The Dead Cat Bounce? (EP.134)

Episode Summary

Executive Summary: The episode is a wide-ranging, COVID-era market conversation centered on public health, political polarization, the tradeoff between reopening and economic collapse, and what investors should expect from an unprecedented shutdown. The hosts argue for staying home, aggressive fiscal/monetary support, skepticism about inflation fears, and patience amid extreme uncertainty, while also discussing rebalancing, investor behavior, and the likelihood of a volatile but eventual market recovery.

Main Topics: COVID-19 data, tracking, and public health reality (Priority: 5/5): The hosts discuss coronavirus case charts, regional outbreaks, and the difficulty of trusting official numbers—especially China’s—while expressing concern for frontline workers and families in hospitals. Political polarization over the virus response (Priority: 5/5): They lament how concern about COVID-19 has become partisan, using charts showing stark Democrat-Republican differences and state stay-at-home guidance to illustrate the divide. Reopening vs. economic shutdown (Priority: 5/5): A major theme is the tension between stopping the virus and preventing a depression. They argue both sides have legitimate concerns, but the policy debate has become overly politicized. Fiscal/monetary rescue, debt, and inflation (Priority: 5/5): The hosts debate record debt, money creation, and whether inflation will follow. They argue current borrowing costs make rescue spending feasible and that inflation remains uncertain, not imminent. Market behavior, dead-cat bounces, and investor psychology (Priority: 4/5): They examine whether the recent market rebound is a dead-cat bounce, cautioning against certainty, social-media sentiment, and all-in/all-out behavior during crashes. Rebalancing, portfolio management, and investor flows (Priority: 4/5): The discussion covers 60/40 portfolios, rebalancing rules, timing luck, and evidence that many retail investors are buying dips rather than capitulating. Quarantine media and recommendations (Priority: 2/5): The episode closes with lighter recommendations on TV shows and books, including Ozark, Westworld, Tiger King, and children’s books.

Key Arguments: Official COVID reporting, especially China’s, is likely understated, so cross-country comparisons should be treated cautiously. The virus response should not be driven by politics; public health risks and economic tradeoffs are too serious for partisan framing. Staying home longer and using aggressive fiscal/monetary intervention is preferable to premature reopening that prolongs the outbreak. The government can and should borrow heavily right now because interest rates are extremely low and debt service is manageable. Inflation is not the immediate concern many assume; money supply changes matter less than velocity, which has collapsed as people stop spending. Current stock market rebounds may or may not be dead-cat bounces, and nobody can know with certainty. Investors should avoid all-in/all-out decisions; partial rebalancing back toward targets is usually better than panic selling. Automatic contributions, target-date funds, and institutional rebalancing may provide a floor under markets and reduce the odds of an extreme collapse. Retail investors, especially on Vanguard and Schwab, appear more resilient than stereotypes suggest, with many buying equities during the selloff. Experience alone does not protect investors from emotional mistakes; even veterans can violate their own rules in crises.

Data Points: New York share of U.S. cases: nearly 40%-50% - Used to describe how heavily New York was being hit at the time Extremely concerned Democrats in Washington: about 60% - Partisan survey example showing concern about coronavirus Extremely concerned Republicans in Washington: about 22% - Contrasted with Democrats in the same state U.S. weekly jobless claims: 3.5 million - Referenced as a sign of labor-market stress and economic fear Historical U.S. deficit forecast for FY2020: $1.1 trillion / 4.9% of GDP - CBO forecast made before the outbreak became severe Projected deficit after rescue efforts: closer to 10%-12% of GDP - Moody’s analyst estimate mentioned during the discussion Prior post-WWII deficit record: 9.8% of GDP - Set in 2009 and expected to be exceeded Debt service on an extra $2 trillion at current rates: about $29 billion a year - Used to argue that borrowing costs are trivial relative to the economy Largest three-day bounce since: 1931 - Referenced when discussing the market’s dead-cat bounce debate Potential U.S. currency in circulation increase: largest since December 1999 - John Paul Koning chart cited during inflation discussion Gas price level: below $2/gallon in the U.S. - Cited as evidence that inflation pressure is weak in the near term Weekly deaths in the U.S.: down by 7,000 to 10,000 for the week ending March 7, 2020 - Chart used to show behavioral changes during COVID-19 60/40 portfolio drawdown threshold: -20% - Trigger level used to study historical recoveries Historical recoveries after 60/40 fell 20%: 10 to 20 months - Observed in post-1945 examples of major crashes Average annual return after 20% 60/40 drawdown: 12% over the next five years - Referenced from historical analysis Vanguard U.S. household trading activity: 16 of 22 trading days among the highest since 2011 - Evidence of elevated but not panicked household trading Vanguard U.S. households making trades: 8% - Share of households that traded during the selloff Vanguard traders moving into equities: about 70% - Most households that traded were buying stocks rather than selling Vanguard self-directed investors staying the course: more than 90% - Used to argue retail investors were not universally capitulating Texas Manufacturing Outlook Survey response on COVID impact: 68% negative, 18% no effect, 15% positive - Illustrates uncertainty and uneven impacts across businesses Equity ETF inflows during the plunge: $9 billion - Schwab data cited as showing individual investor demand

Pivotal Quotes: "I think this is a case where cash is a gateway drug to just sitting in it forever." — Ben Carlson: Warning that moving to cash after a crash can make it hard to re-enter the market "The virus broke me in 40 days." — James Stewart (quoted by the hosts): Example of how even experienced investors can be overwhelmed emotionally during crises "If the national debt were to rise by $2 trillion...the debt service would be about $29 billion a year, a trivial amount in a $20 trillion economy." — Neil Irwin (quoted by the hosts): Used to argue that current borrowing costs make aggressive fiscal response feasible

Implications: Listeners are encouraged to prioritize health, avoid partisan thinking, and focus on disciplined investing. The episode implies markets will likely recover eventually, but timing is unknowable, making diversification, rebalancing, and patience essential.