Here are a list of issues I see developing over the next 12-18 months. They all go back to what is essentially a $260 Trillion dollar industry. That’s the estimate of worldwide debt as of last quarter. We could have smashed through that number already, who knows. What I’m seeing in these following issues amounts to a ton of defaults and a freezing up of the thing that essentially makes the wheels of the global economy go around. If this pandemic and lockdown keep going, the price of the Nasdaq and S&P 500 are going to be irrelevant.
- The FED is back in the MBS game. fred.stlouisfed.org/series/WSHOMCB They have recently been piling into mortgage backed securities lately. They got up to a high of close to $1.1 trillion during the GFC in 2010. They upped it to about $1.5 trillion in 2015 and were just starting to unwind some of that over the last few years. However, within the last 2-3 weeks they have piled up over $100 Billion in MBS to stabilize that industry. With all of the other issues I’ll mention later, you will quickly see how this whole thing could unravel and the FED will reach an ATH in MBS holdings in order to try to stabilize everything.
- The FED as a whole has been extremely busy. fred.stlouisfed.org/series/WALCL I don’t really even need to write anything here. Just look at that graph. It’s terrifying.
- Unemployment. We are basically 2 weeks into the numbers being reported, and they are absolutely awful. There’s no telling when this will end, but with global leaders like Donald Trump and Jair Bolsonaro, this could be going on for a long time. The longer this goes, the more dreadful the numbers will become. Unemployment peaked at around 10% during the last crash, and if this goes on for another 2-3 months, we are going to absolutely demolish that number and get into the ball park of the 25% record during the great depression. This ties back into #1, there are going to be so many mortgage defaults and late/missed rental payments (which, in turn, also causes defaults from larger investors).
- Check that link I posted at the top talking about corporate bonds being downgraded. In the simplest terms, when a bond is downgraded, it means it has a higher risk of default. A ton of players in the credit industry are limited to type of ratings on bonds they can hold. I honestly think this may be the domino that sets everything off. If a business can’t produce/sell/operate, they can’t pay off their loans. We were already at debt levels higher than we were in 2008 before COVID happened, this lockdown is just exacerbating an already pre-existing condition that was probably going to cause a mini-meltdown all on its own. If this lockdown stage goes on until mid-summer, I fully expect there to be at least one bankruptcy on the same level as Lehman Brothers, if not multiple.
I could go on FOR DAYS on this. There are so many underlying, systemic issues that this crisis is going to bring to the forefront. One thing that I’m terrified/interested to see unfold is the fate of the USD over the next little while. The FED has basically gone through their entire playbook from the GFC. Target rates are already 0%, and they are going to blast through any amount of expansive policy that they ever engaged in 10 years ago. On top of an ever increasing “supply” of USD, there is a market that is going to see a dramatic drop in “demand” of USD….oil. If you don’t know anything about the petrodollar, pop some popcorn, and fall down a youtube wormhole and feel the dread sink in. I feel like OPEC is gonna get their crap straightened out, and the price of oil is going to stabilize, but there are so many industries that are shut down right now that guzzle a ton of oil. On top of that, about 50% of the world is on a lockdown, and consuming a fraction of the oil they normally would. A decrease in demand for the dollar, combined with a dramatic increase in the supply of the dollar and an ongoing recession is a recipe for a nightmare I can’t even fathom. Thankfully the USD is basically what the global economy relies on, so I don’t think any government, no matter how malicious they may be, will allow it to collapse.
I want to finish this all of by saying that I ABSOLUTELY hope I’m wrong on every single one of those things. I 100% hope, pray, wish that a cure/vaccine/treatment were discovered yesterday. I’ve heard stories of how dreadful this disease is, and it makes me deeply sad to know that millions of people are going to have to deal with it before all is said and done.
TL;DR – The credit market is WAY more important than the equity market and much larger. Spend less time looking at the price of the S&P 500 and look at the asset sheet of the FED, bond yields, foreclosure amounts, etc.
Bonus. This is what my big “gamble” is right now. I’ve been rolling a bit of money into SLV (a “paper” silver fund). Just look at the price of silver in the early 80s. It was insane, and we are entering into some of the same monetary territory that we had back then.
Although some believe that QE and Central Bank purchases are sufficient to reduce credit spreads, investment-graded corporate bond downgrades are on a 20-year high.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.