Chris’ note: The Daily Cut AM is a new e-letter from the Legacy Research team. For as long as the coronavirus pandemic lasts, it’s where you’ll find our best ideas – paid or free – about the outbreak and its impact on your health and wealth.
Today, you’ll hear from trading legend Andy Krieger. Andy heads up a new trading service, Andy Krieger Trading. And last month, in these pages, he accurately predicted a surge in stimulus from central banks in reaction to the coronavirus panic.
As he reveals below, the “hyper volatility” this virus has kicked up in the stock market is not over yet. That means having plenty of cash on board, as we’ve been recommending, is a must right now.
Make sure to stick around to the end of this morning’s dispatch for the reader mailbag. I’ll also have more updates for you on the virus that’s stalking America… and the world.
Last week got off to a wild start.
On Monday, we had the largest one-day decline in the stock market since the “Black Monday” crash of 1987.
At the close of trading, the S&P 500 was down over 27% for the year, and the Dow was down over 30% for the year.
The Fed’s panic interest rate cut on Sunday, March 15, coupled with its enormous funding commitment, did little to stem the massive waves of selling of stocks, gold, and other assets.
Trillions of dollars have been lost. The prospects for the economy over the next several quarters look abysmal.
On Tuesday, the markets bounced back with a vengeance, making back half of the huge declines of the prior day.
The stock market’s volatility has exploded to levels we have never seen before.
This hyper-volatility will likely be here for quite some time.
Overall, I persist with my negative views on the economy and stock markets. We are already in a global recession, and things are going to get much worse.
But it’s not all bad news.
The current conditions are creating great trading opportunities for me and my readers.
In the meantime, an overview of what is happening – and what it means for the economy and the markets – is in order.
The first thing to know: We’re in the early stages of an unprecedented demand shock.
Wherever I look, I see economic hemorrhaging.
With major portions of the world’s population trapped inside their homes, many sectors of the economy are getting hit very, very hard.
This won’t change anytime soon.
Travel, leisure, airlines, entertainment, retail, dining, energy, and commercial real estate are among the sectors that are getting smashed by the coronavirus.
China is a prime example. The coronavirus there brought industrial production to a near standstill. It dropped 13.5% year-on-year for the first two months of the year.
Now the country is going through a second shock due to the lack of consumer buying – at home and abroad. Chinese exports are down 18% year-on-year. Fixed-asset investment is down 24.5% year-on-year. And retail sales have plummeted by about 24%.
Banks’ balance sheets are going to be a mess. There will be huge quantities of non-performing loans that the government will cover up.
China’s first-quarter GDP is going to come in at about minus 11%. That’s a truly staggering drop from its typical high, single-digit growth rate.
And it’s not just China. Europe is hunkering down, with nearly war-like conditions across the continent.
People have been instructed to stay at home except for emergencies. Economic activity is collapsing.
In fact, Europe has shut its borders to travel. So economic activity will slow even further there.
I could carry on, but the point should be clear. In countries across the globe, economic activity is slowing – FAST. It will get much worse before it gets better.
In a worst-case scenario, we are looking at a global depression.
This is the first time I have used the “D-word” in public, but I need to tell you how I see it.
In a best-case scenario, we will have two horrendous quarters of negative growth. Unemployment in the U.S. could potentially reach 20%, a terrifying number.
As the data starts to roll in, we’ll be able to finetune just how ugly this scenario is becoming.
For now, one thing is clear: This is unlike prior shocks to our system.
The Fed providing liquidity will not solve the problem. It may stabilize the stock market temporarily, but it will hardly create the economic demand the U.S. needs in order to recover.
While people are trapped in their homes, consumption will remain extremely weak. Retailers will need to shutter their stores, hotels will close, restaurants will shut down (many are already doing take-out and delivery only), airlines will be on the verge of bankruptcy, and the oil shock will threaten the entire oil sector.
