Photo credit: Carol VanHook
I haven’t written much over the past couple of months. That’s because I’ve been watching in rapt awe as the financial markets first dropped like a rock and then quickly recouped most of those losses in a ludicrously improbable rally. The unfolding economic deluge, coupled with absolutely bizarre market dynamics have been fascinating to follow, if not somewhat disconcerting.
I had been expecting a financial crisis of some description for quite some time. I just didn’t expect it to be triggered by a pandemic. Much like the Spanish Inquisition, no one expects a pandemic.
So I’ve decided to put pen to paper here and record some of my observations on our current economic predicament.
But first things first. We are absolutely screwed, financially speaking. The long-feared Greater Depression has arrived.
On that cheery note, it is obvious to me that the entire Treasury yield curve is headed to zero sooner or later. This has already happened for everything out to about 3-years until maturity, all of which currently trade for yields below 30 basis points (bps) – equal to 0.3%. It is only a matter of time before whatever yield remaining in the long end of the Treasury curve gets slowly squeezed out – like a tube of toothpaste.
This might seem fantastical considering that the U.S. 30-year Treasury was trading for well over 2% as recently as the beginning of this year. But we need look no further than Japan, which seems to perpetually be about 10 years ahead of the rest of the world (economically speaking). Their entire yield curve is negative out to 10-years until maturity, with the Japanese 30-year bond trading at less than 50 bps.
An outcome like Japan’s was long thought to be impossible in the United States, but since the Covid-19 pandemic struck, a convergence with their experience seems to merely be a matter of time.
And this very neatly brings us around to my second thesis. We have officially entered the Greater Depression. The collapse in demand and output we are currently experiencing in the economy is without precedent unless one references the Great Depression of the 1930s. Cumulative unemployment claims over the past 6 weeks from mid March to late April 2020 have totaled a staggering 30.3 million claims.
This puts the unemployment rate in some states (8 to be exact) at more than 15%! If that doesn’t qualify as a depression level event, then I don’t know what is. Yes, some of these unemployed people will head back to work when the stay-at-home orders are finally lifted, but far fewer than many hope.
With the country facing its long-telegraphed Greater Depression, you might think that the stock market would finally get a clue. You would be wrong. The S&P 500 is currently (as of early May) just 16% off its all time highs, hovering around the level of June 2019. So let’s get this straight. Financial Armageddon arrives and the stock market reacts by giving up its last 1 year of gains (in the context of a 10 year bull market), but not a penny more.
This makes no sense whatsoever.
It makes even less sense when you consider that wide swaths of corporate America are quickly going bankrupt. The entertainment, vacation and leisure sectors, including cruise lines, casinos, hotels and resorts are on the fast track to going broke.
Brick and mortar retail companies are in the same predicament. Lord & Taylor, J. Crew, Neiman Marcus and J.C. Penney are among the national chain stores that have declared bankruptcy (or soon will) due to coronavirus-induced economic disruptions. And that last great department store stalwart, Macy’s, probably only has 2 or 3 years left before it joins them.
Now, don’t misunderstand me. I’m not saying that all physical retailers or entertainment-oriented firms are going to disappear, just that there will end up being far fewer of these companies in existence after our Greater Depression concludes than there are right now.
The transportation sector is facing similar headwinds. Many airline companies are headed to bankruptcy for obvious reasons. And world trade has taken quite a hit as well, which is causing tremendous pain for trans-oceanic cargo shipping firms.
These trends are highly unlikely to reverse, too. The world is de-globalizing, a process that will take many years, but appears to be virtually unstoppable at this point.
If this news wasn’t bad enough, the entire energy sector is currently on life support. The price of WTI (West Texas Intermediate) crude oil plummeted below $20 a barrel in late April 2020 – commensurate with price levels last seen in 1979 and 1986! Natural gas prices aren’t doing much better, bumping along late 1990s lows. Oh, and those values aren’t inflation adjusted – just pure nominal goodness.
So yeah, a lot of oil & gas contract drillers, energy service firms and oil & gas exploration and production companies are going to go to corporate heaven pretty soon – along with all the bonds and stocks they’ve issued. In fact, it is a safe bet that many companies – perhaps most companies – involved in drilling for oil and gas in the shale fields of the United States will be forced into bankruptcy.
