In a previous blog about the Covid-19 threat posted February 27, we wrote the following: “We can only hope that the coronavirus can be contained quickly. However, at this stage it appears more likely that one domino will fall after the other.” Now we can state, that many dominos are already down, but that we are still far away from the bottom.
The latest Covid-19 numbers look grim. 245,000 people have officially been infected globally and 10,000 have died. In many countries the numbers are increasing at exponential rates. This could have been avoided if governments had prepared properly in advance and reacted decisively, when the virus emerged. The same applies to your investments. If you invested in accordance with our crisis portfolio you would be fine. But for those who haven’t, last minute portfolio changes can still avoid the worst.
Before we discuss the various asset classes in detail, let’s take a look at what has happened in recent weeks affecting your portfolio:
- China: In the first two months of 2020 China’s industrial production fell by -13.5%, retails sales by -21% and fixed asset investments by -25% according to the official numbers (the real numbers are likely to be much worse)
- World economy: The airline sector is in freefall as flight operations are severely reduced or cancelled completely. The tourism industry has come to a virtual standstill in many areas, with others likely to follow soon. Restaurants and bars are shut down by government regulations or lack of demand. Automotive and other plants are ceasing production due to a lack of input parts from suppliers. Unemployment is rising rapidly, as companies are forced to lay off employees
- Stocks: Stock markets around the world have experienced rapid declines since their recent peaks. The European Stoxx Europe 600 has crashed by -34%, and the S&P 500 and Nasdaq in the USA have tumbled by -29% and -27% respectively. In Asia the Japanese Nikkei 225 is down by 31% and Hong Kong’s Hang Seng index by -29%. Among the main indices, only the Chinese SHComp, that has fallen by -18%, has avoided bear market territory which starts at -20%. However, all indices are still far above their 2008/09 lows and can certainly fall a lot further
- Bonds: The corporate bond market is in turmoil. Rates are rising everywhere, especially in the “junk” bond market, but even for so-called “investment-grade” bonds. Prices of governments bonds, that are considered “safe investments”, are on a rollercoaster ride, experiencing large daily changes that were previously unknown
- Non-fiat assets: Bitcoin has crashed by 59%, even though it is still by far the best performing asset since the Great Financial Crisis, going up from less than $1 to over $5,000. Silver has plunged by 39% and only gold has managed to retain most of its value with a modest decline of “only” -13%, being up by over 100% since 2008/09
- Monetary policy: Central banks have started a tsunami of “easing” measures. This month the U.S. Federal Reserve (Fed) has slashed interest rates in 2 steps from 1.5% to 0% and promised to increase its bond holdings by another $700 billion Quantitative Easing (QE) program. The European Central Bank (ECB), has so far kept its interest rates at 0% for refinancing operations and -0.5% for the deposit facility. However, it intends to purchase bonds and commercial paper worth up to 750 billion EUR until the end of the year through its “Pandemic Emergency Purchase Programme”
- Fiscal policy: Governments all over the world are implementing huge stimulus programs. The White House is proposing a $1 trillion package and the European Commission is ready to green-light widespread fiscal stimulus for euro nations. Even the German government is now willing to suspend its constitutional “debt brake”. Free cash hand-outs to citizens, so-called “helicopter money”, is on the rise. Hong Kong has already provided a 10,000 HKD cash subsidy to all adult permanent residents and the U.S. Treasury has proposed to give $1,000 to every American. Europe and many other countries will certainly follow.
The coronavirus is only the trigger and not the cause of the bursting of the Everything Bubble. If our economies were on sound footing, Covid-19 would cause heavy disruptions, but we would be able to deal with it. Unfortunately, as shown in one of our previous blogs, the “growth” of the past decade was only achieved by accumulating a record level of debt, which now stands at $250 trillion or 320% of world GDP. Central banks embarked on reckless monetary policies, governments spent borrowed money on consumption and unsustainable welfare projects, and companies increased risks by going deeper into debt to achieve a higher return on equity, thereby boosting equity prices to previously unknown levels. Now we have to pay the price for the irresponsibility and exuberance of our central bankers, politicians and top managers.
