the practice of also commemorating the victims of communism on November 7.
I am also more than willing to endorse almost any other date that could command broad support. Unless and until that happens, however, May 1 will continue to be Victims of Communism Day at the Volokh Conspiracy.
‘I Was Searching For Tractors’ – UK MP Resigns After Admitting Watching Porn In Parliament…Twice
Neil Parish, British Conservative MP for Tiverton and Honiton, in Devon, first elected in 2010, has resigned after admitting watching pornography in the House of Commons in what he described as a “moment of madness”.
“I’m not going to defend it… I think I must have taken complete leave of my senses and my sensibilities and my sense of decency and everything.”
Fighting to hold back tears in his first TV interview since the scandal broke, Mr Parish said that he had looked at adult material twice, the first time stumbling on a porn website while looking for tractors online, but returning deliberately on the second occasion.
“The situation was that – funnily enough it was tractors I was looking at. I did get into another website that had a very similar name and I watched it for a bit which I shouldn’t have done…”
“My crime – my biggest crime – is that on another occasion, I went in a second time. That was deliberate. That was sitting waiting to vote on the side of the chamber, on the side door as you enter back into the lobbies.”
Two unnamed female Conservative MPs said earlier this week they had seen a male colleague watching porn while sitting on the Commons benches.
Before he was identified senior Tories, including the attorney general, condemned his actions, and suspended him from the Conservative Whip pending the outcome of an investigation.
After initially indicating on Friday that he hoped to remain in his seat, the resignation announcement came as a dramatic change of heart from Mr Parish.
The opposition Labour party’s shadow Commons leader, Thangam Debbonaire, said Parish was right to resign over his “disgusting behaviour”.
“But it’s shocking that the Conservatives have allowed this debacle to drag out over many days,” she added.
Labour’s deputy leader Angela Rayner mocked the Tory MP’s excuse for viewing porn “in error” in the House of Commons, tweeting:
“He was looking for tractors but ended up with porn actors? Neil Parish must think you were all born yesterday…”
Following Parish’s announcement that he will resign as an MP, a spokesperson for Tiverton and Honiton Conservatives said:
“We would like to take this opportunity to thank Neil Parish for his service to our communities over the past 12 years.
“We support his decision to step down as our Member of Parliament.”
Well at least he will have more time on his hands to spend with family… and looking at sexy tractors?
The Marshmallow Test is a legendary 1970s experiment in child development which seemed to show that some people have an innate ability to defer gratification, a key life skill. More recent research shows that all it really measures is how reliable a child’s home environment may be. For Story Time Thursday we apply the same idea to capital markets. Investors are constantly assessing environmental conditions when deciding to allocate capital. When they see uncertainty increasing – as now – they pull back. Peak unpredictability creates market bottoms.
Today we’ll discuss the “Marshmallow Test”, a topic we touched on twice in 2020 but not since then. How can almost-May 2022 remind us of 2020 so much that we are revisiting a theme from that year? Read on …
The setup: back in the early 1970s, research psychologists at Stanford University developed a simple test to measure a young child’s ability to delay gratification. Here is the basic structure of their experiment and its core findings:
Offer a child (aged 3 to 5 years old in the original studies) their choice of common treats: a cookie, or a piece of hard candy, for example, or (yes) a marshmallow.
Then tell the child that they will be left alone for about 15 minutes and, if they don’t eat the treat, you’ll give them another one when you return.
Some children in the study waited the allotted time and received the second treat, but others did not.
That outcome is hardly surprising, but it was never the point of the experiment.
Here’s what was: the researchers tracked their subjects’ academic and personal progress over subsequent years. The ones who “passed” the Marshmallow Test tended to have higher SAT scores and do better in school. They were also less likely to develop substance abuse problems later in life or be incarcerated.
Given the Marshmallow Test’s seeming ability to predict academic success in even very young children, many American private schools started using it to screen potential applicants in the 1980s and thereafter. And, as you can imagine, parents started prepping their 3- and 4-year-olds to pass. I (Nick) have many friends here in New York City who spent hours with their toddlers doing exactly that.
The twist: 40 years after the original study, a doctoral candidate working at a homeless shelter had the observation that few of the children she worked with every day in that setting would pass the Marshmallow Test. More importantly, this had nothing to do with their innate abilities. Growing up with persistent food and shelter insecurity, they would eat the first treat because experience had taught them this was the right strategy.
