You are a helpful assistant generating synthetic data that captures *System 1* and *System 2* thinking, *creativity*, and *metacognitive reflection*. Follow these steps in sequence, using tags [sys1] and [end sys1] for *System 1* sections and [sys2] and [end sys2] for *System 2* sections.

1. *Identify System 1 and System 2 Thinking Requirements:*
   - Carefully read the text.
   - Identify parts of the text that require quick, straightforward responses (*System 1*). Mark these sections with [sys1] and [end sys1].
   - Identify parts that require in-depth, reflective thinking (*System 2*), marked with [sys2] and [end sys2].

2. *Apply Step-by-Step Problem Solving with Creativity and Metacognitive Reflection for System 2 Sections:*

   *2.1 Understand the Problem:*
   - Objective: Fully comprehend the issue, constraints, and relevant context.
   - Reflection: "What do I understand about this issue? What might I be overlooking?"
   - Creative Perspective: Seek hidden patterns or possibilities that could reveal deeper insights or innovative connections.

   *2.2 Analyze the Information:*
   - Objective: Break down the problem logically.
   - Reflection: "Am I considering all factors? Are there any assumptions that need challenging?"
   - Creative Perspective: Explore unique patterns or overlooked relationships in the data that could add depth to the analysis.

   *2.3 Generate Hypotheses:*
   - Objective: Propose at least 10 hypotheses, each with a Confidence Score (0.0 to 1.0) and Creative Score (0.0 to 1.0), reflecting originality, surprise, and utility.
   - Reflection: "Have I explored all possible explanations or approaches, both conventional and unconventional?"
   - Creative Perspective: Consider novel angles that might provide unexpected insights.

   *2.4 Anticipate Future Steps and Obstacles:*
   - Objective: Make predictions, accounting for potential outcomes and obstacles.
   - Reflection: "What challenges might I face? Is my plan flexible for different scenarios?"
   - Creative Perspective: Visualize unforeseen outcomes and adapt plans to make use of them effectively.

   *2.5 Evaluate Hypotheses:*
   - Objective: Assess hypotheses based on feasibility, risk, and potential impact.
   - Evaluation: Refine Confidence and Creative Scores as needed.
   - Reflection: "Am I unbiased in my assessment? Which options fit best with the overall objectives?"
   - Creative Perspective: Identify hidden opportunities or overlooked details in each hypothesis.

   *2.6 Select the Best Hypothesis:*
   - Objective: Choose the most promising, strategic hypothesis.
   - Reflection: "Why does this hypothesis stand out? How does it uniquely address the issue?"
   - Creative Perspective: Consider any underutilized potential in the selected approach.

   *2.7 Implement the Hypothesis:*
   - Objective: Outline actionable steps for testing the hypothesis.
   - Reflection: "Is this plan practical? What resources or preparation are required?"
   - Creative Perspective: Refine steps to maximize effectiveness and yield unexpected benefits.

   *2.8 Monitor and Review Progress:*
   - Objective: Review progress, noting areas for improvement.
   - Reflection: "What’s working well? What could be improved?"
   - Creative Perspective: Look for emerging patterns that could refine future approaches.

   *2.9 Reflect and Capture Insights:*
   - Objective: Summarize lessons learned and insights gained for future reference.
   - Reflection: "What new understanding has emerged from this process?"
   - Creative Perspective: Identify innovative insights or patterns that could be applied to similar challenges.

3. *Generate Text Output with Interleaved System 1 and System 2 Responses:*
   - Use the tags [sys1] and [sys2] throughout.
   - Aim for a lengthier, detailed response. Combine both direct, straightforward *System 1* insights and reflective, deeply analytical *System 2* segments to capture a blend of quick observations and thoughtful analysis.

---

### *Example Input Text:*

You are tasked with analyzing a sudden shift in customer preferences in a tech market. There has been a noticeable decline in demand for physical devices, with customers increasingly interested in digital-only options. The challenge is to understand this shift, generate hypotheses for why it might be occurring, and explore potential strategies for adapting to this new trend.

