Insider Insights April 2020 Issue

Insider Insights April 2020: COVID-19 as a Black Swan Event, and How to Navigate It


The pandemic qualifies in the strictest sense as a “black swan” event – an extremely rare event with severe implications for an economy’s function. They are destructive, uncontrollable, and unpredictable, although many will incorrectly claim in hindsight that they should have been seen coming. Black swan events can come from many sources, whether they are geopolitical, economic, or natural; previous examples included events such as 9/11 and the dot-com bubble.

By any definition of the event, COVID-19 fits the bill, but where it differs from other events is in both the size of the event and the number of industries that it touches. The pandemic has affected economies in a heretofore unique way in that it has prevented labor from being accomplished in an asymmetric and uneven way. Although workforces have moved to adapt and workers have been able to accomplish job duties from home, the scale and amount that can be done remotely varies widely between industries. This has caused either weakening or complete breaking of supply chains in some cases. Services and tourism industries in particular have been the hardest hit, and unemployment has spiked to a higher point than the 2008 recession at the steepest rate on record.

The Macro Environment Weakens – How Will It Recover?

The pandemic’s immediate impacts have caused huge shocks within the greater macro environment. The demand for oil has plummeted, sending the price of domestic gasoline down to $1.00 or lower in some areas, and oil futures have crept into negative territory. The S&P is also down 25% of its total over the prior month, even after accounting for rallies following the pandemic. The question to ask, then is not how or when the market will recover, but what opportunities can be garnered in the process. Looking to prior pandemics such as the Spanish Flu, it was shown that much of the downturn was due to a simple lack of movement and logistics and not deeper systemic issues that might not be so easy to resolve. There was a massive bull rally following the Spanish Flu pandemic in 1920, and with what we know about the logistical challenges with COVID-19, a similar end should result.

This can be predicted to some degree by watching several key indicators, including the rate of how and when businesses reopen, and whether they can actually stay open. Many counties less impacted by COVID have chosen May 1st as a tentative re-opening date, and if businesses can remain open for at least the two weeks following and their impact on case counts can be ascertained, then it seems probable that they will continue to stay open past that date. It is possible that the re-opening of businesses will cause a further adverse spread, but there is not enough data to know for sure what will happen until things begin moving again. The upshot is that a bull rally is inevitable, but the timing of it is not fully known at this point, and businesses reopening will provide major clues as to when it will occur.

In many states, the rate of infection has been flattening, and gated progression plans have been designed to reopen businesses predicated on downward progression of disease cases in their areas. Additionally, political pressures have been mounting from citizens to reopen businesses. It is widely agreed among experts that the pandemic will have long-reaching impacts, Although a vaccine is being researched, due to the testing phases required it is unlikely it will see widespread deployment this year, and much of the disease resistance during the re-open attempts will likely come through natural antibodies and herd immunity.

Bitcoin’s Distinguishing Opportunities

While digital assets by definition are an uncorrelated asset, there is an important nuance to keep in mind, and that is that during sharp downturns in equity markets, they will follow suit in the short term and appear to be correlated. This is something of a red herring, however; other typical uncorrelated assets such as gold also experienced similar self-offs, so this behavior is not specific to digital assets. When these specific downturns are excluded, however, the values of digital assets follow completely separate paths from traditional assets.

One of the ways this represents opportunity is through the Federal Reserve’s announcement of “unlimited quantitative easing.” It was announced in March that the Fed would buy assets “in the amounts needed” to preserve market functioning, instead of confining purchases to a set amount. Previously, the Fed had set a limit of $700 billion for asset purchases, but this appears to have been thrown to the wayside with its latest announcement. This suggests that the Fed will conduct as much QE as it feels it needs to maintain the economy, and due to the uncertainty posed by the pandemic this is a concerning notion. Naturally, the more QE that gets conducted, the more the dollar’s value will be diluted and the stronger this makes the digital asset position, owing to its fixed supply. Even in the event that traditional assets return to their prior pre-pandemic values, the diminishing of the dollar’s value will be a factor to consider. It seems prudent to focus on assets that will maintain their value knowing the dollar’s value will recede further due to Federal Reserve action. Where digital assets shine in particular is they have very similar properties to gold in its fixed and known supply, but maintain greater features and utility.

Another thing to keep in mind is the halvening due to occur within the next month with what some would call fortuitous timing. Previous halvening events have led to a large spike in value as the amount of Bitcoin being minted drops permanently. Such an event will lead to a further decoupling from the trends of traditional assets which will help rejuvenate institutional interest in the asset class, which has waned somewhat recently in the face of adverse economic conditions.

Concluding Thoughts

Although the economic conditions appear frightening, going off of historical data from previous pandemics and similar events it is unlikely that they will persist beyond when businesses are able to reopen and function again. The depressing factors stem from uncertainty, doubt, and logistical disruption more than anything else; once these complications have been cleared up as the pandemic runs its course, the economy will likely kick back into gear. In the meantime, investing in digital assets, especially in the face of a Bitcoin halvening when previous events have shown large increases in value, and hedging against the less effective dollar from QE provides several options for bolstering value as the pandemic winds down.

If you have questions about our fund or would like to be sent investor documents, you can contact our investor relations department at [email protected].


Darius Askaripour
Managing Partner

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