I am sure this post will get a rash of blogger hate-mail accusing me of being a “doom & gloomer”, but this is a topic I believe needs discussion. We can’t stick our heads in the sand, and pretend there is no crisis. It is real. It is here. Those who have known me a long time know I prefer the positive, but when facts justify decisive action, I will act accordingly using best judgement, backed by data, without all the emotional baggage.
My concerns about the financial markets didn’t just start with the coronavirus. They started a few years back when the Federal Reserve’s quantitative easing, currency printing machine went into overdrive. During the Summer of 2018, and more so the Fall, I began sounding alarm bells, while the rest of the world was acting like the party would never end! Well now the party HAS ended in dramatic fashion, and the hangover is just beginning!
There are two economies in today’s system, the real economy of jobs and “stuff”, and the financial economy of paper, stocks, bonds, and derivatives. Under normal circumstances, these two economies align. They both go up or down together.
For the past few years, we have not seen normal times. While the stock market continued making new highs, we saw retailer after retailer in the real economy declaring bankruptcy.
Sports Authority, Payless Shoesource, Sears, Gymboree, Dressbarn, Bon Ton, Forever 21, Fred’s, Mattress Firm, Davids Bridal, Toys R Us, Nine West, HH Gregg, Gordman’s, Radioshack, The Limited, Pier 1 Imports, Modell’s, & hundreds of other well known brands have all declared bankruptcy in the past couple years, while even more like JC Penney and Neiman Marcus are well on their way. It goes without saying, these bankruptcies are NOT a sign of a strong healthy economy!
As a backdrop to all the retail bankruptcies, we have tent cities springing up across America, particularly on the coasts. Even well run inland cities like Denver and Austin are seeing a sizable contingent of residents living in mobile homes, pickup trucks, and tents because housing and basic living costs have spiraled out of control. Yes….I know many such residents have addiction issues. But these days, many also do NOT. They have been ravaged and unfairly beat down by a real economy that has not been healthy for a decade – courtesy of the Federal Reserve’s currency printing machine!
Auto sales have similarly been slowing over the past year, and it was only a matter of time before the slowing is felt in the job market. Most of those autos are financed with massive debt!
Meanwhile, the financial economy had never been better……until now. Every time the stock market saw a small dip, it was bought, and the Federal Reserve offered cheaper and cheaper dollars to anyone willing to buy more. Hedge fund managers and investment bank promoters bought $10 million, or even $100 million, mansions in the Hamptons!
The President and Congress passed tax laws that lowered the costs of doing business, while at the same time building up massive deficits and debt on the federal balance sheet. Corporations used that free tax money to borrow all the cheap dollars they could to buy back their own stock, sending the stock market higher still, whether it made sense or not. They didn’t invest in the “real” economy because everyone knows the real economy is severely ill, and has been for years! There was no return to make there, so the investment dollars went to the paper financial economy, which makes the rich richer, and the poor poorer.
CORONAVIRUS PIN PRICK:
As the real and financial economies diverged, and as the financial economy became more and more dependent on abundant cheap debt, it was only a matter of time before something popped that credit bubble. The coronavirus, having completely shut down over one-quarter of the world’s business, is the pin that has finally pricked the largest financial bubble in US history.
Shutting off a quarter of the world’s production for 60 days, while painful, is not in itself disastrous. The world has seen disasters like 9/11 or the 1987 stock crash, and when the event passes, we spring back. Only when such events are accompanied by a credit collapse do we see a longer drawn out economic calamity. The credit collapse is of course caused by allowing too much risky debt to build up in the financial system…..exactly where we find ourselves today!
Those in real economy know that times are NOT good, that the economy is NOT healthy, regardless of the propaganda spread by alcoholic presidential economic advisers…..uhhh, I mean Larry Kudlow….and Treasury secretaries who are under threat of losing their cushy jobs if they disagree with President Trump, trying to show him that things are in fact not well in the republic!
Because the population knows things are NOT well, they panic to buy toilet paper, supplies, medicine, chicken, and long term food staples that will sustain them in an extended period of economic shutdown.
DASH FOR CASH:
One thing those wise citizens have so far mostly ignored is cash! As the massive debt bubble now implodes and businesses grind to a halt, having cash and precious metals on hand….in YOUR possession…. is critical!
Indeed, the dash for cash has started. Two of the largest private equity firms, Blackstone and Carlyle groups this past week told their portfolio of companies to withdraw their entire revolving lines of credit to ensure they remain liquid during this slowdown: https://finance.yahoo.com/news/blackstone-urges-companies-hurt-virus-190158024.html
Clearly, corporations are going for the cash, and we also see, as of Friday, wealthy individuals taking out cash, having emptied all the $100 bills from bank branches in New York: https://www.dailymail.co.uk/news/article-8113389/NYC-bank-temporarily-runs-100-bills-customers-withdraw-cash-amid-Wall-Street-crash.html
If corporations and wealthy individuals are withdrawing their cash from the nation’s banks, it is probably only a matter of a few more days before the general population joins in, making the toilet paper run seem like child’s play.
Given the backdrop, their actions make perfect sense! We all know the largest credit bubble in history is now popping:
We all know that banks use “fractional reserve” banking, where they only keep a fraction of depositor’s money on hand (about 10%). So they don’t have everyone’s money if everyone wanted it concurrently…..as is happening now with corporations and the wealthy, as they want $100 bills.
We also know that banks are now allowed to use “bail in’s” (as opposed to “bailouts”) when they get in trouble…..meaning they can SEIZE YOUR DEPOSITS, taking the deposits for their own use to rescue the bank: https://www.investopedia.com/articles/markets-economy/090716/why-bank-bailins-will-be-new-bailouts.asp . Having excess cash in the bank is the easiest way for the bank to take your money! Since the banks don’t pay any interest anymore, there is really no reason to have excess cash at risk in a bank, especially when the largest credit bubble in US history is popping!
Remember too, a safe deposit box at a bank is the same as a regular deposit at a bank! If you don’t hold it, you don’t own it!
Along with cash, precious metals are a good thing to hold in one’s own possession. And they went on a bit of a sale this week, in spite of record demand.
The US Treasury has indicated they ran out of Silver Eagles due to excessive demand. Bullion dealers are clamoring to get more. The following note was at the top of JM Bullion’s website as I write this: “NOTE: Due to extreme order volumes, please expect shipping delays of 5-10+ business days. We also have a temporary $299 order min.” SD Bullion has a similar notice on their website: “*** Please note: Due to extremely high order volume, please expect a shipping time of 5-10+ days.***”
With this much demand for metals, it’s clear that the price took a small hit this week due to other reasons, reasons like a hedge fund getting margin calls, and having to panic sell metals futures contracts (paper) to meet the margin call. That should be a short lived phenomenon, and I personally used the lower prices to buy more on Friday.
What you do with your cash though is your business. I personally don’t feel safe with the economic environment the way it is. There will be severe ramifications of shutting off one-quarter of the world’s production, and possibly more in the several weeks ahead! A dash for cash does appear to be the optimal option, but only for those who act sooner than later.