Where to invest now, when stock markets are crashing, government debt is exploding and central banks are printing massive amounts of new base money?
Coronavirus has caused by the time of writing 740’000 infections and 35’000 deaths. The lockdowns have been put in place and the stock markets have crashed worldwide. Here is the S&P Index since the 2008 financial crisis till now:
Every crisis is an opportunity. The question is how will the current crisis play out and where to invest now in the current crisis?This article analyses the following:
- What is happening now?
- In which phases will the current crisis play out?
- What will happen next?
- Which investment strategies can be applied during the coronavirus crisis
In short – What is happening? What’s next? Where to invest 10’000, 50’000 or 100’000 $?
Please note, this is not financial advice. You need always to speak with your financial advisor before making financial decisions.
Asset prices decline, unemployment raises
It’s not only that the stock markets have crashed, but the other asset classes have also crashed since the start of the Coronavirus news:
The main interest belongs, of course, to the Bitcoin price. We explained in the ‘Corona Virus and Bitcoin Price‘, why did the Bitcoin price crash, although Bitcoin has been considered by many as a safe heaven. However, don’t worry about this – during the flight into cash, all assets will be sold, including the Bitcoins, Gold, and Treasury Notes. They will recover after the dropdown by a multitude.
In parallel, the unemployment claims are going up. Here are the unprecedented unemployment registrations in the U.S. Last week (Source: Zerohedge):
Central banks create massive amounts of the new base-money
Federal Reserve has announced 2.206 trillion USD base-money creation, which is in total 59% of Federal Reserve’s balance sheet till now. Additionally 4 trillion USD base-money based stimulus for the corporates was announced (resulting in total in 150% growth of the USD base-money within the months). ECB has announced 0.75 trillion EUR base-money creation. They call it a “package” or “liquidity injection”, but in reality, it is new base-money creation.
Let’s think that the average world-wide base-money creation rate per year is circa 12%. The current monetary response exceeds this by multiples already.
40 central banks in total have reduced their base interest rates or have launched their next phases of the base-money printing. This will be pushed into the economy through the banks, however, as the balance sheets of the banks will deteriorate, then we doubt that banks will help push this newly created base-money into the real economy.
G20 countries have launched fiscal support programs in the size of 6% of the GDP. And 80 countries have already requested emergency assistance from the International Monetary Fund…
The phases of the current economy shock
The stock markets have been waiting for a crash for several years. There have been some incidents on the markets, but the central banks have absorbed them with their standard tool – create more base-money and patch with the newly created base-money the places, where the markets start to blow off.
The repo crisis, which started in September last year and culminated in December last year, showed that the central banks are fully committed to removing any irregularity from the markets by using their standard tool.
So, central bankers’ understanding of the networked financial markets is much better than it was during the Lehman crisis in 2007/2008. Central bankers were prepared for everything except a black swan of the Coronavirus.
The declaration of the worldwide pandemic by WHO, the lockdown, and the fear of people became the black swan event. Of course, the central bankers responded with their usual toolset (create more base-money), but they were not prepared for the scale of this event.
Our current event is not a monetary crisis, it’s a shock on the supply lines – the internetworked economy cannot deliver if just-in-time delivered parts are not available. And because of the supply shock, we get the demand shock on the economy, which leads to the deflationary environment.
This economic shock will play out in the following way:
First Phase – Declining Revenues (we are here)
As the demand is declining, then the revenues of the companies will start to decline too. This leads to the decline in their earnings, which will then lead to the decline of their stock price. That’s the logical reasoning of the current stock market crash.
Second Phase – Failing zombies
The quantitative easing (the creation of the new base-money by the central banks) has created in the last 10 years an army of the zombie companies. These companies are not able to cover their capital costs in the normal interest rate environment, their operational revenues are too small for this. These companies can exist now only in the current very low-interest-rate environment. If their interest rates would grow or if their revenues would decline, then they will end up in the bankruptcy.