She created a preamble to the Marshmallow Test, where the child subjects would be promised arts and crafts material but in some cases the researcher would then tell them that there were none left. Those children receiving the materials tended to “pass” the subsequent Marshmallow Test. Those who were disappointed by the researcher were more likely to “fail”. If the adult couldn’t deliver on crayons and paper, they probably weren’t going to come across with the second treat either.
The upshot: the Marshmallow Test says more about a child’s environment than it does about anything innate in their personalities. If they are growing up in a household where adults’ promises are predictably kept, they are more likely to believe the researcher’s promise of a second treat. If they do not have that baseline confidence that the world is a predictable place, then eating the first treat right away is perfectly logical.
How all this relates to investing and trading, in 3 points:
#1: The perceived reliability of an environment strongly influences human decision-making. The capital in a portfolio is analogous to the first treat in the Marshmallow Test. Expected future returns are the second one, the “reward” for patience. It is simply human nature to constantly assess the environment that is supposed to deliver the next “marshmallow” and respond accordingly to signals that might change the probabilities of its eventual appearance.
The current global investment climate is, ironically, less predictable than when the world was in the throes of the pandemic crisis and its immediate aftermath. Monetary policy is likely to tighten at an aggressive rate, rather than remain very accommodative. Inflation pressures (nonexistent in 2020) remain a wild card, both with respect to future central bank policy and corporate profit margins. And, of course, the Russia-Ukraine war puts fresh uncertainty into both the future growth of the European economy and global oil/food prices.
#2: “Peak unpredictability” makes for sustainable stock market bottoms. The one question we ask ourselves every morning is whether US/global equities have already made their lows for the year. The market’s litany of woes, outlined in the prior point, are well known. Absent a new catalyst, it is tempting to believe their impact is already incorporated into asset prices.
We remain cautious, however, because the range of possible economic and corporate profit outcomes remains so wide. The market is not in a position like March 2009 or March 2020, where changes in fiscal and monetary policy created incremental certainty around economic outcomes. Moreover, corporate earnings are at all-time highs, unemployment is near all-time lows, and wage growth hasn’t been this hot in almost 40 years. The Fed may well be able to thread the needle and engineer a soft landing as it fights inflation, but we won’t know if they’ve accomplished that for at least a few quarters. Since daily market fluctuations are a function of anticipated economic conditions 6 months out, it is hard to argue that the final bottom is in. We’ll keep asking the question, though … It will come.
#3: Relatively high unpredictability makes for tradeable lows. We’ve spent a lot of time this year analyzing the CBOE VIX Index and, last night, added the NASDAQ 100 Volatility Index (VXN) to our toolbox. In our mental model of the market, these measure relative uncertainty:
We know that the long run average of the VIX and VXN are 20 and 25, respectively.
We also know that the market faces above-average uncertainty right now, so the VIX and VXN should track at or more often above their long run means.
When the VIX and VXN get above 1 standard deviation from the mean (28 and 37, respectively), markets are signaling unusually high uncertainty. Once the VIX/VXN get to 36 and 49 respectively (2 standard deviations), you know markets are truly fearful. Those are spots where traders may want to take a shot long in anticipation of a near term bounce.
Takeaway: while US equities always eventually deliver the second marshmallow, stock prices over the shorter term are a function of investor confidence in the current environment to deliver it.
Half Of France’s Nuclear Reactors Are Shutdown Amid Energy Crisis
Half of France’s nuclear power plants are offline because of “maintenance or defects,” which comes at a precarious time for energy and power markets across Europe as prices soar due to the Ukraine conflict.
Bloomberg reports energy supplier Electricité de France (EDF) is struggling with widespread outages after 28 of the country’s 56 reactors are offline due to routine maintenance or defects.
France’s nuclear power plants supply more than 66% of its total power output. The outrage has caused nuclear power output to hit the lowest seasonal level in at least a decade.
France’s electricity market has trended higher in terms of prices, upwards of 30% more than its German neighbor that relies mostly on fossil fuels to power its plants. French power prices are four times higher than at the same time in 2021 because declining nuclear power has put more pressure on other power generation sources, thus triggering a supply crunch.
Emeric de Vigan, chief executive officer at French energy analysis firm COR-e, told Bloomberg that high power prices are likely to remain because the country’s nuclear power problems are “going to last beyond this year and likely into the year after.”