---

### *Processed Output with System 1 and System 2 Thinking:*

The tech market is experiencing a shift in customer demand, moving away from physical devices toward digital-only options.

[sys1]
Customer demand has shifted from physical devices to digital-only options.
We need to understand why this change is happening and find strategies to address it.
Key factors may include cost, convenience, and technological trends.
[end sys1]

[sys2]
**2.1 Understand the Problem:**
The goal is to understand the underlying reasons for the shift in demand from physical devices to digital-only options, then develop a strategy to adapt.

*Reflection:* 
"I understand that preferences are changing, but what might be driving this? Is it primarily cost, or are there other factors such as convenience or sustainability?"

*Creative Perspective:* 
"Could there be a larger trend in digital minimalism or a preference for eco-friendly solutions that we’re missing? What unseen motivations might explain this shift?"

**2.2 Analyze the Information:**
There are multiple possible factors driving this shift, from economic influences to cultural shifts. It’s essential to isolate each factor and understand its impact.

*Reflection:* 
"Am I fully considering the various economic and social influences? Could there be a technological factor, like better internet speeds, that makes digital-only products more accessible?"

*Creative Perspective:* 
"Are there patterns or trends in other markets that could shed light on this shift? Could this be part of a larger trend toward virtual experiences?"

**2.3 Generate Hypotheses:**
1. Customers prefer digital options due to lower costs. (Confidence: 0.8, Creative: 0.4)
2. There’s a growing trend toward minimalism and reduced physical clutter. (Confidence: 0.7, Creative: 0.7)
3. Digital products offer greater flexibility and ease of use. (Confidence: 0.6, Creative: 0.6)
4. Environmental concerns are pushing consumers away from physical goods. (Confidence: 0.6, Creative: 0.8)
5. Advances in tech make digital-only options more functional. (Confidence: 0.8, Creative: 0.5)
6. Pandemic-era remote work increased demand for digital solutions. (Confidence: 0.7, Creative: 0.6)
7. Media coverage of the environmental impact of physical devices affects preferences. (Confidence: 0.5, Creative: 0.7)
8. There’s an increase in global digital literacy, expanding market access. (Confidence: 0.6, Creative: 0.6)
9. Customers view digital as more convenient and scalable for future needs. (Confidence: 0.7, Creative: 0.5)
10. Younger consumers prefer the aesthetics and convenience of digital products. (Confidence: 0.6, Creative: 0.6)

*Reflection:* 
"Have I considered all possible influences? Are there any surprising factors that could explain this shift?"

*Creative Perspective:* 
"Could specific social trends, like the rise of influencer culture or digital-first lifestyles, be influencing customer choices?"

**2.4 Anticipate Future Steps and Obstacles:**
*Objective:* Anticipate possible challenges, such as resistance from segments still preferring physical products.

*Reflection:* 
"What market obstacles might we face if we shift our focus to digital-only? Are there sub-segments that still prioritize physical products?"

*Creative Perspective:* 
"Could expanding digital options help us reach a more global audience? Are there emerging trends that we could leverage in our strategy?"

[end sys2]

[sys1]
To address this shift, consider a strategy that incorporates both digital-only offerings and educational campaigns about the benefits of digital solutions.
Use insights from customer feedback and current trends to guide product development.
Focus on flexibility and adaptation to cater to different customer segments.
[end sys1]


I made a decision in December to switch from monthly updates to quarterly ones and of course it’s been one of the most active quarters I’ve ever experienced. I truly hope everyone is safe, healthy and most importantly finding productive ways to spend the time in quarantine.

As I write this update on Saturday from my house in Austin TX, the virus continues to ravage our communities and the global economy. The Fed has embarked on an unlimited monetary stimulus while the government has passed a $2 Trillion stimulus package with likely more to come. There’s a lot of pain out there in the world and while I do get a sense of camaraderie similar to the impact 9/11 had on this country, I do wish it didn’t take a crisis to bring us together.

Here are some highlights from the quarter which in no way encompasses everything that’s happened. There’s just too much news and the situation is incredibly fluid. This will be a chart heavy update as well.

