Regular readers know I usually refrain from politics and taking sides.  I’d rather just have an honest look at the economics of policy and events.  Regarding politics I’ll say this, that the worse it gets economically, the more likely we are to see a Democrat in the White House next year, and if it gets bad enough we’ll probably see Bernie Sanders impossibly overtake Joe Biden for the ticket in November.  Until two weeks ago it was looking like the Teflon Don was a sure thing in November.  I’m not so sure anymore, depending on the economic outcomes of #CoronaVirus and how the Trump administration both handles this as well as how it is projected and perceived in the mainstream media.  Remember that I said many times in the last several months that if the economy tanks before election day, then it’s likely Trump will be out.

Because I’ve made my case for #recession in past articles, I won’t rehash all that here.  What I’ll say is that it looks like Corona Virus is the pin that pricked all the #bubbles, including the economy itself, junk bonds, government bonds, housing, equities, and just about everything under the sun.  The only two exceptions that I don’t see in a bubble are #preciousmetals and #uranium. And all those bubbles were caused by easy money policies over the last 12 years, which caused a complete misdirection of good capital towards bad investment opportunities.

My usual format is tossed aside today, and I present my list of expectations:

Recession – CV is shaping up to look more and more like the pin that pricked all the bubbles, including the bubble economy. We’ll probably see downward revisions in previous economic indicators like unemployment, manufacturing, GDP, and job creation.  And going forward we can expect the numbers to move in the wrong direction on all economic indicators.

Layoffs – We’re already hearing reports of layoffs and massive cutbacks in business (airlines come to mind), and when the economy goes into recession, we see lots of layoffs.  That will be ultra bad for most businesses and for the people who are laid off.  Peak unemployment during the GFC was 10.0% in October 2009.  However, not all is lost, as many people and businesses will do what is necessary to adapt and retool themselves, not just surviving but thriving and come out stronger when the economy recovers.

Bankruptcies – I expect to see a wave of corporate bankruptcies that will put all prior recessions to shame.  Combined. This is because with interest rates as low as they have been for the last 12 years, the rates on all those loans will rise (see below, comments on the 10-year and QE) and corporations will no longer be able to service those loans.  And with less revenue because of recession, it will be a double whammy.

Junk Bonds and Pensions – Because of all the corporate bankruptcies that are bound to happen, the junk bond market will continue its plunge into darkness.  75% of all BBB bonds will be downgraded to junk, and 25% of all A-rates bonds will go to junk as well.  Junk defaults will probably exceed 30%.  Remember, as a corporation is downgraded (the average downgrade is two notches in a recession), its borrowing costs begin to climb.  Hence, the wave of defaults and bankruptcies.  Sadly, the junk bond market implosion will cause mass hysteria amongst pension fund managers as many pensions will also fail. That means retirees and baby boomers will be back looking for work, but in the heat of a recession, they won’t find any.

Assets – I am expecting assets in all classes to experience a deflationary event.  This will only be temporary, however, the ensuing rise in valuations will not keep pace with inflation, so it won’t matter.  People will lose their purchasing power. If you suddenly find your house priced with $1 million of extra equity, it won’t help you retire.  At that point, you’ll probably need 20-30 times that to retire on what $500K will do today.

Inflation – You thought the 70’s was bad?  Just wait.  Inflation will be so bad in America that we’ll be forced into a new currency system by the time this is over.  That’s right.  Our financial system will reset, and everything will be repriced but not in the current USD we use.

Stagflation – We’ll see a recession with inflation, which means we’ll experience a long period of stagflation when the economy stagnates or shrinks against the backdrop of high inflation.

Gold – #Gold has a history of initially crashing with everything else, but not by as much (see #BitCoin below), and then quickly rising before anything else comes close to bottoming out.  I expect the same now, which presents an enormous buying opportunity to protect yourself with more portfolio insurance for a lower price in dollars. 

More importantly, I am expecting $2000 gold may happen sooner than most people think.  And that’s when you’ll all wake up and realize you better get in before it’s too late.  Because gold will go much higher than $2000.  When the monetary system is reset, everything will revert back to the mean of one ounce of gold representing about 2 days of labor for the average American and 4-5 days of labor for entry level positions.  We’ll also find that 180-200 ounces of gold will pay for the average single family home. I’d love to put a price tag on an ounce, but I can’t. Placing the final price of gold in USD is above my paygrade. 

