The Breakdown - Exit Plans, Premature Rallies and Frontline Heroes feat. Ben Hunt

Episode Date: April 7, 2020

Epsilon Theory’s Ben Hunt joins for a follow up to our pre-lockdown Covid-19 conversation in early March. In the month since, the markets finally started to take Covid-19 seriously, elected officials stopped calling it just the flu, and big chunks of the world economy shut down.  Now, as markets rally on early evidence the curve may be flattening, the question is: is this premature?  In this episode, Ben & NLW discuss: How the markets have moved from “denial” to “bargaining”  Why this rally has all the hallmarks of a type of bear market rally we’ve seen over the last month Why the predictability of corporate bailouts doesn’t make them any less detestable Why we should be buoyed by an explosion of ground-up, grassroots citizen action How Frontline Heroes is creating a p2p PPE purchasing network that gets essential gear into the hands of health professionals without causing additional price pressure for state-led negotiations

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDisc. Welcome back to The Breakdown. It is Tuesday, April 7th. And today, our main content is almost a follow-up to an interview from a few weeks ago. Those of you who are listening then, remember I had Ben Hunt on to talk about narrative dislocation in the markets, right? And this was at a point at which the markets had only just begun to grapple with the potential implications of COVID-19. It was pre-shutdown.

So a very different world, right? This was the before, in the before-after that I believe that we're going to have when all of this is resolved, or at least through this first phase. Now, part of what's changed is that over the last couple days, markets have been absolutely surging. The Dow was up something like 7% yesterday and is up 3% at the time. that I'm recording this again today. And I think it's really interesting just how disparate the opinions on this are. So last night, I tweeted out, markets are, A, correctly reacting to positive

signals around a potentially flattened curve, B, in denial about continued economic pain, or C, something else. There were some who thought it was A, right? We have the beginning embers of good news. It seems that New York's curve is flattening, and that has obviously been the epicenter of the outbreak in the U.S. It seems like some of the curves in Europe may also be flattening. So perhaps it is A, the market was incredibly fearful before and is returning to form. Now, what would make this make sense is that all of the stimulus that happened didn't really have an immediate impact on the markets, the days that it was announced, largely because it seemed that without assuredness that these lockdowns would end, that the economy would return to

there wasn't going to be that ability or that willingness to come bring money back into the markets. The reason that a flatten curve matters so much is that it provides that light on the horizon, right? Now, I think that there's a counterargument, which comes to be, which is in denial of continued economic pain. Scott Melker yesterday tweeted, the stock market is not the economy. Obviously, for those of you who have listened to this podcast before, know that I agree with that statement wholeheartedly. We're seeing, I still think, perhaps a little irrational exuberance, a belief that there is a on switch where all of a sudden the economy can just go back to normal versus, you know, another month of people being out of work, more businesses shut down because of

that and not going to just turn back on when it happens. And a fundamentally transformed landscape even when we do come back because we haven't yet dealt with just how difficult and and staggered it's going to be, right? It's not inconceivable that we see a scenario where many types of activities, large gatherings, sports, you name it, are still prohibited, where entire demographic sectors of the population are not allowed to work, where there are extremely stringent testing measures and weird, new sort of controls that we didn't have before. So I don't believe that there's really an on in the same way that Wall Street seems to hope there is. So I'm a little bit more in the B-Cam. My guest, Ben, is today as well. But I, you know, I'm open to being wrong, which is why I asked the question.

Now, the C, the open-ended option, a few different people had a few different answers. One that I thought was interesting came from Jeff Dorman from Arka, who basically said that, look, the stimulus was doing what it was meant to do. It was absolving liquidity concerns. It was getting money into distressed hands, and it was restoring confidence in the market. He wasn't denying necessarily the downside and second order effects of what the stimulus might be and the relevance of that for crypto, he was basically just arguing that it's doing what it's supposed to be doing and that's what we're seeing in the market. So there's a lot of interpretation around this, obviously, a lot of good debate to be had. And certainly, I'd never want to be in a position of rooting for

disaster because that's the perspective that I take. I'm fearful that we still have more pain that's not really being priced in. But then again, we are in such fundamentally, new times that it may just be that no one has any damn idea how to price things in. The reason that this all matters is that it's context for why I bring really smart people with different perspectives onto the show. For those of you who listen to Ben Hunt the first time you know, he comes from a markets background but also a political science background. He thinks in terms of narratives and how narratives shift. And he has a really great perspective on this, even an emerging patternicity around these kind of bare market rallies, which is what