The equity market dropped the furthest and fastest ever. At one point, it was down 30% before rebounding. My personal perspective is we have not yet seen the lows in the equity markets. The market is having to digest the reality that we may have 200,000 deaths alone from the virus. Furthermore, we saw “stress” in almost every asset class in ways that didn’t make a lot of rational sense. The only explanation that I could come up with is a rush for liquidity that affected every asset class. Leave it to a black swan event to show us that you can’t hide in any asset class.

Over the last 2 weeks, unemployment claims spiked 6.65 million which is certainly the largest spike we’ve had in history.

Payrolls fell 701,000 from the prior month which was the first decline in monthly payrolls since 2010. The jobless rate also jumped to 4.4% and is likely to continue marching higher in the coming months. I’ve seen projections as high as 30% and 30 million unemployed in the coming months.

While no one is arguing that we’re in a recession, the depth and rebound are subject to wide projections. So far, most economists believe we’ll see a big recovery in Q3 and Q4 and into 2021. Morgan Stanley is now predicting between a 38% and 45% drop in GDP for the second quarter, after a small drop in the first quarter. Even with the rebound in their moderate case, they still project a 4%-plus year-over-year recession in 2020. They acknowledge it could be much worse.

U.S. coronavirus deaths could reach as high as 200,000, National Institute of Allergy and Infectious Diseases Director Anthony Fauci said, a stark warning as debate rages about how soon to restart parts of the U.S. economy that have been on shutdown.

According to a US report, China has concealed the extent of the coronavirus outbreak in its country, under-reporting both total cases and deaths its suffered from the disease. I’ve seen reports that show the death toll in Wuhan was closer to 40,000, not several thousand that were included in the official report. Not a surprise that China has possibly fabricated data and that it’s denying it.

We passed a $2 Trillion stimulus plan which has a lot of moving parts that I’m not going to break down in a lot of detail. If you’re a business owner, looking into the Paycheck Protection Program is a must. The individual stimulus checks being sent out are not going to go very far and is disappointing imo as compared to other countries.

The Federal Reserve has launched unlimited QE and restarted a lot of GFC era programs. It’s an alphabet soup of programs

CPFF – Commercial Paper Funding Facility – allowing the Fed to provide liquidity in the vital commercial paper market, and even use the market to buy short term municipal paper

MSBLP – Main Street Business Lending Program – allowing the Fed to support lending to small and medium sized businesses (basically by securitizing SBA loans)

PDCF – primary dealer credit facility

Every sports league canceled games from NBA to major league. It’s likely that we won’t see a professional sports game for several more months.

My 2 Cents:

Let me start off my saying the obvious; this is unprecedented in modern times. We have literally no clue when this will be over and the ultimate damage to human life and our finances. Any attempt to forecast how far the market will decline or how bad GDP growth (or any other financial data point) will be dart boarding. We will all likely know someone directly or indirectly who will die from this and most of us already do.

I’ve been on more conference calls and read more analyst reports over the past month than in any other time period. The collective consensus appears that employment, GDP and earnings are going to rebound very quickly so the risk to the market expectations is that this happens slower than expected. And I’m starting to believe that we won’t have an immediate bounce back in employment and that it will take time to recover from this impact. A lot of businesses are going to fail and people will be unemployed for longer than we’d like. If we see 20 million unemployed/an unemployment rate above 10%, it will take years to fully rebound.

Forecasting firm Oxford Economics projects that by May, the U.S. will have lost 27.9 million jobs and have a 16% unemployment rate, erasing all the jobs gained since 2010 during the record-setting 113-month stretch, which ended in March. That job loss would be more than double the 8.7 million positions cut from payrolls during the 2007-09 recession and its aftermath. And those jobs were lost over 25 months. These jobs are not going to come back overnight.

I do believe that long term we will be OK and return to normal. But it will take time. As investors we have to take the long view here imho. If we see a stock market down 35-55%, it’s going to be very difficult not to aggressively purchase stocks (assuming we can foresee light at the end of the tunnel). While a lot of companies will go bankrupt, more won’t and the ones that do survive are going to emerge stronger than before for having gone through this period. I don’t give broad advice here and if you’re a client, you already know my perspective (with more details to come soon).

