We are witnessing a Global financial snowball I never thought I’d see in my lifetime. Central Banks everywhere have gone from a Zero interest rate policy with waves of Quantitative Easing to the mother of all - broad equity purchases everywhere! These actions are completely manipulating currencies and stock prices by much so, that they are basically nationalizing markets.
In a matter of a few weeks, the US Fed pumped over $6 Trillion and pledged to purchase an “unlimited’ amount of assets to maintain stock values. In contrast, the IRS collected $3.5 Trillion in Corporate and Personal Income Taxes in 2019. But in a matter of say, a 10-minute meeting, the Fed injected $6 Trillion with no end in sight. Wow!
Traders are used to predictable intervention by the US Fed when traditional economic events occur. These days, the amount of money being injected is so far reaching that there is zero potential for open free market trading. If you thought the Ponzi scheme called QE was bad, this policy is many times worse and they can’t stop. You simply cannot taper down a Ponzi. This is a global catastrophe that can’t be undone at this point without a complete Debt & Currency reset. In addition, it will take going back to a currency that can’t be debased or leveraged by unexpected stimulus or interference. It could be going back to pegging the dollar to Gold or a non-debasable Crypto currency and cancelling all debt, period.
Because of the constant news regarding the Coronavirus, I missed an interesting transaction that is all but normal now but was the harbinger of things to come. In February, LVMH (Louis Vuitton Moet Hennessey) went to the European Central Bank (ECB) looking for a handout to purchase Tiffany’s in the US. LVMH was short $10.6B of the $16B cost to buy the exclusive Jewelry Icon. Apparently, this wasn’t a problem for them as the ECB had LVMH issue a $10B Corporate Bond and then the ECB wired them the money so they could complete the purchase. Thank you very much, ECB! To make things worse, the Bond carried a negative interest rate. So not only did the ECB gift Tiffany’s to LVMH, they will give them interest to hold the paper. That is what I call a giant slap in the face of normal people everywhere, but nobody cares. Unbelievable.
The problem with going down this road of Nationalizing the free markets, is they won’t be able to stop there. With an expected 35-40 Million unemployed by the end 2020, the economic impact of that reaches every corner of the economy. Hospitals could be on the verge of going bankrupt as is the insurance companies who pay them. The Fed will have to Nationalize Hospitals, Clinics and Insurance Companies to avoid these bankruptcies. The next stop on the snowball’s trajectory is Pension funds, both, Public and Private. As it stood at the end of 2019, Pension fund managers were taking unprecedented risks to maintain the necessary liquidity to meet their monthly pay out obligations to pensioners. With massive unemployment, those funds will see a dramatic decrease in cash injection, putting further strain on an already fragile situation. Before the crisis, pension funds needed to earn 6.7% to meet those obligations, and that was with Full Employment of 3.3%, not 30-40% unemployment. That means the 6.7% will have to jump considerably and that can’t happen without the Fed’s involvement. Do they Nationalize that as well? They will absolutely have to prevent people from not getting their pension payments and those companies from going bankrupt. It doesn’t stop there but you get the idea. Everything is connected and there is no stopping this runaway train.
The only thing we can do is reassess our priorities and brace ourselves for an economic reset the likes we’ve never seen. Our team has devised strategies to mitigate the financial fallout and seek specific assets or commodities that are minimally affected by central bank interference. In every major crisis comes the dawn of new opportunities, but only if you’re hedging yourself properly. Give us a call if you’d like to discuss the effect these historic economic events are having on your company and see if we can’t help put you in the driver’s seat.