NEW INVESTMENT STRATEGY-
Federal Debt May Stop Any New Recession
ONLY FOR THOSE WHO ARE YOUNG ENOUGH OR CAN TAKE RISK I suggest a new ‘Investment Strategy Program’. Besides investments in gold and the Bitcoin, Set up a program’ to be ‘fully invested’ as follows: Choose 21 of the best performing stocks like Amazon and 21 stocks that have big dividends and hold up well in down markets like Exxon. This portfolio should be updated every quarter.
HOW BAD WILL IT BE?
The truth is, nobody knows how many people in the US will be infected with the corona virus, how long the pandemic will last, or what effect it will have on our economy. Estimates of GDP loss in Q2 2020 range from -11% to -30% for the US and unemployment is forecast from 10% to 20%. Goldman Sachs just reported that it sees Q2 2020 at -34% GDP and a 15% jobless rate. I believe that if the Goldman scenario is true, their worst case scenario would be devastating to the country and will take years for us to recover. However, the Goldman report goes on to say that this worst case -34% 2ed quarter scenario, will be followed by the fastest recovery in history, with a 19% Q3 2020 growth rate. I disagree with the recovery scenario.
First of all, we do not know when the pandemic will end in either the US or on a worldwide basis. On Sunday 3/22, there were 30,000 case of virus in the US. This Sunday 3/29, there are 124,686 confirmed case and 2,100 deaths, which doubled in 72 hours. Now, two days later, (3/31) there are 165,482 cases and 3,186 deaths. As I said in ISL 733, “Still most of the country is not affected, ‘yet.’ The key word here is ‘yet.’ Some 75% of the reported cases are in metropolitan areas that voted for Clinton; therefore the Trump areas want an early end to the ‘stay-at-home lockdowns’ and business closures.” I expect rural Trump Red States to be effective next, while the Blue States and metropolitan area will reach a crisis stage of limited hospital equipment and medical personnel. President Trump now says the ‘stay- at -home -lockdowns,’ will go on to May 1st.. However, this early lifting of the shutdown could have a devastating effect on deaths from the virus. So, let’s keep track of the corona virus cases and deaths. If they continue at the present exponential rate, we will need another 30 day extension to the shutdown. Although, this will have a continued effect on the economy, this should not be a difficult decision. As I said in ISL 733, “This reminds me of an old Jack Benny joke ‘You’re money or your life’ says a robber. Jack Benny pauses and says, ‘Wait, I’m thinking!’ Not funny!”
WHAT ARE THE LONG LASTING REPERCUSSIONS?
Good Question! A lot will depend on the extent of the corona virus worldwide. Apparently from what I read, I believe the following: 1) The effect on Emerging Nations will be more devastating than in the developed world, because they do not have the resource (hospitals etc.) to deal with the crisis and many live in overcrowded conditions (India, refuges etc.). Also the European economy, with low growth, which hasen’t yet recovered from the 2008 crisis, will have a difficult time recovering (especially European Banks!). The US depends on a healthy global economy. In my opinion, it will take a couple of years for a worldwide recovery in a best case scenario. On a worst case scenario for next year, this virus or an ‘air born virus,’ may return, crippling the world economies for a longer time. 2) The ‘Stimulus Package, will be slow to roll out. In the meantime a lot of small business will go bankrupt, never to return. The US loans are said to be forgivable, if business keep their employees. In most cases I believe the business owners will take the money to meet their immediate needs and not retain an expensive payroll. Big business will get $500 billion. Trump unencumbered, will decide which business survive and which fail. In my opinion the Big Corps will use this money to destroy their smaller business competitors, as the banks did in 2008. 3) Big corporations will use this crisis and their privileged position, as an opportunity to continue to automate with labor saving machinery. Low paid workers will continue to see their wages decrease and jobs limited. High tech college graduates will also see their jobs diminish as ‘Artificial Intelligence’ invades their privileged status. 4) In spite of what the Fed is doing, I expect a many as 10% of the S&P companies to default ion their bonds. Also mortgage bonds will once again be threatened, as people stop paying on their mortgage payments or rent. What about the massive amounts of derivatives outstanding that crippled the banks and insurance companies in 2008? 5) I believe even when the stay-at-home quarantine is lifted, consumers will be slow to take on their old habits. People will stay cautious, and will be reluctant to venture out to restaurants, theatre and sporting events. The ‘Depression Generation’ were so badly hurt from the lessons of that event, that they became very reluctant to spend and remained economically conservative their whole lives. I believe the long term effects of this ‘Virus Generation,’ will have the same effect. 6) The federal government paid $580 billion in interest in its last fiscal year on $22 trillion of debt. What will happen when interest rates go higher and the interest on the current (so far) $25 trillion debt costs us more the entire budget does now? 7) How will we (the taxpayers), ever pay down this debt?