The interest rate for the corporate credit will start to grow – because the banks are aware of the situation of the zombie companies, so the banks just start to charge more interest (higher risk premium). We will get a situation, where banks will start to give less credit to the economy, which results in the defaults and bankruptcies of the zombie companies.
Third Phase – Bank Failures
These bankruptcies will create the losses to the banks – the banks have loss provisions, but the anticipated losses from these zombie companies will be magnitude higher than the loss provisions. The banks have to pay these losses with their equity. As a result, the banks will start to give even less credit to the economy, there will be credit-crunch and this will lead even more zombie companies into the bankruptcies…
The banks will receive bail-in and bailout. However, there will be no more funds available after the excessive fiscal stimulus. This leads to even more massive base-money creation, which will be more as we see now.
The result will be the nationalization of the banking sector. The nationalization of the pension funds will follow. The taxes will be significantly increased as governments are looking for the funds. This will be the wealth transfer from the middle class to the government balance sheet black hole.
Fourth Phase – Monetary reset
Exploding additional base-money creation by the central banks will result in the hyperinflation, people will stop using the fiat currencies and they will move into the alternate blockchain-based financial system. The government will not tolerate this and they will respond with the monetary reset – the introduction of a new monetary system.
The new monetary system will be probably gold-based. As central banks possess still significant amounts of gold in their balance sheets and as the gold price will grow significantly due to the monetary debasement, then central banks will be well equipped to launch gold-backed reserve currency.
Which investment opportunities are there?
There are multiple scenarios for how this crisis will play exactly through the economy. However, all paths will result in the:
- Massive base-money creation, which erodes the trust into the fiat money
- Massive fiscal stimulus, which creates more government debt, which brings the interest rates up, which will cause the banks to fail
These two trends are the key to investment decisions.
In the following, we analyze main asset classes one by one.
Is it Time to Buy the Stocks?
This is not so good idea. Be ready, that the stock markets will go more down and that the economic crisis will take longer to resolve than just 2-3 months lockdown.
We forecasted in our blog article Coronavirus and Bitcoin price – What’s next? that the S&P 500 will move to 1700 or 1250 level. It is too early to buy stocks. If you want to buy stocks, then you just need to wait. If you want to keep your stocks, then consider selling them and buying back at the lower level. At the same time, some sectors will do in the next month’s better – food, pharma, telecom, and weapons. However, as the all market will be going down, then they will do relatively better, but will lose in the absolute value.
Is it Time to Buy Bonds?
The credit-spreads on all corporate credits will grow. So, you should not invest in the corporate bonds of any maturity or risk rating. If you have bond portfolios, then you should consider selling them.
As 80 nations have asked for the support of the IMF (which will use their standard operating procedure to heal the economy – one get loans if one agrees to “kill” their economy), then you should not invest into sovereign bonds – you will have currency risk and credit downgrade risk.
However, if you have too much cash at hand (for example if you wait when to buy the stocks) then you should put this into the U.S. Treasury notes instead of keeping cash in the banks.
This is Where You Should Invest Your Money
Buy monetary assets – Gold, Bitcoin, and Silver.
This is the main recommendation. Here is the chart of the fiat currencies priced in gold (from 1969 till now). As we enter the massive new base-money creation era, then the gold price will just explode.
The same will happen with the Bitcoin.
The same will happen with the Silver as an alternate monetary metal beside the gold.
If you buy gold or silver, then you should buy only a physical one. Never buy “financial innovation-based” gold certificates, which defeats the purpose of the gold – the monetary assets do not have any counterparty risks. That’s why they are monetary assets.
If you buy Bitcoin, then you should keep this on your wallets and not in some exchange wallets. The crypto exchanges are trading with the IOU’s, which have counterparty risk. Having Bitcoin in your wallet does not have any counterparty risk.
Buy agriculture land, farms?