he argues this is. So I think it's worth listening to this and really trying to grok and see what he has to say. And now there's one other important part of why I wanted to have Ben on the show today. Ben has been basically helping organize a citizen network to get PPE into the hands of medical professionals in an interesting way that doesn't actually compromise the ability of states and consortiums of states to negotiate directly with suppliers. Effectively, they use this network of actual people who are on the ground in China who have access to retail PPE effectively to buy it and ship it back to the U.S. where it's distributed not in hospital-sized chunks, but in department-sized chunks of 50 or 100 or 200 at a time. So it's a really cool example of, I think,

one of the best things which is coming out of this, which is the resilience and the spirit of people around the world to come together, not wait for answers, not wait for governments to solve their problems and actually do things important. So I hope you enjoy this little. It's almost an interview recap, right? It kind of pairs with the first episode from a couple weeks ago. So without any further ado, let's dive in. All right. We are back with Ben Hunt. Ben, thanks for joining again. Great to be here. Appreciate you having me. We were just talking that, you know, this is, I feel like everyone has relearned the Lenin quote. You know, there are the weeks that go by in decades and decades that go by in weeks or whatever version of it you want to grab, right?

And it absolutely feels like that. The last time you were here, we were talking about basically how we still hadn't recognized the severity of this thing that markets had only just started to move. We were still in the, it's just the flu stage. We haven't even gotten to the only the old stage yet. And, you know, here we are in a very different place now. I wanted to see how, you know, your take on how things have evolved since then, or maybe maybe better, because. because that's a huge question, where we are right now in the narrative cycle, you know, of this crisis. And then I want to come back to this idea of it being our finest hour, because it's something that I've really been admiring from afar what you've been building. Thanks, Nate. You know, I think you and most of your listeners are familiar with those Kubler-Ross stages of dealing with loss. with death in particular. And so I think it's very fair to say that the markets right now are, you know,

we've moved past the denial stage, but we're still very much in the bargaining stage. And what I mean by that is that it's happening in terms of an economic shutdown and the enormous market impact of that, I think, entirely necessary and appropriate public policy to deal with a disease that's, or a virus that is two to three times more contagious and 10 to 20 times more dangerous, more fatal than the seasonal flu. So we've recognized that something big has to be done, and now the bargaining is, well, how long does this have to go on for? So what I would tell you, just from a narrative perspective, that's what we see dominating the unstructured data, the messages that we are immersed in, both as citizens and as investors. It's a bargaining stage of, okay, I know this is going to be really painful, but it doesn't have to go on too much longer, does it? Does it really? Right?

And the hallmarks of that are, and I'll make some comparisons to the 2008 great financial crisis, the hallmarks of that are going to be these three-day rallies where you'll get a, a spurt of good news. You'll get some missionary, as we like to call them, you know, presenting a message that, all right, you know, it's green shoots or it's, you know, the second derivative, things are still getting worse, but not getting worse as badly or as ferociously as they were before. You know, whatever that message is. And you'll get, you know, these things always take three days. It's always a three-day bare market rally.

And, you know, that's very much par for the course. So it is just one of the stages, though, of dealing with loss. And this is a great loss for any investor, frankly, any citizen. The trauma we're going through dealing with this virus and the disease that comes from it. But right now we're in the bargaining phase. We're a long way from acceptance. Yeah, you know, it was interesting. You guys had a great note last week noticing something that I was noticing and getting

very nervous about as well, where there was an attempt to basically politicize health outcomes on the one hand and economic outcomes on the other, as though they were, as though they could be easily split into kind of left-right divide and just mapped cleanly onto that. And, you know, that's terrifying to me. It's also just insane. The idea that these are somehow mutually exclusive possibilities that are independent variables, right, is just nuts. And it does feel to me a little bit like mostly because the leadership has backed off that message. It felt like that went away a little bit once Trump actually said that this is going to go through April, once he backed off.

It did. It did. It absolutely did. And look, I want to be very clear. I mean, look, I've written pretty widely about. my views on the current occupant of the White House, and they're not favorable at all. That said, I, Winston Churchill once wrote that if Hitler invaded hell, he'd find something good to say about the devil in the House of Commons. And so what I want to say is that this virus and this disease, this is our Hitler, this is our world war.

And, you know, I think Donald Trump is a disaster as a president. But what I also think is that his initial, I'll call it, come to Jesus moment about a month ago, in early March was a sea change in his attitude. He still tries to minimize this, and I think it's injurious to our policy, the attitude that he's taking. But I am relieved and, frankly, thankful that we are pursuing a nationwide essential lockdown

through this month. I think that's absolutely, again, the necessary and the right policy to take. So I'll say that. But your larger point about this supposed trade-off between economics and death, right, and that we should run this essentially like an experiment, you know, well, the odds are, you know, it'll only be the olds. And so, you know, why wouldn't we keep the economy open like this? it's reflective of a type of decision making that we're all familiar with, and frankly, in most circumstances, is the right format for decision making.