MY PROJECTIONS HAVE NOT CHANGED
In my business career as a broker, I lived through three market crashes of 50% or more. Before a bottom was reached, the 1973- 1974 crash took about 2 years and the 2000 and the 2008 crashes took a year. I can remember thinking at the beginning of these crashes, that a 20% decline represented a ‘buying opportunity.’ Many Invertors today have never lived through one of these 50% decline events. So I can understand why many of you are optimistic, However, I believe that the Financial Industry has not truly fully disclosed stock market risk to the investing public. Instead the Financial Industry gives the false advice that, “on the long term, the stock market will always recover.” Keynes has a famous quote that states “in the long run, we will all be dead.” Because of my experience, I will tell you “to never grab a falling knife.” If I am wrong about my downside projection, and I hope I am, waiting a little longer to buy is worth avoiding the risk, should I be right!
If thing get as worse, as I think they will, real support won’t develop until at least the 2016 Dow lows of 16,000-18,000 and maybe lower! I am now thinking that under a ‘worst case’ scenario my Dow prediction is 10,000 – 12,000, my S&P prediction is 2,000 or below and my NASDAQ prediction is 5,000 or lower. This Bear Market will probably last six to nine month or longer, so don’t expect everything to happen at once. The pain will probably be drawn out until at least the end of the year! “Read ’em and weep! These are the cards we have been dealt.
THIS TIME IT’S DIFFERENT- EIGHT CENTURIES OF FINANCIL FOLLY?
Readers of this blog know that I often refer to the book: This Time is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff. Barron’s Magazine recently spoke with Rogoff about how this coronavirus crisis. This is an edited version of the discussion. Barron’s: How does the fallout from this pandemic compare with the Great Depression? Rogoff: The real big question is how far we’ll come back. All the things being done are extremely important and this will be won or lost on the health front…. On the peak-trough, the U.S. probably won’t hit Great Depression levels. But if you look at the world [economy]— on the depth of this downturn—there is a good chance it will look as bad as anything over the last century and half. If we are back to 95% of normal in two years, it will be a lot better than the Depression. Barron’s: Bulls are looking for a v-shaped economic recovery in the fall. What do you think? Rogoff: I’m skeptical. There’s too much lasting damage to small businesses—to airlines, hotels, the financial sector. If you are locking people in their houses for two months and thereafter three weeks for periods of time [when there are re-infections or flare-ups]… We get a C- or worse on that. Where is testing—and hazmat suits? We were ill-prepared …. If we aren’t solving the health problem, we are still going to suffer mightily. Europe has similar issues… A big question [to the scope of the recovery] is what happens in Europe because the scale of this is bigger than the euro crisis. Barron’s: What are some of the weakest spots investors should be watching? Rogoff: Capital is racing out of emerging markets at a faster rate than in the Asian currency crisis. The graphs are off the chart. And dollar-denominated debt for emerging markets was soaring and growth was falling. Corporate debt, especially in the U.S, If the economy stays at pause long enough, there are still going to be massive corporate defaults…We’re not going to let our banking system collapse. But we could be in a situation in a worst-case scenario like Europe, where the banking system was moribund [postcrisis]; it is a lot of the reason why Europe has stagnated. Barron’s: Is there any silver lining? Rogoff : We are lucky this isn’t worse and we are getting a whiff of what can happen in a highly urbanized and globalized world. We will figure it out in a constructive way. Hopefully this will be a wake-up call. https://www.barrons.com/articles/harvards-rogoff-shares-his-take-on-coronavirus-crisis-51585653300
Carl M Birkelbach 3/31/2020
DOW 22,115 ( Noon EST) Down Down 1.0%%
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Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com
Carl, I enjoyed reading your submission for March and look forward to future works.
Hope you are well.