Oil prices at $22 a barrel will make the entire U.S. fracking industry vulnerable. Executives from every industry sector will be looking for a government bailout. Millions of people will be in desperate need of help.
With all this unfolding, one thing I have not heard the mainstream media focus on is the negative wealth effect that the stock market plunge is going to create here in the U.S. and elsewhere.
Shareholders have lost more than $11 trillion over recent weeks. This will certainly have a dampening effect on consumer confidence and consumer spending. It will likely make the demand shock from the coronavirus worse… and slow down the recovery once the crisis passes.
In this scenario, it’s hard to be bullish on stocks. Eventually they will bottom, and it will be safe to start buying again. At this point, it just isn’t worth the risk.
With that in mind, let’s take a closer look at what the government is doing to try to stem the bleeding – and why it’s a problem…
You may have heard the U.S. government is floating the idea of a $2 trillion “fiscal” (deficit spending) package.
It’s presenting it as business interruption funding. The funding would be a mix of handouts to individuals and loans to various companies.
Will that be enough?
It would certainly provide some much-needed help… But let’s see if lawmakers on Capitol Hill can agree on the implementation of such a major fiscal stimulus package.
At the same time, as I mentioned earlier, the Fed pushed interest rates down towards 0%. That means many of the tools of the central banks have been used up.
The idea of the Fed printing money and buying bonds (aka quantitative easing) is okay as an emergency procedure when the capital markets are seizing due to a loss of liquidity.
That is not what we have going on right now.
This is unacceptable as a standard operating procedure when the economy is not in a state of crisis. But this is what the Fed has done since 2008.
Our economy must be weaned from this artificial life support.
Credit spreads [the difference between yields on riskier and less risky bonds; a sign of stress in certain bonds] have widened.
But the demand shock of 2020 is different from the 2008 crisis. Back then, the banking system was under extreme stress and in danger of collapsing.
It’s a strategy that is ill-suited for the current problem. When the government gives the banks free money, the banks should give their clients free money.
That didn’t happen in 2008… and it won’t happen now. Banks will hold on to whatever funding they get to prop up their balance sheets.
The immediate problem is that millions of people will soon be out of work for two or three months – maybe longer.
Payroll tax assistance – as President Trump has proposed – provides no help to unemployed people. We need to get money in the pockets of these people so that they can eat.
But that’s a discussion for a different time. So stay tuned for more from me on that…
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 we’ll publish answers from Bill Bonner, Doug Casey, Teeka Tiwari, Jeff Brown, E.B. Tucker, Jason Bodner, Dan Denning, Nick Giambruno, Tom Dyson, and Dave Forest… and the rest of the Legacy Research team… in these pages.
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… send it on.
We’re also interested in local updates on quarantines in your area… the state of the economy… or the response by the feds. Don’t be shy. Let us and your fellow readers know.
We want a real alternative to the fearmongering in the mainstream news.
So start sending your questions and stories my way, especially if you’re a frontline healthcare worker. You can reach me and the Daily Cut AM team at [email protected].
First up this morning, a question about our favorite form of “disaster insurance” – gold.
Then some critical updates from your fellow Legacy readers who are stepping up to the plate as frontline medical staff in this pandemic.
And finally, some perspective from a reader in his 70s on what the crisis means for us as a society.
First, that question about gold…
Dan, Chris, E.B. and many others are recommending gold as an asset. For the sake of my education, can you please explain how gold would be used in a deep global financial crisis where other asset classes may fail – including the U.S. dollar.
How would gold be able to be traded or bartered in such a collapse? I understand it as a hedge against the dollar. But I do not understand it as a product for use and trade.
There must be something I’m missing. And I don’t want to miss it as I have at least a third of my wealth tied up in cash and none, as of yet, in gold.
– Alan A.
Here with an answer is Bonner-Denning Letter co-author Dan Denning.
