It’s hard to love pop culture, economics, and general nerdery as much as I do without eventually conjuring up some imagery from The Matrix.
That movie is so jam-packed with catchy, universally insightful, infinitely quotable one-liners that the analogies practically wrote themselves long ago.
When you set out to obtain deep knowledge on an unfamiliar subject… you “take the red pill”.
When some mastery of one of those subjects is gained… “I know Kung Fu”.
And when that mastery leads you to recognize something most others may not… “there is no spoon”.
It was that last one that came to mind while reading through pre-market headlines this morning, because they weren’t the kind of “tape bombs” that would have grabbed my attention as a young analyst learning a sector.
And yet they were actions that will likely have a profound impact on businesses around the world.
“We Are the Cure”
The first announcement was a massive 750 Billion Euro proposal by the European Commission, the bulk of which will be destined for Italy and Spain – the two countries worst hit by COVID-19.
Source: European Commission, Bloomberg
Not to be outdone, Japanese Prime Minister Shinzo Abe’s cabinet announced just two hours later that they had approved a brand new US$1.1 trillion stimulus package – 1/3 of which is earmarked for direct spending – to offset losses due to the coronavirus pandemic. This new package adds about 20% to Japan’s debt-to-GDP ratio – by far the highest in the world already.
Add that in to the US$2.3 trillion in aid passed by Congress and the nearly US$3 trillion that has been pulled onto the Federal Reserve’s balance sheet, and the global response is… well, it’s massive.
And given that widespread vaccinations for coronavirus won’t likely be available by year-end, these numbers are likely to continue growing – and quickly, if a second wave develops.
In fact, during last week’s 60 minutes interview with Federal Reserve Chairman Jay Powell, he said a recovery “may take a period of time. It could stretch through the end of next year. We really don’t know.”
But almost in the same breath, he mentioned that “In the long-run and even in the medium-run, you wouldn’t want to bet against the American economy.”
Indeed, markets around the world have proven resilient, with the FTSE 100 now down just 20% from peaks, while both the Nikkei and the S&P 500 are now down just 12%.
And with the SPY now once again flirting with the 3,000 level, it means there’s only one more point of technical resistance (the 76.4% Fibonacci Retracement at 3,105.67) to push through before we head back toward all-time highs.
You might ask how could such a thing happen with almost 40 million jobs lost during this pandemic?
And the answer is because the Federal Reserve’s actions have left professional investors little choice.
The Federal Funds interest rate is zero.
The yield on US Treasuries is zero.
Ultimately, that drives up the price of the bond, but drives down the yield…which is what investors were looking for in the first place.
When insolvent companies start catching bids and going up in price instead of going to zero, then how can we determine the value of anything?
The short answer is we can’t, because at this point the S&P 500 is little more than a sum total of available liquidity provided by the Federal Reserve. Volumes have decreased to the point where as much as 80% of trades are made by algorithms rather than by traders.
That means the “market” has essentially become the spoon from the Matrix… it doesn’t exist.
In other words, Jay Powell is trying to say to this virus that “we… are the cure.”
When the whole world is printing fiat currency like this at a breakneck pace, there’s really only one way to defend against any future shocks to the system, and that’s to buy gold.
Fortunately for us, gold has decided to take a nap during this new risk-on period, dipping down below the $1,700 level in overnight trading before catching fire at the start of US trading.
As such, let’s buy the dip and add another ¼ stake in Velocityshares 3x Long Gold ETN (NASDAQ: UGLD) here.
While we may see the yellow metal hover for a while – perhaps even test lower levels – we know for a fact that printing will continue until we get an actual cure, the economy actually recovers… or countries begin to default.
And if that’s going to be the case, I want Bazooka Insurance.
All the best,