The Fed vs. Fundamentals
On Tuesday, the Fed announced an emergency 0.5% rate cut. It was a desperate move with a lot at stake.
The risk that we face is a potential drawdown (decrease in stock prices) of 50% or more. These events happen every 10 years or so, and they almost always coincide with the peak of debt bubbles.
And we’re very late in this credit cycle. We’ve piled up a truly incredible amount of debt.
A big drop in stock prices would send consumer spending plummeting. Companies would start having more trouble servicing their huge debt loads. And things could get gnarly for a while.
The Federal Reserve and the government are desperate to avoid this as long as possible. And most people who own stocks want to keep the party going.
I expect we’ll see central banks, like the Fed, and governments try all sorts of things to keep the market going up.
I don’t think it will be enough.
Eventually, there needs to be a correction to flush the market and clear the debt. Yes, that means there will be a recession. And some companies will go bust.
This is how the economy improves. It needs to happen. It will happen eventually. It always does. The stock market and debt party can’t go on forever.
Over the last 10 years, we’ve been trained to buy the dip every time. But eventually, there’s going to be a dip that’s a lot bigger than 10% or 20%. Unfortunately, I think there’s a good chance we may have reached that point.
Coronavirus: A Catalyst, Not a Cause
If the economy continues to sputter, the coronavirus will likely take a large portion of the blame. And it is looking like it will cause a slowdown for a few months. But it’s nothing a healthy economy shouldn’t be able to survive.
So, if we do go into a sustained slowdown, I don’t think the virus will be the root cause of the problem. The real problem is too much debt, too much easy money, not enough saving, no interest payments and too little discipline. As I pointed out last Friday, the economy was already highly fragile before all this happened…
It’s been a bloody week for the market. But it’s important to remember that the S&P 500 is down only about 3% so far in 2020. And believe it or not, the market is still up 10% over the last year.
I think we could be headed a lot lower. Even before the novel coronavirus happened, the market was fragile. Profits were slowing, as was the market before central banks lowered rates and brought back quantitative easing.
In my view, the Fed’s low rates and easy money were the only things keeping the U.S. bull market alive (more on that here).
I believe the risk in stocks hasn’t been higher than this since 2008. The coronavirus happened at a bad time, and it could be the catalyst that sends our economy into a sustained funk.
The Fed will fight this tooth and nail. But as I pointed out a few weeks ago, it is not invincible. Eventually the market will correct dramatically.
I’ve got a strong suspicion that we’re very close to this point. I’ve recently started a list of “buy very low” stocks and suggest you do too. I think it’s likely that we’ll get a chance to buy stocks a LOT cheaper than they are today within the next year.
Why do you suppose Warren Buffett is sitting on a record $128 billion in cash? He’s waiting for some real blood in the streets. We’re not even close to that point yet.
Almost nothing is cheap in the U.S. today. And risks to the downside are high.
In my view, everyone should own precious metals. It makes for a nice hedge against reckless money printing and debt bubbles.
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