Winter is Here - The Great Reset is Upon Us
“There are decades where nothing happens; and there are weeks where decades happen. ”
It feels like more has happened in the past 3 weeks than in the past 3 years.
I believe that decades from now history will recognize the Coronavirus Crisis as the trigger that ended an era and began another.
History is being made now.
Investment Portfolio Update
Although I knew in late January (courtesy of Balaji Srinivasan) that it was becoming increasingly likely that the Wuhan coronavirus would explode into a global pandemic, I failed to take the decisive action that was necessary to protect and preserve my capital.
2020: Portfolio Performance vs. S&P 500
Although my portfolio has performed 13.5 percentage points (ppts) better than the S&P 500 year-to-date, I gave up 43.0 ppts of relative outperformance over the course of one bad month. While I am in confident in the long-term outperformance of my portfolio, I think that I unnecessarily gave up returns despite my knowledge of the coronavirus; I did not know how to tactically manage my portfolio in response to a fast-moving crisis. One of my favorite Bitcoiners, who is also an options trader, Patrick Dugan, made a 22% return in a single day, March 12th, the same day Bitcoin plunged over 40%, its largest single day decline in over 6 years!
One of my top goals for 2020: learn how to manage risk through trading.
The Great Reset is Finally Here
A month into the Coronavirus Crisis in the United States, I now believe it is a forgone conclusion that the Stagflation I thought was coming is now here. The Great Reset will have to happen before the Great Stagnation ends.
In the first month of the crisis, no asset class has been spared. Stocks are down ~29% year-to-date, giving up nearly 4 years of gains. Two of the worst daily percentage declines in US stock market history have occurred in the past 2 weeks!
Even gold is down nearly 12% from it’s ATH on March 8th!
The great debate over coronavirus is whether it will be a short-term public health and economic crisis with a V-shaped recovery or if the fallout from the virus will create a more severe, long-term economic crisis.
My sense is that the longer we go without a vaccine, the more likely the situation will evolve from a public health crisis into a financial crisis. While governments were initially slow to respond to the crisis, they now appear to have a grim resolve to defeat the virus. Quarantines, shutdowns, and dramatic reductions in the movement of people across borders have been enacted throughout the country. Policymakers are making an intentional “lesser of two evils” choice - shutdown the economy to save millions of Americans from dying.
The economic consequences are going to be tremendous.
Economists at Goldman Sachs are estimating that GDP will decline 24% year-over-year (YoY) in the second quarter of 2020; the next largest single quarter YoY decline in GDP was only 10% in 1958. For comparison’s sake, the single worst quarter during the global financial crisis saw GDP decline by 4% YoY.
The estimated spike in unemployment claims for next week will be literally unprecedented in US history.
Source: Bloomberg
The Federal Reserve has responded to the crisis by reducing the Federal Funds Rate to 0% and launching a $700 billion Quantitative Easing program. Now, Congress and the Executive Branch are pushing through a $2 trillion stimulus package that dwarfs the 2009 stimulus package by more than $1 trillion. This means that the federal budget deficit for 2020 will likely exceed 15% of GDP, the greatest annual government budget deficit since the end of WWII in 1945. This is before even factoring in the likely dramatic decline in federal tax receipts.
The nightmare scenario Ray Dalio described in Paradigm Shifts appears to be unfolding before us. It seems highly unlikely that the US government will find buyers for over $2 trillion in new Treasury issuance to finance the deficit, especially when every other country on earth is fighting the virus simultaneously; Germany is also planning a proposal of similar magnitude, and we can be sure that other nations will follow suit.
The Federal Reserve will have to print money to finance the deficits.
I think it is likely that the following events will occur:
The bear market in stocks will continue until the crisis reaches its zenith. We are probably anywhere from several weeks to several months away from the peak.
The dollar will appreciate versus other currencies like it did in during 2008-2009 as investors rotated into “safe-haven” US Treasuries. This has already happened to some degree - the Dollar Index (DXY) has surged to its highest level in over 3 years:
Source: TradingView
The price of gold in dollar terms will skyrocket like it did from 2007-2012 in response to the debasement of the currency to finance massive fiscal deficits.
While the bear market in stocks lasts, I plan on holding dollars. After the virus subsides, and the worst of the bear market in stocks is over, dollars may be one of the last assets you will want to own. I believe that the Dollar and other national currencies will decline dramatically versus hard assets like gold and Bitcoin as central banks print money to finance their nations’ massive fiscal deficits.