1/ I see a lot of smart folks on Twitter and elsewhere struggling to make sense of the market. How do you reconcile unprecedented economic stress -- small businesses wiped out, skyrocketing unemployment -- with stocks being down just 18% from their all time highs?

2/ There are a few ways to answer this question; let me put on my hedge fund hat and take a stab.

3/ Part of it is nominal illusion. Stocks are down 18% but that's at least somewhat due to Fed intervention. Cash is down 7% over the same time (versus gold) so in real terms stocks are down 25%. Which sounds a bit more reasonable.

4/ Part of it is ordinary market dynamics. Markets never go anywhere in a straight line; even the most bearish traders I know were positioned for a bounce in late March, on the theory that stocks had fallen too far, too fast.

5/ Part of it is simply the old traders' wisdom that "markets climb a wall of worry". If everyone were optimistic, they would all be long, and there would be no buyers left. It's precisely because everyone's nervous that there's room to rally.

6/ But these are all technical or structural reasons. What about the fundamentals?

7/ One possibility is that the market is right to price in a V-shaped recovery. The disease is under control, the economic displacement will be temporary, and the Fed will mitigate any short-term pain. Welcome back, good times.

8/ Another possibility is that the market is simply wrong. That's happened before, and it will happen again.

9/ Neither of those bother me much. Markets go up and down, investors are wrong or right, it's all part of the game. I was a trader and portfolio manager long enough to know that.

10/ What worries me is a third possibility: that price discovery no longer works.

11/ It's no secret that many folks have a vested interest in stocks going continually higher: the White House, both political parties, Wall Street, corporations, endowments, pensions, regulators, financial media.

12/ This makes it politically easy as well as "prudent" to support markets in times of stress, no matter what it takes.

13/ As @EpsilonTheory wrote many months ago, capital markets are in danger of becoming a political utility. https://www.epsilontheory.com/pricing-power-pt-3-government-collaboration/

14/ But if, every time markets go down, we intervene to support them, over time *we reduce the information content of market prices*.

15/ This is extremely not good!

16/ It leads to misallocation of resources -- the very essence of why markets and indeed capitalist economies work. Over the long run this is disastrous.

17/ (Note that this is a separate concern from moral hazard: the argument that rescuing over-leveraged entities creates bad incentives for future behaviour -- excessive risk-taking on the way up, in expectation of bailouts on the way down.)

18/ If stocks continue to go one way regardless of the data, and (more tellingly) if good companies and bad companies continue to move in sync regardless of their quality, then truly nothing matters.

19/ But I remain optimistic that that won't be the case.

20/ The arc of the market is long, but it bends toward efficiency.