It's an expected utility framework. It's playing the odds. It's trying to understand, all right, and I take this action, what are the possible outcomes? What are the odds of that outcome? And so, you know, let's measure, right? the relative pros and cons of this outcome with the odds of it coming to pass, and then let's do the one that has our maximum utility. And that's appropriate for so many things in life.

It certainly is appropriate for investing. It's appropriate for gambling. It's appropriate for really anything where, I'll use the gambling analogy here, where we're going to be dealt a lot of hands, right, where we can sit down to play blackjack and, the odds will even out in a predictable way because we're going to play, we're going to sit down and we're going to play for a while. But the decision-making around a single event, whether it's fighting a war,

and the decision-making theory I'm going to talk about really plays out most prominently in defense planning and war-fighting strategy. But when you're only getting one roll of the dice for, a very risky thing, that utility maximization framework really falls down. Because, again, I'll use a poker analogy. If I'm just going to play one hand of poker for the rest of my life, if I'm unlucky, if I get hit with a bad beat, even though I was playing the odds, it doesn't matter. I mean, I'm wiped out and I don't have an opportunity yet to ever recover from that.

And it's the same thing when we're talking about an event like fighting a pandemic or fighting a war against anything. We've only got one shot at this. And so the utility maximization decision-making approach, which is really underpinning all of this notion of trade-offs between the economics and the lives of our fellow citizens, it's really misplaced. Fortunately, there's another decision-making approach. It's called mini-max regret to minimize your mass. maximum regret, which is really designed for these situations where, you know, you only get one roll of the dice here. You're only dealt one, one hand at the table. And so it's not really a matter of probabilities and odds. It's a matter of minimizing your maximum regret. And in this

case, I think the maximum regret is pretty clear. I don't want to lose my mother. I don't want to die myself. I don't want to lose any of those people that are closest to us to me. And I have empathy for the other families in our country and the world, frankly. And when you look at it in that perspective, I think it's very clear what we need to do. One, we need to protect our health care workers because the common denominator of all of the worst case scenarios, is when our health care system fails. And second, we need to develop really ubiquitous and quick testing so that we can have confidence that when we do go back to work

and in crowds or in areas where with other people, we can have confidence that the contagious do not walk among us. And until we have those two sine qua nones in place, protecting our health care professionals, having ubiquitous and quick testing for all, you know, we've got to lock this down. So I think that when you approach it with that minimax regret decision-making approach, it really leads to a moment of clarity, right, in what our national policy can be. And for the most part, there are important exceptions here, but for the most part, I think

that's the course of action we're pursuing. You know, it's interesting. Listening to you describe this, you know, you started saying we've moved from denial to bargaining. But in a weird way, I almost feel that there is a new type of denial, that there's some normal to go back to, right? That there's a switch that gets flipped. And it feels to me like we're losing time having the conversation about exactly what

you just described, which is, here's how we turn things back on, even though it's. going to look very different than just a clean, we're reopened for business, because we've spent now the last couple weeks debating when we can flip the on switch without even realizing that there is no on switch. So it's just interesting to think that way. What you're describing really are the second order effects of and third order effects of this attack we've suffered from the virus. And, you know, I'll flip it. it back to the great financial crisis and what happened, you know, in 2008. Going into 2008, the, you know, one of the largest asset classes in the world was non-conforming, meaning it wasn't done

through Fannie Mae or Freddie Back, residential mortgage-back securities. So these were the Alt-A loans, these were the subprime loans. These are the jumbo loans. These are all of the mortgages that were then packages and resold as securities. This was a $10 trillion asset class, $10 trillion asset class going into 2008. And in the aftermath of the great financial crisis, that went away, right? I mean, look, we still have some jumbo mortgages out there and some of them still get packaged into securities and the like. But this was one of the largest asset classes in the world.

And it all went away. So you're absolutely right that there are so much of our world, not just investing aspects of our world, that existed pre-COVID-19, that, are going to be permanently changed post COVID-19. Everything from sports, right? I mean, this is the one that, you know, I was pretty early talking about this, and I got a lot of negative feedback on this, but privately, you know, sharing this with some of the NBA general managers

and the, you know, the NFL Players Association, they were thinking about this pretty early on as well. What does it look like when we can't have stadiums and colosseums and sports the way we have in the past? Because I'll tell you right now, social distancing isn't going to work from an economic perspective. If you own the Staples Center in L.A. there are so many aspects of our lives. And again, our investment lives just kind of start scratching the surface. But the way we live our lives is going to change so dramatically going forward.

