Chris’ note: We’re putting on an extra morning edition of The Daily Cut for as long as this crisis lasts. Our focus is on how to navigate the coronavirus pandemic… and its financial fallout.
On Monday, you heard from Dan Denning on the different types of bear markets… and what they mean for your wealth. Yesterday, you heard from colleague E.B. Tucker on four key questions you need to answer to make sure your wealth is protected.
Today, you’ll hear from former Wall Street trader Jason Bodner on how the virus panic could morph into a financial panic. That means the situation could get worse before it gets better.
But rest assured. You’re not powerless. As Jason reveals, folks who are patient and have cash will be able to bargain-hunt for great companies. And that will lead to outsized profits when we finally get through this…
I’m the most bullish guy out there. I love stocks and America. And I believe we’ll be fine – eventually.
But what’s happening now is unprecedented. While I’d like to give an exact playbook, there simply isn’t one.
On Sunday evening, the Federal Reserve made an emergency announcement that it would cut interest rates to zero. It also said it would inject $700 billion into the economy to facilitate liquidity through asset purchases and lending.
The move was meant to calm markets. Instead, they were in freefall the next day.
Generally, pumping liquidity into the markets would cause a massive rally. But this time, it didn’t.
You see, the markets believe the Fed is worried about the coronavirus pandemic. And that’s never a good thing.
To kick off Monday morning, the S&P 500 went down 11%, gold fell 3%, and even bitcoin dropped 5%… While they recouped some of those losses on Tuesday, nearly everything has been selling off.
Look, I’ll be honest with you. I believe this situation will get worse before it gets better. But in the end, it will get better.
So today, I’ll tell you why this outbreak is causing the world economy to grind to a halt – and what you should do in the meantime…
The liquidity crunch we’re seeing now is similar to that of the 2008 financial crisis. Just like back then, the monstrous market moves of the last 10 trading days are causing margin calls.
Let me explain…
The big, smart money we follow in Palm Beach Insider often uses leverage. This means it borrows money to buy assets.
Here’s an example…
Let’s say a hedge fund buys $100 of ABC company and earns a 10% return. That’s a $10 gain.
But if it borrows $100 and adds it to its own $100, it would have a $200 position in ABC company. And if it makes a 10% return, the gain would be $20. That’s double what it would make on its own.
That’s leverage. And when it works, it’s great.
But when stocks fall – like they’re doing now – leverage can backfire spectacularly.
For instance, using the previous example, if the hedge fund’s position loses 10%, the added leverage means it also loses $20. So its losses can double just as easily.
But it gets even worse…
When the markets go south, banks that lend (provide the leverage) to these big-money firms begin issuing margin calls.
This means the banks require additional money to ensure that the smart money’s accounts meet the minimum required amounts for borrowing.
Basically, the banks are saying, “Send me cash to balance your accounts, or we’ll be forced to close your positions.”
We saw this happen in the 2008 financial crisis. Between 2008 and 2009, 2,494 hedge funds were forced to close when they couldn’t maintain enough cash to fund their positions.
You see, invariably, all the margin calls come at once. So the funds have to wire cash immediately. But many funds have illiquid products that they can’t easily trade.
So they’ll trade whatever they can trade to raise cash – including equities, gold, and cryptos. And sometimes, even that’s not enough.
Now, this liquidity problem already existed in the financial system. But when an economy is humming along and doing well, the leverage is acceptable.
It’s only once the market trips and falls flat on its face that the problems come to light. So the coronavirus outbreak is merely exposing an ongoing issue.
And I expect a lot of funds to go out of business, just like they did in 2008. Things will get pretty ugly. But we’ll get through this.
So what can you do right now?
Last year, I told my Palm Beach Trader subscribers to prepare for a pullback. And we sold several positions to offload some risk.
Plus, it allowed us to raise cash. Right now, our portfolio is 40% cash (which we’ll put to good use soon).
The second thing you need to do is be patient.
The coronavirus outbreak is disrupting the global economy – and will have huge impacts on company profits… not to mention our everyday lives.
But remember, this will be temporary. This storm shall pass.
As Americans, we’ve endured much worse over the years. And we’ll endure this, too.