If you’d like to play that game, just take the current money supply and add in all future obligations of the government (about $90T-$120T in all), then divide that total by the amount of official US gold holdings in ounces (about 8600 tons officially).  Even if you use only current money supply as measured by the most liberal measurement, it’s still a very high number per ounce, much higher than anyone will publicly state. Because the numbers are so startling, I can imagine a world where not only do we reset the financial system, but we also reset all prices proportionately as well.

BitCoin – By now you know my stance on cryptocurrency, that it’s kryptonite to your portfolio unless you are a profitable day trader.  And with the recent turmoil, the supposed asset that was supposed to perform a safe haven role is down 50% from recent highs over $10,000.  Not only is BTC down about 50%, but the entire crypto universe is down from the recent high on February 14, 2020 at $308B, now at $153B.  Compare that to gold which is only down 18.5% from its recent high, and the S&P500 which is down 29.7%.

The march to crypto-zero continues, and when the current crisis ends I expect the federal government to completely ban cash as well as all cryptos, in favor of its own FedCoin.  CV will be blamed, with the #metoo movement cheering the Fed and Treasury for eliminating the possibility of unwanted touching…as if you can’t just put your cash down on the table when you pay instead of paying hand to hand.

Rise in 10Y vs QE – If you look at ten-year treasury yields and overlay it with QE programs, the yields initially fall, but rather quickly yields actually rise after QE hits the system.  I don’t expect anything different now either.  And this makes sense.  You probably think that QE will cause yields to fall. Like I said that’s only initially. 

However, think about what QE is, as well as what it means for the dollar…debasement of the currency and increased risk.  That is why yields briefly fall, but when investors come to their senses yields then rise for a much longer period than they fell.  Because the 10-year is the benchmark for all lending, the interest rate you’ll see for your credit cards will actually rise, if you buy or refinance your house, the rate will go up, and the same for cars or any other type of loan.  This will put tremendous downward pressure on home prices, and we’ll see a new wave of foreclosures.

All forms of QE – As of yesterday, Sunday March 15, 2020, the Fed announced an additional $700B in QE over the next few months plus it cut the Fed Funds Overnight Rate to zero. This was a very desperate move on the part of the Fed. Very desperate to keep the economy from rolling into recession and prop up the stock market. And very desperate to keep the banks liquid, which is the main issue.  It’s also a desperate move to keep the treasury market liquid which it’s not.

Jay Powell cautioned that there is no room to go negative in the US, which tells you that is on the table already, and it’s next. Get ready, because the current $4T per month in various forms of QE and repo market liquidity is nothing compared to what’s coming.  $60B per month in current QE plus the $700B over a few months will quickly morph into $250B-$300B per month, and then $500B per week.  Repo operations will quickly rise from $4T per month to $1T per day. Bailouts last time were $787B, and everyone collectively said “whiskey tango foxtrot?!” This time around corporate and bank bailouts will probably be in the $5T range. 

Riots In The Streets – The anger of everyday Americans will reignite when that happens, claiming the real bailout is not the evil corporations, but rather everyday people like you and I.  $400 cash advances against tax refunds, like Bush did nearly 20 years ago, will look like pocket change compared to what they’ll do this time.  Thousands will be dumped on each household.  And not only that, we’ll see Universal Basic Income.  It won’t end there either.  Universal health care, student debt forgiveness, and a myriad of other programs are likely to come down the pike.  What will be an MMT theorist’s greatest fantasy will become the average man in the street’s worst night mare.  It all looks good on paper, but it never works out.

I pray that we won’t see the Occupy Wall Street Riots return in full force, however, it is for this reason that I’ve always recommended to own a big dog, a pistol, and a shotgun.  Riots in the street will not stay placidly in Zuccotti Park, four blocks north of Wall Street in Manhattan, and the entrance foyer to the local Chase or Bank of America branch won’t be the only place those people will improvise when they need to relieve themselves.  It’s really a shame that they’ll blame the banks, because banks are not the cause of our fiscal and monetary problems.  Government is, and it is elected government officials who should feel the heat of protests instead. Sadly, capitalism and free markets will be blamed as well, and socialism will come into vogue in American politics as the people vote out capitalism in favor of socialism.