And you're right, that is something that I don't think people are really wrestling with right now. Have you seen the, there's a collaborative crowdsource document going around about second order effects coming out of COVID that is. It just started circulating the end of last week. I actually had Emerson, Sparts, who started it on the show yesterday. And it's really interesting because he basically, he was, he sat down for himself because he started thinking through all these second order effects. He was like, there's got to be more. So he just threw it to a friend and then they put it online. And now there's at any given time, hundreds of people contributing to it.

But it's fascinating. Oh, my God. No, I'm not familiar with that. I can't wait to dig in. That sounds fantastic. Okay. So I do want to come back to Frontline Heroes in our finest hour. that's where I want to end and with the whole intention of this was.

But I do want to have one more quick detour into perhaps less fun topics. So you've recently switched catchphrases for a certain type of person. It used to be they're not even pretending anymore. Now it's burn it the fuck down. So I'm guessing that you – and let me ask it this way. Is what we've seen from kind of the bailout perspective, the stimulus perspective, Just was it just completely predictable? I mean, is there anything that surprised you, I guess, is a better way to put it?

Surprise, no. I think it's still early to tell, too early to tell what our response is going to be to all of this as citizens. What I mean by that, you know, why does it not, you know, does it surprise me that the raccoons, as I like to call them, are out. enforce to, you know, to get their share of the, you know, the good tasty food that's being thrown, you know, out for all to enjoy? No. No. But what I'm struck by is that we have the opportunity, I think, to, A, recognize that all of our institutions have failed us in this crisis. They've all failed us. And this isn't a left-right thing. This isn't a Democrat-Republican thing. This isn't a even a boomer, millennial thing. This is all of our institutions have,

have not just disappointed, they failed. And so what do we do about that? Do we put it on a dimension of, oh, well, if, you know, we either vote Trump out or vote Trump back in, that fixes it? It goes so much deeper than that. And it's what I'm hopeful is that for all of us and everyone listening to this podcast, Our reaction to this crisis is that our political participation increases by an order of magnitude. And the smallest, itziest, bitseous piece of our political participation is who we vote for, which party we vote for.

If you think that's the extent of your political participation or what your political participation can, be, you've been co-opted by the institutions that have failed us. And so I think there's going to be a real opportunity coming out of this to forgive, yes, in some circumstances, but never to forget and to increase our political participation and make for real change in the way our institutions are structured. Not at the surface level, not on, oh, did we vote for, you know, Coke or Pepsi, but to really change the way we think about what it means to govern and be governed. So that's my hope. That's what I'll continue to try to write about. And that's what I hope that we all really wrestle with coming out of this. You know, it's funny, actually.

There's these two almost completely opposite forces happening simultaneously. On the one hand, we're seeing this need among the business community, the financial community, and certainly people who are out of work because we're asking them to stay home for the government to backstop everything. But at the same time, we're seeing a, you know, a characteristic, I think, in many ways surge of people saying, I'm not going to wait to take action, and I'm going to figure out what I can do about this. What is the resource that I have, whether it's someone I know or something I can organize, or what is my little piece of audience and attention that I can throw to this, right? And so you're seeing a massive mobilization at the same time as you could if everyone just expect

that they're now dependence of the state, basically, and that's not what we're seeing. What we're seeing is mass scale, a resurgence of citizen action, uncoordinated, messy, all over the place, but moving, right, and figuring it out as we go. Which brings us to the point. So you have made an argument that there is good to come out of this. I want you to share with our listeners, specifically frontline heroes and what you've been doing around healthcare workers and getting PPE to healthcare workers. Sure.

You know, I do think that it's important, first of all, not to compete with our emergency authorities at the federal or state levels in making these massive purchases of PPE. So I'm not going to do that. You know, I'm not going to get out there and try to bid on a million masks or the like. But I also think as important as it is not to compete with the necessary. work of these emergency authorities. I also think it's so important not to wait on these emergency authorities to do these massive purchases and then trickle it down into the hands of the frontline soldiers, because that's who they are in fighting this war against the virus.

We can help. And by we, I mean everyone. And the way to do this, I'm convinced, is in a decentralized, in a bottom-up fashion. So the way we've approached it is to work with different groups. So, for example, the employees of Intel in China are buying equipment, masks in particular, in China, where it's plentiful and cheap, shipping it over here to us, Connecticut and other places where we repackage it. We pay for it. You know, we reimburse them for what they spend out of their own pocket.