Those who are patient and have cash will be able to bargain-hunt for great companies. Stocks that we all know and love will rebound… and we’ll benefit.
But for right now, here is my advice to you personally…
We all have to be home for a while. And there’s lots of fear about what will happen to businesses, both big and small. But you need to take care of yourself and your family.
I advise you to hunker down and go into conservation mode. Use this time to look over your budget and find areas where you can trim and save.
Sure, the drastic actions our government is taking are inconvenient. But it’s necessary to preserve the thing that matters most: human life.
I believe these actions will limit the spread of the virus and minimize casualties.
Expect the U.S. government to step in and help everyone from mom-and-pop businesses… all the way up to big financial institutions that may have risk exposure.
We don’t know how deep this will all go. What we do know is Americans have an excellent history of overcoming great challenges.
We will get through this – together.
Chris here – As I told you when we created this free coronavirus-crisis resource – Daily Cut AM – we’re putting together a “community center” for you and your fellow readers.
This is where you can get your urgent questions answered by our team of analysts.
I’ll get to as many of them as I can and publish answers from Bill Bonner, Doug Casey, Teeka Tiwari, Jeff Brown, E.B. Tucker, Jason Bodner, Dan Denning, Nick Giambruno, and Dave Forest… and the rest of the Legacy Research team.
And if you have a personal story to share about how you’re coping with the virus… or how you and your family are staying safe… or local updates on quarantine, the economy, or the response by the feds… let us know.
We want everyone to participate. So start sending your questions and stories my way. You can reach me and the Daily Cut AM team at feedback@legacyresearch.com.
Now, on to today’s batch of reader emails. The first is about our favorite precious metal here at the Cut – gold…
There are tax consequences for U.S. citizens who own gold bullion as a “collectable.” Is there a list of funds that sidestep this issue by avoiding such investments?
– Vincent V.
We turned to John Pangere, E.B. Tucker’s chief analyst at Strategic Trader, for a response…
Thanks for the question, Vincent.
Gold and collectible gold coins are an asset. You use physical gold as a way to preserve your buying power. Personally, I prefer owning pre-1933 U.S. gold coins like the St. Gauden’s $20 gold pieces.
Don’t let tax implications get in the way of owning physical gold coins. You’ll still have to pay taxes on funds you buy and sell in the market.
Let’s look at the Sprott Physical Gold and Silver ETF (CEF). It’s a closed-end fund that holds all of its assets in physical bullion.
If you own 100,000 units of the fund, you can redeem your units for their value in physical gold and silver. At today’s price, that means at least a $1,300,000 position.
But selling the fund in the open market or redeeming your units for physical metal still triggers taxes.
There may be a time to sell gold for another asset. But remember what E.B. and I have been hammering on at Strategic Investor. Physical gold is an asset, not an investment. It protects you against the devaluing of paper money. And that’s about to happen as governments step on the gas and start mailing checks out to everyone.
At the end of the day, taxes are unavoidable, whether you own physical gold coins or a gold fund. Hopefully, that perspective can help when making the decision about how physical gold fits with your overall portfolio.
You may have read the harrowing stories out of Italy. It’s struggling to contain the worst coronavirus outbreak in Europe.
So far, the virus has infected 31,506 people there. And it’s killed 2,503 of them. This has led to the widescale shutdown of the Italian economy… and a major economic crisis.
One reader wants to know more…
Hi Legacy, we have been told about the perilous state of the Italian economy for some time now, pre COVID-19. Now that Italy has gone into “lockdown,” I would be interested to hear your views on Italy and the euro.
– Stuart O.
Crisis Investing editor… and Italian passport holder… Nick Giambruno has the answer.
Hi Stuart… Thanks for writing in. I’ve done several investment-scouting trips to Italy. I can tell you from firsthand experience that the country is the weakest link in the (19-member) euro zone… and the (27-member) European Union (EU).
The Italian banking system was hanging by a thread before the crisis. There’s a good chance the coronavirus shutdown could be the catalyst that causes an Italian banking crisis. This would trigger a broader financial crisis in the EU.
At that point, the EU would have to decide whether it has the capacity and the will to bail out Italy. And Italy is significantly larger than Greece was back in 2010, when the Greek sovereign debt crisis was in full swing.
