Dear Reader,

It seems trite to talk about financial markets during a health and economic crisis.

But that’s our beat.

So that’s what I’ll talk about today.

I’ll just make one comment on the virus, for perspective. And to give you some hope.

In Australia, as of last night, there were just 1,258 active cases of the coronavirus. Of those, only two are serious or critical. There have been just seven deaths so far.

Last night, the federal and state governments announced a series of measures to stop crowd gatherings. If we use our brains and take this seriously, we may be able to stop the spread before it puts too much strain on our health care system and society as a whole.

Recent evidence of brain use, however, is not too comforting.

We can hope, though.

The government’s overnight closure of pubs, clubs, indoor sporting venues, places of worship, cafes and restaurants (except for takeaway), casinos and cinemas will likely lead to more falls on the ASX today.

There is just no respite from the selling as stocks absorb more bad news on a daily basis.

What do you do then?

Cash, foreign currencies, and gold are the only safe havens. Cash preserves your capital. But thanks to a plunging Aussie dollar, you’re still losing out relative to foreign asset prices.

Which is why gold priced in Aussie dollars is doing its job. Gold preserves your purchasing power in times of crisis. There aren’t many charts in the world that look like Aussie dollar gold (below) right now…

It’s up 20% so far this year. The market is down more than 30%.

That’s massive outperformance.

But smart investors are also looking at the ratio of gold to shares.

The chart below shows the ASX 200 relative to GOLD, which is the Aussie dollar gold ETF. As you can see, this is the cheapest shares have been relative to gold since at least 2003.

That’s not to say the trend won’t continue. After all, we’re in the midst of an economic storm. But it’s also telling you that your capital might be better served in quality stocks in the years ahead.

Gold has done its job. The question is: how will it perform when this storm blows over? Which it inevitably will.

There is an argument that gold and shares could continue to rise together.

After all, central banks and governments are creating unlimited amount of cash, and will continue to do so.

Right now, the trillions that global central banks are collectively pumping into the economy are merely propping up a deflating credit bubble.

Investors, paralysed by fear, are holding onto cash too. Ironically, of all the asset classes, cash is the only one that central banks can create unlimited amounts of.

In an economic crisis though, cash is the only asset with seemingly unlimited demand. Everyone wants it. Everyone needs it. Until they don’t. Then there will be a torrent of it and its value relative to real assets will plummet.

That’s a story for another day.

For now, we’re in the thick of it.

Aussie stocks are set to open sharply lower again today. Company earnings will take the biggest short-term hit in history. Airlines and travel companies have already been hurt badly. As have banks, property trusts, energy stocks and sports betting companies. Casinos and hotels are next.

Expect more and more companies to go into trading halts as business grinds to a halt.

If the shutdown persists or becomes even more draconian, there is a risk the stock exchange itself will close. Should trading in shares continue when there are questions around short-term solvency and access to capital?

I don’t know the answer to that. But I do know that a debt dependent world runs on a just-in-time system for everything; including cash. No one has enough to get themselves through a crisis.

This is why you should expect to hear more from the reserve bank and government in the days ahead. The response has already been historic. It’s only going to get bigger.

Amongst all the panic and fear, good investors should be on the lookout for opportunities. You haven’t seen a buying opportunity like this since 2008/09.

There is no sign of a bottom in markets just yet. But as the old adage goes, it’s always darkest before the dawn.

I believe you should at least be thinking about buying at these levels, not panic selling. There will be wonderful opportunities to come from this crisis. At some point, we will reach the maximum pain point.

It feels like every day is a maximum pain point. This is truly a historic event, both for society and financial markets.

The most important thing is to stay safe. If you don’t have your health, you have nothing. If you’re healthy mentally and physically, you’ll have a much better chance of taking advantage of this incredible bear market.

Until tomorrow…

Greg Canavan, Editor, The Rum Rebellion

US Enters First Economic Crisis of the Decade
By Bill Bonner

Last night at midnight, a ban went into effect here in the Calchaqui Valley. (As it did in California.)

We were already under house arrest. Now, everyone is.

Caesar’s decree

Yes, a decree went out from Caesar over all the land. People are to return to their homes and shelter there for a fortnight.

A panicky pow-wow was held on our porch. ‘What are we going to do?’ asked our capataz (foreman).