On Wednesday, JPMorgan Chase & Co. questioned if more nuclear reactors scheduled to be down this year can be pushed to 2023 “given the extraordinarily tight supply/demand and the geopolitical context.”
Bloomberg noted the combination of nuclear outages and government measures to cap power prices would result in a massive 26.2 billion euros ($28.3 billion) loss in earnings for EDF this year.
France is Europe’s largest net exporter of power. Continuous nuclear reactor outrages will elevate power prices and strain the crisis-stricken continent ever more as Russia now demands rubles in exchange for fossil fuels.
Crisis Or Hiccup? Assessing The Logistics Impact Of China Lockdowns
By Eric Kullisch of FreightWaves.com
A mixed bag of circumstances and time horizons are creating diverging narratives about whether shipping delays stemming from the shutdown of Shanghai and other Chinese cities are getting better or presage massive supply chain gridlock.
There is no sign that Shanghai’s lockdown is easing anytime soon. Footage on social media shows steel fences being installed on public roads and inside residential compounds to keep people from traveling to other districts and moving in neighborhoods. On Monday, the Shanghai Health Commission reported 2,472 new positive cases of COVID-19, up from 1,401 the previous day. Total daily case levels exceed 30,000. Fifty-two people died Monday of COVID, according to the China Daily.
While some cities in China, including Guangzhou are loosening COVID restrictions, rising COVID cases in Beijing are sparking fears the Chinese capital and other cities could join Shanghai, Suzhou and other major cities in lockdowns. Kunshan, a technology manufacturing hub west of Shanghai, has extended a lockdown, which began on April 2, to April 28. Several districts in Hangzhou, home to e-commerce giant Alibaba, began a lockdown on April 23, with mass testing being carried out for three days.
Based on current trends, China watchers say lockdowns won’t begin to ease until mid-May or possibly June as the government maintains its zero-COVID policy.
In some ways the logistics situation sounds manageable. The Port of Shanghai, the largest container shipping gateway in the world, has remained in operation. Wait times for export loadings are only about two days and the 12 days it takes to pick up an import box is below wait times for other COVID-related disruptions in China since 2020, as American Shipper reported Thursday. The daily number of vessels waiting for a berth has actually fallen since the lockdown began nearly four weeks ago and there is limited congestion from redirected cargo at other ports.
But snapshots of current throughput don’t measure how much deferred cargo is piling up in warehouses or will be churned out by factories working overtime to make up for lost time. A key reason cargo isn’t stacking up at the port is that the vast majority of truck drivers are restricted from freely moving around Shanghai and making deliveries at marine terminals.
Many logistics professionals remain concerned that a huge wave of cargo will be released once the lockdowns are lifted and swamp the handling capacity of local and overseas ports, compounding pressure on the traditional peak shipping season, according to logistics analysts. Shippers that haven’t placed orders yet could miss getting their goods in time for big shopping events such as back to school, Halloween and Christmas.
“Shipping is being very materially disrupted. In 2021, we calculated about six weeks were needed to recover/get back to normal flows for every week of shutdown. Given this effective shutdown is in its third week, we can expect three months or more before flows are restored to normal levels,” Michael Zimmerman, leader of the analytics practice for the Americas at consulting firm Kearney, told FreightWaves.
Shanghai’s industrial output fell 7.5% in March, the city’s statistics bureau said. Reduced manufacturing output and limited truck access to the port and airport have decreased air and ocean export volumes over the past month.
The slowdown in imports has prevented key raw materials from reaching manufacturers and many companies have either shut down or are operating at severely constrained levels.
Export-oriented businesses that rely on global sources for raw materials will not be able to fully recover until logistics networks increase their capacity. There is a high risk that many industrial, technology, and automotive companies with suppliers in Shanghai and Kunshan will have to halt operations due to component shortages, should the current lockdowns in both cities continue into the month of May, says Everstream Analytics, which uses artificial intelligence to help companies predict supply chain threats.
At least 11 Apple suppliers have been impacted by the lockdown, Everstream reported in an update. Foxconn, a key Apple supplier, halted production at plants in Shanghai and Kunshan.
Shanghai authorities last week gave 660 companies the green light to restart operations. But ongoing restrictions prevent many workers from reaching the plants and many are functioning with less than half their workforce, according to various reports. The plants must have workers staying in a closed bubble environment.