The EU is in a damned-if-it-does-and-damned-if-it-doesn’t situation. If it bails out Italy, it will create a moral hazard. It will cause other large countries to act irresponsibly. And that will doom the euro and EU over the long term.
If it doesn’t (or can’t) bail out Italy, we could see the EU and the euro collapse much sooner. The end outcome isn’t a doubt. But current events could speed up the timing. Be careful owning the euro currency or stocks that get their revenues in euro.
Next up, a question about the situation in Australia, where Bonner-Denning Letter coauthor Dan Denning is holed up right now…
Our government in the U.K. is trying to delay the virus in the hope it will not do well when the warmer summer weather arrives. Dan is in Australia, where it is summer now. Is the infection less virulent there than in the northern hemisphere?
– Anthony F.
Here’s what Dan had to say…
Hi Anthony. Thanks for writing in. I really couldn’t say. Right now, Australia has 450 official cases. But that’s partly because testing hasn’t been widespread yet.
No one I know knows directly – or even indirectly – someone who has it. It seems strange from that perspective. But it appears the government will follow suit with France and Spain and roll out widespread lockdowns on gatherings larger than 50 people.
So far, I’ve seen no noticeable disruption to daily life. But it certainly feels as though we’re being slow-walked into a prolonged period of enforced self-isolation.
As we wrote about on Monday, Dan has been recommending you own plenty of cash and gold to protect your portfolio from the hit it is taking right now. And one reader has a follow-up question on that recommendation…
Dan, you talked about having cash. Do you recommend having cash in hand rather than in bank accounts? Do you see banks restricting access to cash? I’m from Canada and would appreciate if you could let us know if your thoughts would be the same for U.S. residents as for folks in other countries.
– Jo P.
Dan’s response:
Hi, Jo. In the past, I’ve recommended you keep as much as six months of cash at home in a safe place (preferably a safe). I mean enough to meet all your basic expenses, under the assumption that you’d be unable to access the money in your bank.
A couple of things to keep in mind… Having physical cash on hand is a risk. If you lose it or get robbed, it’s gone. Be discrete. Don’t tell anyone, other than a spouse or trusted friend (who may be able to access it if you can’t). But make sure they get the importance of discretion.
Second, if your bank account is federally insured, your money is usually going to be safest in the bank. My recommendation is based on a situation where banks (or the government) limit withdrawals for any number of reasons.
Taking ALL your money out of the bank (if that’s even possible in this environment) is likely to raise a red flag (the bank will report you to the government). Be sensible. But be prepared.
Now, on to some of the comments and thoughts you sent in about how you’re personally coping with the strange times we all find ourselves in…
Hello, my wife and I will be trying out high-dosage IV Vitamin C twice a week for the next couple of weeks from my homeopath – that is, if he is not locked down. Germany, where I reside, is restricting almost all unnecessary travel in the next four to six weeks in the hope of slowing down the spread of the virus.
Personally, considering that it is a bioweapon and has already started a worldwide pandemic, I don’t believe that that will stop it. Even though I am 71 years old, I would rather boost my immune system, and if I get it, then I’ll ride it out and hopefully be immune when/if it continues throughout the spring/summer into fall/winter.
This will not be over any time soon. I just hope that most people have enough common sense to prepare for what is coming.
– William C.
So glad to have Legacy as my pandemic econodemic family! I am hunkered down in Hawaii with off-grid power and a kitty. Along with my hobbies (stamps and music), private WiFi, and monastic food supplies. I should make it to 71 later this year.
This acre can hunker a few more or just us already here (meow!). It is remote but within five miles of post, gas, and grocery – if available – and a great local coffee shop with mostly us preppers. We are all waiting for the rest of the story (with some cash, no guns, some charity, and lots of faith).
– Hieromonk B.
What about you? How are you planning on riding out the virus? Do you have coping strategies you can share with your fellow readers?
And do you have any burning questions about the historic market turmoil? Send your questions to me, and I’ll make sure to send them on to your favorite analyst.
Like I’ve been saying, we’re here to get you through this crisis safely and calmly. Just remember that we can’t give personalized investment advice.
Send your questions and comments to feedback@legacyresearch.com. We read every email you send in. And we’ll do our best to publish all your thoughts and questions in these pages.