‘You can’t stop working,’ pointed out a neighbour who had ridden over on horseback to see if we needed anything. ‘The cattle must be fed. We’re farmers, we have to work no matter what the government says.’

‘I know,’ continued the capataz. ‘The grapes are ready to harvest. If they don’t get picked next week, the whole year’s production may be lost.’

‘But the road up to the ranch is so bad that the truck can’t get up there to pick up the grapes. I called the local government. They said they couldn’t do anything because everyone is supposed to stay home.

‘And our grape pickers come from a different town, so they’re not supposed to come up to the ranch.

‘And if you get caught out on the road, they’ll put you in jail. At least, that’s what they’re saying.’

Economic crisis

Grapes not picked. Wine not made. Bottles not shipped…nor stocked on shelves…nor bought by consumers. Even in our dinky operation it still represents a whole year’s worth of work — lost.

Calchaqui wine may become even rarer than we thought.

Sales revenue is used to pay wages…buy fuel…and keep the enterprise going. Now, it may disappear. Multiply that by millions or billions, and you have today’s economic crisis.

All over the world, restaurant ovens are cold. Factories are as quiet as churchyards. (The big automakers announced yesterday that they were halting their assembly lines.)

Unearned wages are unspent. And the Bank of America says a recession has already begun.

All of a sudden, the economy that depended on ‘more’ finds itself with a lot ‘less’.

Taxes are not paid on profits not made on sales of products never produced by workers not working, truckers not trucking, and buyers not buying. And we are just at the beginning.

What lies ahead

So here is the executive summary…our best guess about what lies ahead:

The world of getting and spending is shutting down. Without revenue, neither businesses, households, nor the government will be able to pay their bills.

Stocks will rise (‘a dead cat bounce’, the old timers call it) on all the ‘bailout’ news, and then give up another 50% of their value.

Business will default on its $16-trillion-debt pile. Millions of people will lose their jobs. The Secretary of the Treasury, Steven Mnuchin, says that upwards of 20% of the workforce could be unemployed.

The feds will print money by the trillions to rescue the situation. Spending will rise. But lower output…and more currency in circulation…will raise prices.

In the summer, the virus will slow down. Then, the economy will begin to recover. But people all over the world will begin to mistrust the dollar (and other ‘paper’ currencies). Prices will rise as real growth is suppressed by inflation fears.

Most likely, the virus will return in the autumn, though there’s no way to know how bad it will be. But at some point, there won’t be enough ‘cash’ to keep up with the rising contempt for it.

ATMs will run out. The economy — still fragile, with interest rates below inflation — will need more bailouts and more helicopter money to keep going.

Then, the feds will face a terrible choice. Printing more money may bring a hyperinflation, like Weimar Germany, Zimbabwe, or Venezuela.

But not printing will risk a deep depression…a ‘throw out all the bums’ shock in the next election…or even a revolution.

What Paul Volcker will stand up and bring a halt to the money printing? What Ronald Reagan will back him up? What Horatio will stand at the bridge and say ‘enough’?

The feds will make their choice…the same choice made by von Havenstein in Germany and Gono in Zimbabwe. They will print. Stocks will soar as people ‘rotate’ out of bonds.

The bond market will collapse. Debts will be wiped out by inflation. So will debt-based credits.

Scenes of financial depravity, economic debauchery, and orgies of social degradation, violence and chaos — now unimaginable — will flash across every big screen in the US.

That is, of course, a future. The future is something we wait to see.

Meanwhile, back in the valley…

Confined in the Calchaqui

People must return to their place of domicile. And there they must remain for 10 days.

The carpenters who came to work on our screen doors packed up and left. They came from the province of Jujuy, at least seven hours from here.

Now confined to their houses, the Argentines are getting a little stir crazy. Comes this message from a friend:

‘How difficult it is to work from home! Lots of distractions. I can no longer stand my wife, children, dogs, cats…’

In Wuhan, China, in which people have been confined to their houses for as much as two months, the divorce rate is said to be soaring.

But all the news is not bad. Bloomberg reports that at least three US senators were able to avoid stock market losses:

‘U.S. Senators Sold Stock After Coronavirus Briefings in January

‘Critics say they put protecting their wealth before their duty to protect public health.’

How nice for them!

Regards,

Bill Bonner, For The Rum Rebellion