Pro Perspectives 3/24/20

March 24, 2020

We still don't have an economic package from Congress, but we know it will be very, very large.  And markets are responding. 

Let's talk about why. 

As we discussed yesterday, the Fed is "all-in" pledging to backstop anything and everything by printing unlimited dollars.  With those dollars, among many assets, they are now buying bond tracking ETFs (i.e. they are now in the stock market).  Add to that the government is looking to infuse cash into failing industries by taking equity stakes (i.e. the government will now be in the stock market).  

No wonder, stocks had their best day since 1933.  Not to be outdone, in the spirit of central bank and central government intervention in the stock market, the Nikkei has risen 25% in just two days.  As we discussed yesterday, the Japanese stock market is familiar terrain for the Bank of Japan.

Who’s next in line?  Probably the ECB stepping in to put a floor under European stocks. 

Make no mistake, with global governments and central banks following the "print and backstop everything/everyone policies" we have explicit devaluations of currencies.  That makes it a “buy everything” market.

This is the global "debt monetization" event people thought we were witnessing during the Global Financial Crisis (GFC).  The difference?  In the GFC, people thought the result of the Fed's actions would be hyperinflationary, and therefore a defacto debt and currency devauation.  It didn't happen.  When you give people money in a debt crisis, they hoard it.  With that, we didn't get hyperinflation, instead we got a deflationary bust

The Virus War is the opposite.  Never has there been a more applicable environment to inflate away the value of everything (in the medium term) to keep the economy (the world) intact (in the near term).  It's the only option. 

Again, as we discussed yesterday, this is a brew for massive inflation when we come out on the other side of the virus.  That means, just as people are wanting to hold cash, it's the worst place to be.  The early evidence:  Almost everything (all global assets) was up today. 

With this backdrop, the first place you look, as a preservation of buying power:  gold.  We talked about this yesterday.  Gold was up almost 5% again today. And it's just getting started.  How do you play it?  You can buy a gold ETF.  GLD is the most widely traded gold tracking ETF – easy to buy, and tracks the underlying well.