As I (Chris) wrote about here, the mainstream media’s take on what’s going on with the coronavirus is not going to help you much right now.
The only reason to tune in to the talking heads on TV is to figure out what NOT to do.
We’ve been shouting from the rooftops here at Legacy Research about the need for an independent, alternative press.
That’s why we set up Legacy. Our mission is to show you what’s really going on behind the headlines… bring the big picture into focus… and “connect the dots,” as our cofounder, Bill Bonner, likes to say.
You’re going to read a lot of negative news over the coming weeks. A lot of it will be of the “fake news” variety.
Be especially wary of anything you receive via Facebook, Instagram, WhatsApp, or other social media platforms.
Most of what you read there is garbage. Worse, it’s misleading. Now is not the time to be getting junk information… whether it’s from the mainstream media or social media.
One of the best antidotes to all the noise and misinformation is Jeff Brown’s The Bleeding Edge newsletter. [You can sign up for free here.]
It’s free to read. And it’s the single best source of tech insights and recommendations out there right now. And Jeff has been putting out great research into the coronavirus and its spread.
If you don’t already know him, Jeff is one of the most connected guys in tech.
Before joining the team at Legacy Research, he was an executive at some of the most successful tech firms in the world – including Qualcomm, Juniper Networks, and NXP Semiconductors.
And these days, in addition to writing three tech investing advisories – Exponential Tech Investor, The Near Future Report, and Early Stage Trader – he’s a formal advisor to and angel investor in several early-stage tech startups.
Jeff is also a member of the Chamber of Digital Commerce. It regularly advises the U.S. and foreign governments on blockchain technology.
Yesterday, Jeff showed his readers why a recovery from the pandemic is just around the corner…
- New confirmed cases have completely leveled off in China. There are just a handful of new cases each day – social distancing helps stop the spread of COVID-19.
- We are seeing the same thing happening in South Korea and Japan.
- Research just out of China has demonstrated that warmer, more humid weather slows down the spread of COVID-19 just like past airborne viruses – that means that cases in the northern hemisphere will dramatically fall as we enter spring (humidity) and early summer (warmer weather).
- Electronic supply chain manufacturers in China are on track to return to full production by the end of this month.
- Shipment transportation to airports and seaports for logistics is almost back to normal in China.
- Foxconn, the world’s largest contract manufacturer, stated that supplies to its China, Vietnam, and Taiwan manufacturing plants have returned to normal ahead of schedule. Apple is Foxconn’s largest customer.
- Ascletis, a Chinese biotechnology company, has already shown early success with the combination of its Hepatitis C and HIV treatment for COVID-19. Early data from a clinical trial on 11 patients demonstrated that all 11 have recovered and been discharged from hospital.
- Another China-based biotech company, Hisun Pharma, has been testing its influenza drug. Early tests have demonstrated that patients are clear of the virus in just four days.
- Moderna has already begun testing its synthetic RNA vaccine for safety.
- And Gilead is beginning clinical trials on Remdesivir.
If you want a basic primer on COVID-19… and what you can do to protect yourself, I recommend Harvard Medical School’s online Coronavirus Resource Center.
No one source is going to have perfect answers. But this does a decent job. It has answers from experts on how to care for a loved one if they get sick. It explains new jargon terms such as “social distancing” and “community spread.” And it gives tips on how to prepare for quarantine or self-isolation.
And finally for now, here’s some useful info from our globetrotting correspondent, Tom Dyson. He and his wife Kate have been homeschooling their children for the last couple of years as they travel the world together. And Tom has sent a list of educational YouTube video series that they love showing their children:
- Bill Nye (science)
- National Geographic Kids (nature)
- Peekaboo Kidz (engineering)
- Horrible Histories
- Liberty’s Kids
- World Ahoy
If you or anyone you know is having to begin a homeschooling program this week because coronavirus has closed the schools, you might find these videos useful.
That’s all from the The Daily Cut AM team for now. But I’ll be back with you later for our regular Daily Cut send. Today, we have a short essay from Teeka Tiwari on why sitting still right now is the best thing you can do. Look out for that here this evening.
Regards,
Chris Lowe
March 18, 2020
Kilkenny, Ireland
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