Fiscal Stimulus – Besides just dumping cash in the hands of Americans, the government will also enact other policies.  Trump already floated the idea of a payroll tax holiday as well as helping the airline industry with tax abatements, loans, and more. It won’t help, because if I’m a business owner with $1M of salaries per year that I am paying, a payroll tax holiday leaves about $80K-$90K extra in my company bank account.  I’m not spending it freely because if the economy is going to tank, I’m going to need that to help support my business pretty soon.  But it won’t stop with payroll taxes.  All kinds of tax relief packages, higher taxes here, and lower taxes there. The government on state and federal levels will flail around like a fish out of water, wondering why none of their programs work.  Cash for clunkers ring a bell, anyone? 

Central Bank Coordinated Efforts – Hong Kong offered the first piece of fiscal stimulus by giving HKD $10,000 to each of its permanent residents over the age of 18.  The United States soon followed with several monetary stimulus announcements.  Bank of Canada announced a rate cut.  The IMF announced it is ready to deploy $1.0T.  The Bank of England cut rates.  China cut. Russia cut. And several other major central banks are projected to follow suit soon.  This is a race to the bottom or who can destroy their currency fastest while holding onto the optics of trying to keep rational and maintain order.  The USD will remain relatively strong for the time being, however, that will change forcing us to replace the it in its current iteration.

Bull Moves – As I see it, there are a few moves to make to protect yourself.  A lot of this will sound repetitious to regular readers, but I don’t care about feelings. Your feelings don’t matter to your bank account.  I care about helping as many people as I can to protect their wealth and come out with a couple extra zeroes before the decimal point.  Pay off your margin debt and credit cards, if you held margin debt over the last two weeks and didn’t heed this advice in the past, now you know why I said to pay it off.  Credit cards are about to get really expensive to hold a balance so you should pay them off as well.  Hold lots of cash.  Take a position in physical gold and silver bullion coins and bullion bars, but don’t buy numismatics.  If you own enough bullion you can earn interest on your ounces paid in additional ounces. These moves are your insurance policy. 

To survive and thrive, you’ll want to own discount retail.  The last two weeks of Corona Virus panic should prove why, but if not, just think about where people will shop if they have reduced hours or no job at all.  You’ll also want to own utilities because people will need water, heat, and want to keep the electricity on. They pay high dividends and as the price per share falls precipitously over the next few months, you’ll be able to buy these companies at a discount with a dividend that will reward your patience.

I’ve made the case for #uranium in the past, and you can read prior postings to see that info.  In a nutshell, the cost to produce rests between $50-$60 per pound according to international bodies like the IEA & IAEA.  The market price is currently under $30/lb.  And this will only last so long. As Japan moves from selling their stockpile to turning back on reactors and using their stockpile, the price will rise as world supply commensurately falls.  And world atomic energy use now surpasses pre-Fukushima levels. For a direct play on the price of uranium you can buy URPTF, or if you prefer a royalty streaming company with less risk, you can go into URCCF (I own shares). You can also go into some of the majors like Cameco or even juniors like Uranium Energy Corp.  Just make sure you buy companies which are domiciled and dig in regions that don’t require an AK-47 to sleep at night.

Similar to uranium is gold and silver mining companies.  If you know how to do traditional security analysis, forget about that because analyzing a resource mining company is a different ball game.  If you don’t know what you’re doing you should stick to the right mutual funds who screen what they put in their basket rather than just buying everything available. Those are the same funds I always recommend, which are EPGFX (I own shares), SGDM, and for the juniors SGDJ. Also, with the drop in share prices of the last two weeks, now is a prime time to buy precious metals streaming companies.  If you buy any of those like Franco Nevada, Wheaton Presious Metals (I own shares), or RandGold, you’ll pay a premium if you wait it out a few weeks.  But it will still be worth it, because newcomers to the industry don’t have proven management teams or the same financing costs and capabilities as veteran teams who manage mature companies.

Other Performers - I fully expect the banking and financial sectors to perform very poorly. Services won't do too well either. Real estate will do poorly as well, including commercial real estate.  And I expect healthcare to perform very well.  In fact, anything related to healthcare will do well, like pharmaceuticals, hospitals, and facilities.

Above all, stay calm and stay nimble.  Have patience and wait for the right opportunities, because patience will be very handsomely rewarded. If you don’t think you’ll be patient, try reading “Trading in the Zone” by Mark Douglas, and don’t open any new positions until you do. Remember that there is always a bull market somewhere in the world, and on the opposite side of every crisis there always lies opportunity.