If you’re tired of hearing about the COVID-19 coronavirus crisis … get over it.
We’re on the front end of a series of cascading crises that will likely affect every investor on the planet … including YOU.
Pretending it’s not happening … or blindly trusting the great and powerful wizards behind the curtains … or pulling the covers over your head and hoping for the best …
… will NOT make any of it go away.
Of course, HOW it affects you could depend on how well you pay attention, understand what’s happening, and take effective action.
There will be WINNERS … and LOSERS.
We’re far from experts, but we’re fortunate to have access to some of the smartest folks on the planet. And they’re ALL monitoring the crisis VERY closely. Seems like a good idea.
As you may know, we’re organizing an EPIC mega-webinar featuring discussions with MANY of our big brained friends to find out what they’re seeing, thinking, and doing.
We realize you’re being bombarded with information … we all are … so rather than just pile more on, let’s focus on creating some context to process all the info better.
It’s important to think about how the crisis is likely to spread …
What started out as a health crisis quickly mutated into an economic crisis as cities, states and nations worldwide virtually shut down in unison.
These lock-downs have suppressed both the supply and demand for all kinds of good and services.
Because the decreases in production and demand aren’t perfectly synced, there have been both shortages (toilet paper) and gluts (oil) … the effects of which range from inconvenient to devastating (no toilet paper?!?).
But that’s just the beginning …
Lock-downs stop revenue, profits and paychecks … which stops debt service.
This is where the economic crisis mutates into a financial system crisis.
But unlike toilet paper and oil, the signs of stress in the financial system are harder to see. That’s why financial system failures blind-side many Main Streeters.
Yet there are many clues in the news IF you know what to watch for.
It starts with obvious headlines …
Coronavirus-caused spike of homeowners in forbearance surges on
– Fox Business via Yahoo Finance, 5/4/20
Of course, this surprises no one.
When people don’t have jobs and incomes, they can’t make mortgage payments. For those old enough, this elicits flashbacks to 2008.
Basically, virtually all IOU’s everywhere are in danger of going bad.
This is counter-party risk … when your asset is someone else’s liability … if they fail to perform, your asset loses some or all of its value.
Even your bank account (your asset) is your bank’s liability (they owe you). If the bank fails and you have more than the insured amount, YOU could have a problem.
Counter-party risk is EVERYWHERE in today’s debt-based system.
Yet while bad debt is one level of awful, it gets worse when gamblers in the Wall Street casinos use derivatives to magnify their gains.
Of course, the extreme leverage created through derivatives cuts TWO ways.
Sure, extreme leverage turns tiny gains into massive profits … but it can also turn bad bets into a systemic crisis.
We’ve gotten into the weeds of how all that works in the past, so we won’t rehash it now.
But the first clue in the news indicating stress in the financial system is when asset prices are falling and cash is running low …
… as everyone is madly selling everything and the kitchen sink to raise cash to cover margin calls on their bad bets.
Of course, that’s also when quality assets get caught in the downdraft, so if you’re aware and prepared (i.e., liquid), you can step in and snap up bargains.
Which leads to another clue in the news … savvy investors sitting on huge war chests of cash.
According to a recent Bloomberg article …
“assets in money-market funds have soared to a record $4.77 trillion amid a flight to safety by investors this year.”
Business Insider reports Warren Buffet’s Berkshire Hathaway has a record $137 billion cash pile.
Yet as Buffet explains …
“Berkshire’s cash pile isn’t overkill given the cataclysmic risks posed by the coronavirus pandemic.”
(Buffet is the same guy who called derivatives “weapons of mass financial destruction.“)
Now, with all these demands for cash, it isn’t surprising to see headlines hinting that there’s not enough to go around.
Interestingly, as you may recall, the current cash crunch didn’t grow out of the coronavirus crisis. It preceded it.
We noticed this back in September when the Federal Reserve started pumping billions of dollars per day into the repo market.
(The repo market is like a pawn shop for banks to hock T-Bills for dollars.)
… and stepping in to buy debt no one else can or will, including U.S. Treasuries, and now for the first time ever, corporate debt.
This is very similar to how the Fed put in a bottom to the free-falling mortgage-backed securities market back in 2008 … except WAY bigger.
All this suggests the financial system could be far more stressed than the wizards behind the curtain let on.
Which brings us to the final stop in our progression of dominoes from health crisis to economic crisis to financial crisis …
… a dollar crisis.
As we’ve been pointing out, the financial bondo the Fed is slathering all over the dents in the economy and financial system are dollars.
ALL the pressure is on the dollar, which should concern EVERYONE who earns, owes, spends, and denominates wealth in dollars.
The coronavirus health scare alerted the American politicians and public to a sick dependency on China for critical supplies like masks and medicines.
Naturally, Americans are uncomfortable with this dependency and lawmakers are preparing bills to bring the medical supply chain back to the USA.
Of course, as real estate investors, this interests us because it could mean the creation of new jobs in whatever regions land these factories.
But our point today is that just as Americans realize they don’t want to depend on an adversary for something as critical as life-saving medicines …
… the calls continue for a global alternative to the U.S. dollar as the world’s reserve currency.
And with the Fed conjuring trillions of new dollars out of thin air to prop up sagging asset prices, hold together collapsing credit markets, backstop virtually all insolvent corporations, states, plus the federal government, and suppress interest rates …
… the final stop on this cascading coronavirus crisis tour could be a dollar crisis.
So don’t get tired or bored of watching a slow-motion train wreck. Slow means you have time to get out of the way.
If you’ve been asleep up until now, it’s time to wake up. Because things are picking up speed.
Are you aware and prepared? Stay tuned …