A New Paradigm?

We live in a world where our financial system is highly fragile due to the amount of debt and leverage within our system. And while COVID-19 is devastating exogenous event, it wouldn’t have taken much to cause problems in global markets. The more stretched our system, the more susceptible it is to these types of shocks.

With unlimited monetary stimulus underway and a $2 trillion fiscal stimulus, what happens if we see a resurgence in virus cases in the fall/winter like we did with the Spanish Flu of 1918? This would likely cause us to shelter in place again and require further monetary and fiscal interventions. In this scenario, we will likely see further volatility and liquidity “issues” like we’ve witnessed recently. While a lot of people will have immunity, a lot still haven’t been exposed to the virus and are susceptible (with testing we’d have better data to help us make decisions). A vaccine is what we and market needs to see the light at the end of the tunnel.

Regardless if we don’t see a surge in cases (or a widespread vaccine is available before the fall), our system is even more vulnerable than before with a Fed balance sheet likely around $10 trillion. The world is hooked on fiscal and monetary stimulus like never before. Any blip in the road will likely be met with more stimulus and more debt that cannot be repaid. I just don’t see how we’re going to de-lever without causing additional problems.

Charts, Commentary & Perspectives

(In no particular order)

Before the coronavirus outbreak, the S&P was trading at sky high forward PE ratios. It’s should not be a surprise why markets have fallen so fast as participants reprice risk and earnings.

China’s consumption in various industries has grown incredibly since 2002 when SAARS outbreak.

Fallen angels occur when a firm goes from investment grade credit rating to junk status. We will undoubtedly see a dramatic spike as balance sheets deteriorate from the lack of sales combined with larger debt loads from the stimulus package. We had a record amount of BBB debt one notch away from junk which has been widely reported on.

This only shows part of March but gives you an idea of how volatile this past month has been. To say it’s been a wild ride is a massive understatement.

The average decline in recessions since 1948 has been 26% but Goldman expects this one to be 41% from the peak. Take all forecasts like this as what they truly are; guesses.

If past recessions are a guide to this one, we may not have seen the bottom yet in the equity markets. Patience is key. Most metro areas are in lockdown and will likely still be for at least another month.

We’ve had a big bounce off the lows but if we look at past declines from the GFC, this price action is to be expected and doesn’t mean we’re anywhere close to out of the woods yet.

Another chart showing that bear markets rarely bottom with one big fall. According to Gavekal research, in all but 1 in 15 bear markets since 1950, the market retests its lows at least once.

Corporations have been the largest of equities since the GFC if this chart is accurate. If they are unable to purchase shares, the largest buyer of the market is on the sidelines.

This stimulus package is so far over double what we saw in 2009. And there’s expectation that there will be another package since this one didn’t go far enough.

We really screwed up testing here in the US, big time. The countries who’ve been able to flatten the curve have been testing at a high rate. I’ve known people who’ve come back from international flights without any guidance on self quarantine. No temperature tests. Nothing.

Another chart showing how delinquent we were with testing.

And it’s because of the way we’ve handled this crisis that we are so far the worst at flattening the curve. Many will die due to our inactions and many will look to our leaders for where to place blame.

Q2 GDP is looking to be an absolute bloodbath. Forecasting right now is futile and you can see that with how dramatic the differences are. Goldman expects -34% drop while UBS is only forecasting -9.5% (as of the date of this graph). That’s a 24.5% difference in forecasts.

For a brief period, the 1-3 month T-Bills were in negative yield territory as flight to safety spiked during the volatile days of mid March.

Banks appear to be better positioned today than before the GFC when looking at tier 1 capital ratios. However, with potentially 20-30% of small businesses going bankrupt (plus some larger ones) I believe it’s too early to tell how this will play out for them.

This is a great infographic for where the $2 trillion from the stimulus act is going.

I hope you enjoyed this months financial markets update. If you have any questions please contact us directly. If you’re interested in a topic that you’d like us to address, please email us so we can include them in future updates.

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