Dan is holed up in Australia right now. But I sent him your question, and he sent back this reply…
Hi Alan, that’s a good question. Looks like we’re about to find out…
My answer is that I would NOT use or trade gold for any transactions, at least not yet. Gold is a savings vehicle. I save in gold so if and when the time comes, I can convert it back into whatever legal tender currency is being used.
As of now, there’s been no change in government-run currency regimes anywhere. The price of gold in those currencies IS changing. So there may be a point where you would sell some gold if you needed cash.
If physical money (paper) was discontinued, for whatever reason (if it’s contaminated, or there’s been a switch to digital), then silver might be a more likely medium of exchange for barter or trade.
Mind you, it wouldn’t be legal tender. But people might use it anyway.
Now, on to the emails from the brave men and women in the medical profession bracing for the impact of the coronavirus…
I work as a physician in emergency departments in rural areas of the U.S. Currently, a sporadic case here or there. We all feel like we are on the edge of a shore watching the tide go out before the tsunami.
– Tom F.
I have been following your notes with quizzical piqued interest for about a year. Here’s some observations on a world no one imagined…
I work in a Med center in Maine, where we have had the good fortune of being able to watch this all happen in slow motion. So far, we have 42 cases diagnosed. 1,690 cases tested negative. No cases admitted to our hospital, but there are admissions in the larger hospital in Portland.
The biggest question here is what happens if we start losing providers and nurses at an alarming rate, due to quarantine and illness. For rural hospitals, we have been running on a shoestring (budget and personnel) for years, due to the hollowing out of the entire system.
I am a single doc in my department. If I get sick, that’s many patients who would have to travel 35 miles to the next doc in my specialty. I am on call 24/7 for days on end. If our ICU [intensive care unit] staff get sick, lack of ventilators won’t be the problem. Simple staffing issues will be.
The anesthesiologists are standing by to lend a hand if necessary. My brother in upstate NY retired from his job as Intensivist last year. Now, he’s being asked to come out of retirement to help cover the ICU, if necessary.
But he has a significant other at home with chronic medical issues. So he would probably have to quarantine himself away from family for the duration of this pandemic; he may decide it isn’t worth the ethical dilemma.
Dwindling medical supplies is another problem. Many of them come from China, and some are included in the still-enforced tariffs. The anesthesiologists are trying to limit surgeries to conserve equipment so that we can be ready in case the tsunami of admissions hits.
Decreased patient throughput and surgeries causes knock-on effects. And staff have to be down-sized. This is occurring in all businesses. But it may negatively impact the medical system’s ability to respond well.
The best answer seems to be to isolate, minimize human contact, stay healthy through hydration and sleep, and live to see another, brighter day. The good news up here in Maine is that we have plenty of woods to hike in with minimal human contact.
I can’t overstate how wonderful that spaciousness is. I just wish everyone had access to that supreme luxury like we do… Take care and stay healthy…
– Norris L.
Dr. Kevin is an emergency room physician in suburban Detroit, Michigan. They are currently down five ER doctors due to exposure. And Kevin has worked double shifts continuously for the past week.
His PPE [personal protective equipment] looks similar to a welder’s – with full hard hat and face shielding. He has not seen his children in a week. Prayers for his health and welfare, as well as his patients!
– Raymond B.
I’m 71 years old. My wife is 73. We lived through the smallpox era, polio, Vietnam, and lesser problems like chicken pox and measles. Most of America can reflect on HIV and, of course, the opioid overdoses.
Times like this help us to focus on what is important and who is important. For some, this will be traumatic; for the rest of us, it is a lesson and a blessing.
For me, the hardest part is watching the stupidity, both in the common person and the media. Thank you at Legacy for adding some sanity to the “funny farm.”
– Milton E.
Daily Cut AM is a shared resource for you and your fellow Legacy readers. These are trying times. And as I keep pounding the table on, the way we’ll get through this is together.
