Our Opinion

April 2020 - Covid 19 Update      

Chinese Coronavirus Special Newsletter

 April 14, 2020

 

The following is an eclectic summary of our comments on the current situation from economic, political and spiritual viewpoints. We believe our market projections for the near future are more reliable and valid when assessed from differing standpoints, and then viewed holistically.

U.S. stocks closed out their worst quarter since the depths of the 2008 financial crisis, a stunning blow for the market few investors could have anticipated at the beginning of the year. Since April 1st, the market has rebounded off what we think is the bottom. The coronavirus pandemic quickly became a force that brought business to a standstill around the world, causing a pell-mell selling stampede of almost all asset classes. Volatility in the U.S. stock market has since been relentless, and people are confusing the panic they feel in their personal lives with their financial lives. But we believe that it is folly to derail your investment policy and long-term goals. However, the deep and pervasive health measures to stem the spread of COVID-19 will have a major economic impact regardless of how widespread the illness becomes. As a result, we think the U.S. economy will take a huge hit in the second quarter, contracting at an annual rate of anywhere between 15% and 30%, with the global economy heading for a sharp contraction in the first half of this year. We believe growth in the U.S. will return in the second half of 2020. This year may turn out to have only one negative quarter, but we think it’ll be a doozy.

Signs of anxiety also lingered in the markets, boosting the value of assets like U.S. Treasuries and gold, which tend to do well when investors are uncertain about the economy. Gold rallied, with the precious metal finishing the first quarter up 4.2% at $1583 a troy ounce, resulting in six consecutive quarters of gains. To date, gold bullion is about $1750 a troy ounce.

To clarify matters, there are three types of bear markets – structural, cyclical, and event-driven. Every bear market has a unique set of drivers, but throughout history most of them fall into one of these three categories. Structural bear markets are like the 2008-2009 downturn which was driven by financial bubbles, too much leverage, and  credit market dislocations. The average length of a structural bear market is about 3½ years with about a 50% market decline. Cyclical bear markets happen more as a function of the business cycle, when growth leads to inflation, interest rates go up too fast, the yield curve flattens or inverts, loan activity declines and demand wanes. The average length of a cyclical bear market is about two years with around a 30% decline in equities. Event-driven bear markets are triggered by an exogenous occurrence like an energy crisis, political instability, war, or in the case of the current bear market, a global pandemic. The average length of an event-driven bear market is about nine months with a 30% average equity decline. Note that there has never been an event-driven bear market in history that was triggered by a virus/disease outbreak!

It makes sense why structural bear markets tend to be the most severe because they result from systemic issues in the financial system and capital markets. Cyclical bear markets generally require the business cycle to run its course. They are bad, but have tended to resolve themselves with time and adequate policy responses. Last is the event-driven bear market, which throughout history has tended to be shorter, moderately severe on the downside and takes less time to recover. This is logical because the economies are in decent or good shape before the outside event took place, so that it does not take quite as long for the economy to recover once the impact of the event fades.

Further, we think it’s important to note the possibility that this event-driven bear market could morph into a structural bear market if the crisis is not contained soon. But once restrictions are removed, the lost jobs could return quickly, and arguably more swiftly than if this were a structural or cyclical recession.

Of further importance, is the reduction in interest rates, where the benchmark 10-year Treasury Note now stands about .75%. The Federal Reserve also cut the discount rate (the rate that banks pay to borrow directly  from the Federal Reserve) by a whopping 1.5% down  to  .25%. Further, the Fed is injecting upwards of $6 trillion dollars into the market to buy debt, that includes Mortgage-Backed Securities, investment-grade corporate bonds, high yield corporate bonds, and will also make loans to small businesses. This is in addition to the government’s $2.2 trillion dollar stimulus package. All this translates to injecting liquidity into the economy by borrowing money or printing dollars. Needless to say, this will increase the official inflation rate, and the real inflation rate even more. Sound money matters. When the Federal Reserve radically changes the money supply, distorts interest rates, and overregulates the financial sector,

it makes rational economic calculation difficult. Markets do form bubbles, and Federal Reserve policies make them worse. Our country would be better off if the U.S. Treasury printed United States Notes based on a market standard, such as gold. If the United States had continued with the classic gold standard instead of allowing our currency to be controlled by a cartel of independent private bankers who call themselves the Federal Reserve System, we would have a radically better financial system and higher economic growth today. The Federal Reserve Act of 1913 needs to be repealed.