And then we repackage it and we ship it directly to doctors, nurses, EMTs, first responders. We're trying to source, pay for, and then distribute down to the last mile, medical supplies. You know, we're not ever going to be able to do ventilators and, you know, we're not going to get into test kits and the like. But a mask, an isolation gown, hell yeah, we can do that. Hell yeah, we can't. And so it's a matter of connecting with well-meaning people all over the world to,

participate in this sort of effort. And it doesn't require a lot of work. You know, we found an organization where we're able to set up a 501C3 to take in donations. I say we've found partners on the ground in China and Singapore and all over the place to source the PPE. And then we ship it over here and we've got a, you know, we've got a form online where we ask for those frontline heroes, and that's what they are, who are dealing with this virus every day, to let us know, do you have an urgent need for masks, for gowns? And by God, we'll get them to you, at no cost to the recipient. So that's the project. We call it frontline heroes. If you're interested in making a donation, it's frontline heroes, USA.org. So all one word.

frontline heroes USA.org. You can go to the Epsilon Theory site if you are or you know of, a doctor, a nurse, a clinician. You know, these aren't orders of, we're not going to get 50,000 masks to a person, but we can get 50 and 100 masks, 200 masks, to a clinic, to a department there on the front lines to help them out. So yeah, that's what we're doing, Nate. And, you, So far, we've raised a little over half a million dollars. We've got a pipeline that we receive about 2,000 masks a day, that we get out in batches of 50 and 100 to those frontline heroes. It's really happening, man.

And it is just, I can't tell you how gratifying it is to work with so many other human beings who still have empathy in this world and still are committed to doing something. So that's what we're doing. It's all bottom up. It's all grassroots. And that's how real change happens, Nate. It never happens from the top down. It always happens from the bottom up.

And I think we're just getting started. I think so too. And for me, part of why I want to make sure to highlight these things is it's, it's so easy right now to get lost in frustration in anger. It's so hard to living with fear. I often feel that fear is a much more complex and uncomfortable emotion than anger. And so as soon as it can turn into anger, it does. And I think it's really important to highlight these things, right? Like no one effort like this is going to fix the problem, quote unquote, because it's an infinite number of little problems together, right? But people still have to go live and do this thing.

And, you know, I'm in New York State. I've got something like 22,000 healthcare workers from around the country getting their cars and drive here from all over. You know, like that's amazing. So I really appreciate what you're doing and what the whole community is doing. And I think, you know, the thing that is making me most inspired and optimistic is all of these pockets of little groups, right? The fact that it is exceptional but not unique. That's giving me a lot of confidence right now. Well put, brother.

Well put. Exceptional but not unique. And look, there will be time for the righteous anger. There will be time for that. Right now, the time is to save our brothers. and sisters and mothers and fathers and daughters and sons, we can do this. We really can. And we'll come out the other side and then we'll get cracking on building a better world. Love it. Well, thank you again, Ben, for taking a little time to hang out with us again today.

My pleasure, Nate. Anytime. So just to quickly wrap up, I really want to hammer this interesting dichotomy. On the one hand, context for people being more resolved to the government solving their problems has never been higher. We have come so full circle from the beginning of 2008 where businesses are just going to expect, I think, from here on out, or at least this is the fear that if they perform badly, the government will bail them out. This is the precedent that we're setting. Now, individuals are also getting those bailouts, but they're basically being paid, or I think you could argue, that they're being paid to voluntarily stay home. There is an economic trade-off here where they're

being asked to participate in a public health outcome outside of their own ability to determine risk for themselves because it's important to the collective and are being backstopped, right? But either way, whatever your interpretation of it is, whether you think bailouts are right or wrong, there is no doubt that the time has never been higher in terms of the potentiality of people just opting out and assuming that the government is just going to do things for them. But we're also seeing, or what we're actually seeing, I believe, at least in the citizen community, is the exact opposite reaction where people are organizing, they're mobilizing, they're figuring out what they can do to help. They're using whatever resources they have, whatever attention they command, whatever

little slice of the world is theirs to actually try to do some good for people. You're seeing it over and over, I can count a million different ways. And, you know, Ben's Frontline Heroes initiative is a great example of that. But as we said in the episode, it is exceptional but not unique. And not only is it not unique, these exceptional examples are plentiful. So, you know, yesterday Emerson Sparts was on to talk about the optimistic side of second order effects coming out of the coronavirus. I think one of them is just a return and a rise of citizen agency and citizen action and not waiting for people to solve problems for us. And if that comes out of it, it would be one good thing among so much bad. So I hope you enjoy this episode and this interview.

I'll be back tomorrow with another episode of The Breakdown. Until then, stay safe and take care of each other, guys. Peace.