Whereas the coronavirus was originally mostly confined to China, it is now well-ingrained in the rest of the world, with further accelerated spread certain. It is doubtful, that Western governments will take the same draconian measures that China has taken to contain the virus. Consequently, the damage to the population and the economy will potentially be even worse.
Since the Great Financial Crisis (GFC) in 2008-09, most assets have appreciated substantially. Even after the recent market corrections, prices are still well above the lows during the Great Financial Crisis. As the below chart shows, the U.S. Nasdaq is still up by 464%, the U.S. S&P 500 by 199%, and even the STOXX Europe 600 has maintained a gain of 69%. We should not assume that markets have already fully priced in all future losses. Be prepared for a potential further crash in asset prices.
The crisis has just started in most Western countries. More lockdowns will be implemented to contain the virus forcing more and more companies to lay off employees, defer payments and reduce or cease production. This will affect other companies, who will see their demand drop, their invoices remain unpaid and their supply vanish. A vicious downward cycle is starting. Small and medium-sized businesses with low capital ratios and limited public support will likely default first. Larger companies will also be in serious trouble, but probably be saved by generous government hand-outs at the expense of taxpayers and bondholders. Very soon banks and insurance companies will be in trouble. Some will be “bailed out” by governments, others will get involuntarily “bailed in” by its customers (respective bank regulations are already in place in Europe and the USA).
Politicians will unleash many new stimulus programs causing government debt to skyrocket, as we have seen in the last crisis. Most of that debt will probably be financed by central banks, that are expected to create billions and trillions of new money ex nihilo. In addition, central banks might push interest rates even deeper into negative territory. Get ready for a drastic deterioration in economic performance and potentially a collapse of the current fiat currency system, which will have a devastating effect on cash, stocks, bonds, life insurance companies, and even real estate.
Over the past few years we have invested in line with our crisis portfolio:
Based on recent developments, do we have to make adjustments? Not really. But if your portfolio is still heavily exposed to the value of fiat currencies, such as the USD, EUR, GBP, CAD, AUD or JPG, you should look into the possibility of switching at least some of your assets into investments with very low or no exposure to fiat currencies, such as precious metal and well-established cryptos.
Our view on various assets classes is shown below. We are no soothsayers and don’t claim to know the future. We just provide information that will hopefully help you, to take the right decisions in accordance with your own personal situation and risk appetite.
As we can see from the chart above, most stocks are still well above the bottom reached in 2008/09. Therefore, we think that prices can go down a lot further and that it makes sense to wait, before investing in stocks again. Of course, there are exceptions. Some gold/silver miners or oil producers (except for shale companies) might be undervalued. But even their prices can go down further. You never know. It is always risky to catch a falling knife. Wait until prices start to recover truly. Your profit will be lower, but also your risk. Don’t be fooled by “dead cat bounces”, where prices surge for a short time, just to crash over the following days.
A lot will depend on the actions of central banks. If they start to buy stocks at a larger scale, this might be an opportunity to get in. But be careful. Central banks have distorted markets in the past and they will continue to do so. However, as their power is waning, we doubt that they will succeed indefinitely. They might be able to boost prices in nominal terms, but adjusted for real inflation the value of stocks might go down despite central bank interference.
Government and corporate bonds are becoming riskier by the minute. Some industry veterans might be able to make a lot of money by playing the current market volatility. But the average retail investor does neither have the expertise, nor the tools or connections to be successful. We can’t rule out, that the price of governments bonds will stay at the current level or even go up substantially, if central banks decide to fully monetize government debt. The same applies to corporate bonds, even though this looks much less likely. However, in view of the risk and possible losses of bonds, it appears prudent to stay away, as there are better alternatives.
The current melt-down in asset prices has substantially increased the risks associated with insurance companies. Many will probably survive due to a bailout (by the government) or a bail-in (by the insured). But even if they survive, inflation-adjusted returns of life insurance policies will likely be negative. Now might be the last opportunity to get most of your money back by selling them.