So please share your stories of how you’re coping… along with any local updates… at [email protected]. We’ll publish as many of your emails in future Daily Cut dispatches as we can.
Now more on the spread of the virus… and some more home-schooling tips.
Our tech expert here at Legacy, Jeff Brown, is one of the most connected guys in tech.
Before joining the team at Legacy Research, he was an executive at some of the world’s most successful high-tech firms.
Now, he’s using his expertise… and his network of contacts… to figure out what’s next in terms of therapies and vaccines for the coronavirus.
So, expect to hear a lot from Jeff in these pages in the days and weeks ahead.
Last Thursday, we brought you Jeff’s report on the frontline of biotech research – the race to find a coronavirus vaccine.
And on Friday, we unlocked the actionable stock recommendation he recently sent paid-up subscribers of our Near Future Report tech investing advisory about a “virus resistant” stock he believes is a no-brainer for your portfolio right now.
Today, I want to highlight news from Jeff of a discovery that may save thousands of lives.
Researchers at MIT (Massachusetts Institute of Technology) have published data about the effect of temperatures on how the virus transmits. Over to Jeff…
The data shows that the maximum number of transmissions occurred in regions that had temperatures between 3 degrees and 13 degrees Celsius (37.4-55.4 degrees Fahrenheit).
The data also shows that countries with mean temperatures above 18 degrees Celsius (64.4 degrees Fahrenheit) have seen less than 5% of the total number of cases.
This fits with what we’ve seen so far in the U.S. The warmer southern states have seen a slower spread of the coronavirus than the cooler northern states.
And researchers in Europe came to the same conclusion.
Last week, they found that 95% of all cases globally took place in a temperature range between 28.4° F and 50° F (-2° C and 10° C).
As the warmer spring weather takes hold, that means we could see a drop-off in the number of new cases of COVID-19 (the illness caused by the novel coronavirus).
Our globe-trotting “gold bug” Tom Dyson needs no introduction to our regular readers.
But if you’re just joining us, you can catch up on Tom’s backstory in his free daily Postcards from the Fringe e-letter.
Tom and his ex-wife, Kate, have been home-schooling their three kids.
And Tom has been sharing some of his favorite home-schooling resources.
On Wednesday, we shared some of them with you. Below are some more of Tom’s recommendations…
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Scholastic Learn at Home: Free Resources for School Closures – 20-day courses made especially for children affected by school closures. Suitable for all grade levels.
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Google Arts and Culture – Among many other cool educational programs, it offers virtual tours of over 500 of the world’s most famous art galleries and museums, including the British Museum, the Guggenheim, Musée d’Orsay and many others.
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Sir Ken Robinson – A very funny and motivational TED Talk about creativity.
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Logan LaPlante – A very inspiring TED Talk for kids by a 13-year-old.
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Rita Pierson – Another TED Talk – about what kids really need.
If you – or anyone you know – need to home-school kids right now, we hope you’ll find some of these resources useful…
And finally, as we keep reminding you, “fake news” about the coronavirus is a huge problem.
Avoid the hysterical coverage on cable news. And take everything you read on social media with a grain of salt. It’s likely B.S.
But here are some news stories about the virus that caught my attention…
On Saturday, the FDA (Food and Drug Administration) authorized the first rapid test for the virus. It can give a result in about 45 minutes.
Scientists at Oxford University in England have developed new technology for even quicker virus testing. It takes half an hour and doesn’t need any complicated equipment.
Finally, in Florida, folks are concerned that spring breakers are ignoring the calls for social distancing. The concern is they’ll become coronavirus super-spreaders.
And don’t forget, the isn’t the only free newsletter resource you can tap into during these difficult times.
We also publish Bill Bonner’s Diary, The Bleeding Edge, Casey Daily Dispatch, Palm Beach Daily, Palm Beach Insider, and Postcards From the Fringe.
Regards,
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Chris Lowe
March 23, 2020
County Kilkenny, Ireland
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