A coronavirus recession may sound like a reason to sell but it’s not. Equities typically start rising at least three months before a recovery.   In other words, the bear market will likely come to an end as the news remains bad, and even gets worse. We think on day one of the new bull market, we’ll still be reading about job losses, lost profits, and the bleak statistics about the pandemic. If this remains as an event-driven market, which we believe it will, that rebound could arrive much sooner than anticipated.  

Attempting to see the underlying political tones of the pandemic from a conceptual viewpoint, we think will help put this coronavirus pandemic panic in perspective. Examining the trees in front of us is paramount, but a view of the forest beyond is just as important. As you know, red China embraces the communist ideology, and they’ll do anything to achieve their goal of breaking down the sovereignty of our country. The Chinese government surely does not believe in making America great again! We also know that communist countries could care less about the well-being and happiness of their citizens. It’s our opinion that once this virus was discovered, they seized the unexpected opportunity and did not take adequate measures against the spread to other countries, most especially to America, to further their communist agenda.

Americans are squarely focused on the trees in the forefront of the forest, e.g. a reduction in everyone’s net worth, along with interruptions of income and the expense associated with virus containment and subsequent elimination. But the issue is never the issue – it is the objective of breaking down a democratic constitutional republic, and to manipulate Americans to accept socialism, with communism as the result. And we all know that communism is a killing machine. Until recently, this agenda has been ignored by America because of the impact of orchestrated confusion. Past viruses that went away with much less  interruptions  in the  economies and  market-place,   were  more  severe   than  the   present   COVID-19,   although   lesscontagious. They all disappeared without permanent effect, except for some lessons well learned.

The markets do not like uncertainty, so between now and election day we believe is an opportune time to add to your investments, most especially retirement accounts. As we all know, time makes money not timing, but tactical investment opportunities like this present themselves every so often. Taking advantage of opportunities takes courage – buying low and selling high takes guts – but that’s how your estate can quickly increase. More importantly, the additional shares purchased at lower prices will earn dividends and capital gains for the life of the investment! Further, we strongly recommend that you contribute as much as possible now, and fully fund your retirement plan.

As part of the Federal government’s Coronavirus Aid, Relief and Economic Security Act (CARES) in response to the pandemic, 2020 Required Minimum Distributions from retirement plans need not be taken. However, if you have already taken your 2020 RMD, the distribution stands as taxable. Also, withdrawals from retirement plans up to $100,000 are still taxable, but  the 10% IRS penalty will not be imposed for this tax year. Further, the deadline for filing Federal and state income tax returns has been extended to July 15th, and that includes making 2019 retirement plan contributions.

On a spiritual note, we see a blessing hidden in our grief and pain. We all know that God works in strange ways, and that He can write straight with crooked lines. We also realize that now is not forever---this, too, shall pass. We remember that in the Old Testament, wars, famines, natural disasters, plagues and persecutions are God’s punishment for sins. As saying goes by C. S. Lewis that is pertinent now, “God whispers to us in the good things in life, He talks to us through our conscience, and shouts to us in our pain.”

When the Chinese COVID-19 panic comes under control, we’re willing to bet that as a nation we’ll be stronger and smarter. We’ll place more value on love and time with our families versus money and time in the office. We’ll finally recognize the red Chinese government as a stealthy, formidable and expanding mortal enemy, not as a friendly business partner. The Chinese government’s ideology is the  exact opposite  of that of America’s.  But God’s grace will shine through the temporal, short-lived coronavirus pandemic, and the American way will ultimately prevail.

Before she died in 2005, Sister Lucia dos Santos, the last of the three seers present  at the  apparitions of 1917 in Fatima, Portugal, stated  that the final battle against humanity  will  be  waged  against  the  family.  America’s intelligent response to the coronavirus pandemic was the temporary shutdown of businesses and schools, but we think the unintended result will be the stronger bonding of our families that will prove to be our sharpest weapon against the spread of socialism and communism.

Confusion and isolation are the two most effective weapons of the devil, but when this pandemic subsides, we’ll be closer as a nation, and tighter as American families. The dedication of the United States to the protection of the Blessed Virgin under the title of Mary of the Immaculate Conception by Catholic bishops in 1846, has since then been our national armor against the lasting effects of evil.

Conflict forces people to choose. We know that’s why God allows evil to exist in the world – so we can choose between good and evil. God wants all of us to exercise our God-given free will so we can make choices that will determine our individual eternal destiny – heaven or hell.

Our country was founded on biblical tradition and we know that cataclysms do not mark the end. They are a call to repentance and revival. Great struggle can produce great clarity. Could a rogue virus lead to a grand creative moment in America’s history? Will Americans, shaken by the reality of a risky universe, rediscover the God who proclaimed himself sovereign over every catastrophe?   

“The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people” – Warren Buffett