Prices in most areas are still at an elevated level. Therefore, we prefer to wait until prices have dropped further. Of course, real estate is a local business and there might already be excellent opportunities out there. In case you know an excellent piece of real estate that is properly priced, now might be the right time to buy, provided that you can pay for the purchase by divesting some of your fiat assets. But think twice before taking up a large mortgage.
We don’t believe in the long-term potential of (fiat) cash, but currently cash is king. To have 3-6 months of expenses in cash, will give you ease of mind and will enable you to navigate the coming challenges easier. However, don’t keep all your money at a bank. Instead keep a larger amount at home or in a safe place outside of the financial sector. Don’t be surprised, if at some point you won’t be able to withdraw cash from ATMs or only in very small amounts. We have seen it in Greece and Cyprus, not to mention Zimbabwe and Venezuela. It can happen in your country as well.
Compared to other assets, gold has only sustained limited losses recently. This is normal for a downturn. However, it is still up over 100% compared to its low in the Great Financial Crisis. As we expect further central bank and government stimulus packages, which will further erode the value of fiat currencies, gold is likely to be a winner. It went up from $731 to $1,901 between 2008 and 2011. A similar or even better performance is possible within the next few years.
Silver has not gone anywhere since 2008/09. Inflation adjusted it is even down. However, this makes it particularly interesting for the investor. Silver is both, a precious metal and an input for production. In recent weeks it has joined other commodities in in the way down. At current prices, hardly any silver producer can operate profitably. But severe cracks are already developing between the paper market (where the price is around $12.50) and the physical market (where prices remain above $16.00). Eventually the market has to return to a price, that is in line with production cost and demand. We are confident that there is huge upside potential for silver, even more than for gold. However, if the current manipulation of the gold and silver prices persists, it might still take a while until prices start to soar.
We have always asserted, that cryptos are a new asset class with high profit potential, but also the risk of total loss. Volatility has been extremely high, as markets are still mostly unregulated and manipulated by some big players. Despite the 59% drop in Bitcoin since its recent height, Bitcoin is still up over 69000000% compared to its original price in 2009. We are therefore confident, that Bitcoin and a few other cryptos have a bright future. Even if the market drops further (some crypto analysts expect a drop in Bitcoin to below $1,000), we see the recent drop as another chance to add some more coins. Irrespectively, only invest what you are prepared to lose and stay away from the many “Sh*tcoins” out there.
The world is starting to fall apart. Whereas we have experienced coordinated activities by governments and central banks in the 2008-09 crisis, today we see more and more independent and self-serving actions by local entities. As global tensions between super powers and even at regional level have been on the rise, this is hardly a surprise. Less corporation means, that the impact of the crisis will not be the same everywhere. Some countries might avert the worst, while others are in danger of experiencing an economic meltdown. Don’t expect it to happen just in some Third World countries. Currently Europe, the USA, Canada and Australia are also pretty high on the list.
Under current circumstances our focus must be on “return of assets”, instead of “return on assets”. Ignore many sell-side analysts, who urge you to invest in some obscure securities with “life changing” profits and a “guaranteed” return of 490%, 861% or 1,760%. Now is the time to play it safe and avoid big adventures. Leave it to the professionals, to earn a fortune or go bust.
As risks in the financial systems have increased tremendously, portfolio diversification is a must (for more information read here):
- Diversify internationally by holding assets around the world as the situation will likely differ between countries. Having assets away from home might also help you to move abroad if the situation in your home country becomes intolerable
- Diversify between custodians as every service provider is vulnerable to bankruptcy, confiscation or fraud. In particular don’t keep all your money with a single bank and all your stocks/bonds with a single broker
- Diversify away from fiat assets as there is a high risk that the main fiat currencies such as the USD, EUR, AUS, CAD, JPG will fail. Consider investing part of your money in physical gold/silver and also in some cryptocurrencies
Apart from your assets, it is even more important to stay safe during these turbulent times. If you survive the coronavirus pandemic with your health and wealth intact, you will have excellent opportunities to prosper in the future. Covid-19 is not the end of the world. There will be a future and it can be brilliant for those, who are well prepared.
Disclaimer: The above is for informational purposes only. It is not an offer or advice to buy or sell any products or services. LBB and its owner do not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.
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