We as investors have a hard time focusing on more than one thing at a time. Lately, the theme has been “can they stop the stock market from falling”. I have not followed the market(s) this closely in quite some time, simply because so much stuff is happening.
Regardless if the stock market bottoms out tomorrow, or continues to fall from here, there are some over-arching themes that should not be forgotten in the daily noise…
FED cutting rates to zero might help calm the market but it also means that the “last refuge” for European and Japanese (etc) yield seekers seem to become like the rest of the Western World. If the underfunded pension funds around the world had a tough time before this, it will get even worse now. In other words; The pension debt bomb is only going to get worse by the US going to zero as well.
Another thing to keep in mind is that the price of oil is still down around 60% from the two year mean. This means that there is probably a LOT of especially US oil companies that are on the fast track to insolvency. This is another debt bomb that is still ticking loudly.
We should also not forget the fact that a sea of corporate debt downgrades can come at any time due to the crash in oil and the world economy grinding to a halt due to the Corona virus.
Furthermore we have the fact that the crash in pretty much every market has been more intense than even 2008 so we can be assured that there has been a LOT of damage done behind the scenes. Thus, one should be prepared for headlines saying “entity X is closing shop due to market losses”.
Another bomb is the fact that the rising dollar is making every outstanding dollar loan in the entire world more expensive. Combine a rising debt burden in real terms with the worst “shock recession” ever due to entire countries being in lockdown!
Lastly one should not forget that the European banking system was very bad even before world markets cratered and credit spreads etc blew out. If Deutsche Bank was a problem before, how bad is it now? How many businesses might default due to the shut downs and/or crash in asset prices?
Maybe endless QE and trillions in helicopter money etc can “fix” this in the short to medium term. With that said, it feels like there is almost a certainty that the FED and the government will do anything possible to create inflation. Maybe now more than ever due to the fact that the pension bomb will tick faster due to the drop in rates and because the oil sector will go bankrupt at these prices. If the global shut down drags on, these headwinds will get even stronger and they will have to do even more to keep either from exploding.
I think it is more important than ever to keep ones eyes on the forest and not the trees. Anyway you slice it, the central banks and governments of the world are pretty much forced to inflate or die, now more than ever.
I have no idea how all these factors will play out in the short or medium term but I still think pretty much any and all scenarios leads to gold having the best risk/reward out there (oh and gold miners).
Note: This article is highly speculative and not investment advice!
The Hedgeless Horseman
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