Fade Humpty Dumpty Rally

My Comments: My attempted theme this week is what to do with your retirement money going forward. For better or worse, I’m still waiting for the next significant downturn to put my money back to work. Some of you who have ridden the upswing over the past several weeks think I’m nuts.

Some of this has to do with where I am in the cycle of life. If I was in my 30’s, I’d be riding the rally hard because even if it crashes again, I’d have many years to go before I had to use any of it to pay my core expenses.

Me, on the other hand, find myself well into my SLO-GO years and reaching into those reserves to pay bills. I will say the pandemic has pushed us into spending money on what we NEED as opposed to spending money on what we WANT. An interesting phenomena.

The article is far too long to replicate it here. So what you see is the first 20% minus the charts and graphs. Enjoy…

by Long-Short Manager \ 18 MAY 2020 \  https://tinyurl.com/yc4f4x5o


  • Fourth article in the Corona Bear series takes a look at prospects for a V-shaped “Humpty Dumpty” recovery.
  • Fed liquidity appears to be simplest explanation for the bear market rally.
  • Virus resurgence as states open up is unclear while consumer spending by mid-May continues to be at 80% of prior-year levels.
  • Large pockets of the market continue to be significantly overvalued.
  • Long-term impacts of extra money in the system.


“Humpty Dumpty sat on a wall, Humpty Dumpty had a great fall. All the king’s horses and all the king’s men, Couldn’t put Humpty together again.”

In my last article, I called the idea that the US economy could quickly be put back together after what has happened since mid-February as the “Humpty Dumpty” recovery. Certainly, one explanation for the stock market rally since March has been that many market participants subscribe to this view. I provide a pandemic and economic update, along with an alternate explanation, and outline several ways things could go from here.

Pandemic Update

All state-level graphs are as of 5/15 (source: Johns Hopkins Tracker).

Mentally, I would multiply the tested, confirmed positive count in the graphs below by 10 to think about how many people likely already have the antibodies, based on early random-sampling results from NY state.

These are states that started their outbreaks earlier, have denser large metro areas that went under lockdown and show clearly the exponential, linear and log phases of growth as lockdowns had a strong impact on infection rates. Generally, the exponential phase comes with an effective R0 above 1, the linear as it decreases close to 1, and the log phase if it is sustained below 1 for multiple cycles. Initially, the national graph of case counts, which much market commentary fixated on, was dominated by what was going on in NY, NJ, LA, IL, etc. But different states now have different graphs.

I chose the last three because these are states that are attempting to re-open their states prior to entering the log phase, the first two at their governors’ choosing and the last one due to a court ruling. In fact, the day the ruling came out, news stories came out with pictures of packed bars in Wisconsin.

Commentary from the far right and far left were predictable (support, condemnation). No one seemed to toast the bar goers for volunteering to help build herd immunity faster. For example, even with only 1 in 1,000 members of the general population infected, the odds that in a bar with 100 people at least one infected person will be present is about 10%. If 400 people pass through in the course of the evening, this increases to 33%, and over the course of several such bars over several such nights, it approaches a virtual certainty. Bars and other crowded, enclosed gatherings are the best way to achieve rapid herd immunity – for example, see here for an article written to help determine how to minimize spread risk as offices and businesses re-open (which could be used in reverse just as well to determine how best to rapidly increase herd immunity).

What are states that open earlier likely to do as case counts rise faster? Accept the higher rates of death, following the Swedish (the Swedish approach is unlikely to have the same rates of death per capita when adjusted for Texas/Georgia/Wisconsin demographics) or re-trench? What about states like Louisiana and NY that have turned the curve – is it better to open up a bit faster to try to keep hospital capacity utilization constant (given that actually eliminating infections completely seems unlikely) over time, and achieve herd immunity sooner, rather than later? Or will these states now shift to trying to completely collapse the curve rather than merely flattening it?

Researchers have conducted county-level analysis to look at the impact of closing large venue (sports, mass gatherings, restaurants, etc) businesses and strict lockdown measures (e.g. shelter-in-place). This was done when we had reached 1 million reported cases. Their estimates were that in the complete absence of any measures, we would have been at 35 million reported cases by then, whereas with those limited business closures alone, but with no discouragement of personal gatherings (e.g. house parties), we would have been at 10 million. While I believe this analysis does not take into account the herd immunity impact (on this below), it may still be somewhat applicable to the reopening going on, and the odds of further consumer caution in the face of persistent growth in death rates when re-opening is done without risk mitigation measures such as contract tracing and quarantines of infected people and their recent contacts.