The lockdown means food shortage. If you have an opportunity to buy land or farms, you should do so. The food security will become a hot topic in 6 months from now.
Buy Decoupled industries – Not Blockchain and Crypto based?
Decoupled industries will not be influenced by the ongoing crisis from one side and they have high potential from the other side.
Let’s think on the:
- Virtual reality industry
- Gaming industry
- VPN providers, Website development tools providers
- 3D industry
It’s about equity investments into the companies, where the connectivity with the real world or with the banking sector is missing.
Buy Decoupled industries – Blockchain and Crypto based?
The massive upcoming monetary debasement will cause the loss of trust in the fiat currencies, which will lead to the monetary reset. When this happens, then the traditional banking sector and related sectors will be evaporated. Additionally, the savings of the people in these financial institutions will be evaporated too.
This monetary reset will enable the blockchain-based financial system – see the article “Blockchain-based financial system – Are we ready?“.
These are the key components for a monetary system (and all of them are available by now in the blockchain):
- Base-Money –main cryptocurrencies, which are not manipulatable in the supply will serve as base-money: Bitcoin, Ethereum, and Litecoin.
- Credit-Money and Debt – blockchain has well-developed means to borrow and to lend. There are central lending solutions (which control the private keys of the users) and there are decentral lending solutions (which do not have any access to the user’s assets).
In our current fiat money system, 90% of the money is the credit-money, created via bank lending. Banks are continuously creating credit-money via the lending process and destroying credit-money when the loans are paid back.
The credit-money means in essence loan agreements (debt), which are transferable to third parties, which can use this as a means of payment to the next parties and so on. At the end of the loan term, the borrower has to pay to the holder of the loan agreement.
The only blockchain company, offering the concepts of the credit-money is SmartCredit.io. It’s a de-central lending platform, where the lenders will receive tokenized loans (these are called Credit-Coins on the SmartCredit.io). These Credit-Coins are transferable and the holders of these Credit-Coins will receive loan principal and loan interest payments.
- Means to keep/store the base-money, credit-money, and financial assets – Crypto ecosystem has well-developed wallets, which can store either the crypto-currencies or tokenized assets. Additionally, it’s the wallet owners, which control the assets in the wallets (the one with the private key’s controls the assets).
Let’s think about the current accounts in the banks (where most people keep their fiat money) – legally speaking – the bank is the owner of this money. The account holders have only sub-ordinate claims against the bank to receive their money. If things go bad, then senior claims will be served first and after that the rest, if anything is left
In blockchain wallets, the users and only the users are controlling their assets. No-one else has access to the user’s assets.
- Means to make payments and to transfer financial assets – this is the key functionality of the blockchain
- Exchange of different money’s and financial assets – Ca 1000 crypto exchanges have been, which are exchanging ca 2’000 different cryptocurrencies and asset tokes
- Financial products – Crypto based financial products are so far little developed. The main reason for this is the regulatory aversion to the crypto, which is nothing else as protection and subventions to the traditional banking industry
- Means of the wealth management – Traditional banks are avoiding the “risks” associated with the cryptocurrencies and blockchain (although most of the transaction histories are available on the public chain)
The upcoming monetary reset will be painful to society. However, it will enable the blockchain-based financial system, which will be one of the main winners of the upcoming economic crisis.
This upcoming monetary reset will see massive wealth transfers. The savings of the middle class will evaporate, the value of the pension funds will disappear as well. Real estate prices will collapse. The illusion of wealth will disappear. This will be necessary after the fiat money party since the gold-decoupling of the U.S. Dollar in 1971.
At the same time, we should see the situation as an investment opportunity into the sectors, which will prevail after coronavirus economic shock.
Our crisis roadmap has 4 phases, we are in the first phase of this crisis. Every crisis is an opportunity. It’s about analyzing the big picture and seeing where the trends will go.
We recommend the readers to analyze the situation and the facts. And please consult with your financial advisor before making any investment decisions.