“Production will ramp up as imports increase and logistics services improve, but will not fully catch up until June or July,” said Andrea Huang, senior director of supply chain at Overhaul, a provider of supply chain visibility and risk management software, in an email.
While the Port of Shanghai continues to operate, port productivity has decreased 20% to 30% and some carriers are not calling the port. Shipping delays are impacting intra-Asia trade, as well as North America and Europe trade lanes, according to international logistics and trade finance companies monitoring the situation. When the Yantian terminal in Shenzhen went under quarantine a year ago productivity was slashed by 80%, but in that case the restrictions applied specifically to the port and not the city itself.
On Monday, Maersk announced a dozen blank sailings for its AE1 service to the Port of Ningbo, citing accumulating bottlenecks on its Asia-North Europe network. It is also rerouting cargo cargo where possible to mitigate delays and avoid bunching and adjusting barge and rail capacity to help off-set landside issues.
Several carriers are skipping Shanghai as a port of call until mid-May.
The Alliance (ONE, Hapag-Lloyd and Yang Ming) had canceled 36 voyages to Shanghai as of April 14, said Zimmerman. The lockdown has also led to significant shortages of 40-foot containers and diversion of 20-footers to other Chinese ports.
Many carriers, including Maersk, ONE, Hapag-Lloyd, Mediterranean Shipping Co. and CMA CGM, have suspended accepting new refrigerated and dangerous goods cargo to Shanghai, due to insufficient storage space at Shanghai’s port for such specialized containers. Maersk said it resumed booking dangerous goods at the Port of Shanghai on Friday as yard density begins to improve.
According to FreightWaves’ SONAR, ocean demand out of Chinese ports to the U.S. dropped 31% between April 6 and 15. Other factors, including lower consumer demand, could also be involved, experts say. Real U.S. retail sales are down from last year as inflation squeezes pocketbooks and people spend more on services.
Ocean freight bookings from China to the U.S. are about the same as last year at this time, according to Customs data compiled by SONAR.
“If shippers are really nervous about not getting a lot of goods they should in theory be increasing their bookings” as they did after manufacturing shut down because of the Wuhan outbreak in 2020, said Luke Falesca, enterprise account director for SONAR on last week’s episode of #WithSONAR. “There’s not the same panic as when ports shut down in the past.”
Drewry Shipping Consultants reports container volumes from Shanghai to Los Angeles and Shanghai to New York are down 17% and 16%, respectively, since the beginning of the year.
Airport troubles
Freight shipments through airports arguably are being jammed more than at ports, but also are subject to rapidly shifting dynamics.
Since March, inbound airfreight has experienced 10 to 20 days delay due to airport customs closures in Shanghai and quarantine rules at other major airports. Outbound volumes have also declined. Once the lockdown eases, airfreight will pick up pace, with courier services taking a bit longer to recover, said Huang.
Delta Air Lines (NYSE: DAL) has extended its embargo on all imports and exports at Shanghai Pudong International Airport until May 6 due to the local COVID restrictions that forced the airline to cancel all flights to the city.
Many passenger and cargo airlines continue to cancel flights in and out of Shanghai. Cargolux, for example, stopped operating there until Monday.
Cargo terminals at Shanghai’s airport have suspended on-site X-ray security testing and testing service for chemical goods, according to a recent customer update from Crane Worldwide Logistics.
Air cargo diverted from Shanghai is disrupting freight operations at other Chinese airports, causing a shortage of pallets for exports, Chicago-based AIT Worldwide Logistics reported.
Meanwhile, Shenzhen International Airport imposed a daily import cap of 250 tons, including 125 tons for perishable and temperature-controlled cargo from April 21 to 27. During this period, the terminal won’t accept dangerous goods, loose cargo or cargo destined for Shanghai, the logistics provider said.
While air cargo operations are functioning at the Shenzhen and Guangzhou airports, shipping and logistics giant Maersk warned customers that lead times for reserving space on aircraft are now two to three weeks due to the increased volume diverted from Shanghai.
Import operations are suspended in Nanjing.
AIT Worldwide Logistics reports that Air China’s terminal is back to normal operations, but China Southern’s terminal remains closed at Guangzhou airport. In Qingdao, air imports must be stored in the terminal for 10 days following disinfection. Wuhan has a three- to four-day backlog of air cargo because truck deliveries are suspended to cities facing outbreaks. Tianjin, in north China, is also preventing truck movements to cities with rising case counts.