The deflationary impulse from these events will be absolutely massive – an outcome not even remotely discounted in the securities markets at the current time. The price of energy feeds into almost everything else that the global economy produces. With oil and gas plumbing multi-decade lows, the prices of many goods will have a tendency to decline.
Now many people are quite worried about inflation right now. This worry is misplaced, at least in the near term. Yes, I am aware that the Federal Reserve has just printed $2.5 trillion over the past couple of months (with the promise of more where that came from). But this is like throwing money into a black hole where the global economy once stood. Those freshly printed dollars simply disappear forever into the maw of nearly unlimited liquidity demand.
The total value of securities that will ultimately become valueless due to our Greater Depression is certainly greater than $10 trillion, and probably more than $20 trillion. The Fed’s new $2.5 trillion infusion doesn’t go very far in this context. And their next $2.5 trillion won’t do the trick either. They would have to print tens of trillions of dollars to effectively stoke inflation. And while that might be a distinct possibility towards the end of the 2020s, I don’t see it as being a realistic outcome over the next few years.
But make no mistake – bad times are coming for the dollar, albeit several years (or longer) from now.
The U.S. dollar, along with every other fiat currency in the world, is slowly losing its ability to transmit value over time. The importance of this development cannot be overstated. The governments and central banks of the world have fully embraced debasement (generally in the form of MMT) as a painless solution to their economic problems. But money printing is like an addictive drug. At first it seems like an unmitigated good, with no negative repercussions whatsoever. It is only later, when it is already far too late, that the printing press demons make themselves known.
Right now you can still find U.S. dollar denominated CDs paying around 1.4% or 1.5%. But that won’t be the case forever. As the March 2020 liquidity crisis recedes into the rear-view mirror, banks will pay depositors progressively lower and lower interest rates. The natural floor is the Fed Funds rate, which is currently hovering between 0% and 0.25%
And even though the Fed has sworn up and down that they will not pursue negative interest rates, there is still a good chance that they will panic and cut below zero at some point in the future.
So what is an investor to do?
I believe the answer is tangible assets: precious metals, antiques, gemstones and fine art.
Due to the Greater Depression, there are tremendous bargains available in the world of antiques. For example, I recently purchased a magnificent set of 12 French .950 fine silver teaspoons from the 1860s or 1870s on eBay for only $13.75 a spoon. To put this value in context, I remember frequenting an antiques store in the late 1990s where a fine set of one dozen sterling teaspoons by Frank M. Whiting (a well-respected name among antique silver collectors) sold for $12 each. And I thought that was quite a deal at the time.
In other words, even though more than 20 years have elapsed, nominal prices have barely budged!
Another example of undervalued tangibles can be found in the coin market. I recently bought a couple mixed rolls of 90% silver U.S. State quarters/America the Beautiful quarters for almost no premium over circulated junk silver. Each $10 face value roll consisted of 40 coins in outstanding proof condition. Under normal circumstances, proof coins intended for collectors should always trade at a premium versus similar non-proof issues.
But due to the fallout from our Greater Depression, these wonderful coins are being treated as bullion pieces (for now anyway).
Sure, there will be a bit over 100 million specimens struck between the two series when the America the Beautiful series finishes up in a couple years. This isn’t a particularly small mintage. But guess what? Those hundred million coins are enough for…wait for it…about 4/5ths of a single coin for each U.S. household.
And they are downright rare when compared to the Washington quarter mintages typically found in junk silver rolls and bags. For instance, in their last year of regular production, there were over 1.2 billion silver Washington quarters struck in 1964. Even if you assume a brutal attrition rate of 90%, there are still more 1964-dated Washington quarters in existence than there will ever be of silver proof State quarters and America the Beautiful quarters in the two series combined!
In the future, coin collectors looking back at this period of American history won’t care about any of the nasty copper-nickel clad coinage struck for circulation. Instead, they will gravitate towards precious metal bullion coins and select commemorative pieces (like the America the Beautiful quarter series) struck in silver or gold. And because the silver proof mintages for the State quarter/America the Beautiful quarter series are spread over a hundred different designs spanning 20 years, collectors will have fertile ground to build an interesting, attractive and attainable collection.
So why not pick up a roll of these undervalued silver coins for only $160 to $180 each (subject to fluctuating bullion prices) while you still can? It sure beats earning nothing in a savings account or spinning the roulette wheel in the crazed stock market. The Greater Depression might mean that conventional assets are a losing proposition, but it doesn’t mean that tangible asset investing is dead.
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