Chris’ note: Our goal at Daily Cut AM… Market Mission Control is to help you get out the other side of the coronavirus crisis with your health and your wealth intact.
You can’t just rely on the mainstream view of what’s going on. There’s so much misinformation swirling around on cable news and social media, it’s easy to lose perspective.
That’s why, today, I’m sharing with you a clear-eyed view on what lies ahead from currency trader Andy Krieger. Andy is legendary in trading circles for his mammoth wins. He’s made hundreds of millions of dollars in profits on single trades – several times in his career.
And as he revealed in an update he sent to his paid-up subscribers last week, we need to be realistic about future growth prospects. That means we’ll likely get a U-shaped, not a V-shaped, recovery in stocks.
Since March 22, the U.S. stock market has rallied sharply from the lows. This rally matched almost perfectly the 50% correction I forecasted on March 23.
[Paid-up subscribers of Andy Krieger’s Big Trades can catch up in full here.]
Is this recovery almost done?
I think so. But bear market rallies are very tricky beasts.
Could the rally carry on a bit further?
Yes.
Am I confident that this rally is corrective and not the start of a new bull market?
Yes. But I am not certain.
What could shift my view?
I’ll break that question down in today’s update. I’ll also explain why we could see an “L-shaped recovery,” or depression, in the weeks and months ahead… and show you what that looks like in a real economy.
In the short term, the Federal Reserve [America’s central bank] could panic even further and deploy what I would label as its ultimate nuclear option. That is, it could start buying stocks directly.
Right now, the Fed is simply trying to support equities with extremely aggressive liquidity support. If the Fed starts buying stocks directly, I’d see it as a sign of total desperation. That would tell us that the Fed fears the markets are about to completely crater.
Would it support the stock market in the short term and result in a sharp rally?
Yes.
Would it be an idiotic long-term decision?
Absolutely.
The Fed already fired its bazooka by promising essentially unlimited liquidity to a wide array of borrowers. Will it resort to the nuclear option?
Well, the Fed already resorted to buying corporate bond exchange-traded funds (ETFs), so it is not so far away from the next step.
Overall, the reality for the U.S. economy does not look rosy.
When a pandemic triggers a total collapse in demand, the tricky part is getting the economy moving again… without risking a new wave of viral infections.
The faster we return to “normal,” the greater the risk of spiraling back into a shutdown due to new infections spreading through society.
It is a vicious loop that we must avoid.
Could we potentially be headed for an L-shaped recovery, otherwise known as a depression? And what happens then – in both the economy and the currency markets?
To get a good idea, let’s turn to a prime example: Japan.
The long-awaited recovery of Japan’s economy is a textbook example of an L-shaped recovery: a vicious economic contraction followed by a long period of essentially no growth.
An L-shaped recovery is the most dramatic type of recession. After a drastic drop in economic growth, the economy does not recover for a significant period.
Japan is a case in point. Over the past 30 years, the performance of its economy has been awful.
That wasn’t always the case, however… and it’s a lesson that Congress and the Fed would do well to learn.
Leading up to the 1990s, Japan experienced remarkable economic growth. In the 1980s, the country ranked first for gross national production per capita.
During this time of growth, real estate values and stock market prices were rising fast. In fact, real estate in Tokyo got so inflated, the land on which the Emperor’s palace sits had a higher market value than all of the land in California.
It was a bubble of amazing proportions. But instead of letting the bubble run its natural course, Japan’s central bank intervened.
In 1989, the Bank of Japan (BoJ) raised interest rates. But it was too late. A stock market crash followed, and annual economic growth slowed from 3.89% to 1.14%.
For the next decade, Japan experienced what is now known as the Lost Decade. It failed to recover from the crash for 10 years, and the country has only had a limited economic recovery ever since.
The BoJ has tried stimulating the economy through various measures. Since the collapse in 1989, however, nothing has really worked.
Interest rates have been around zero – or lower – for many, many years. The BoJ resorted to buying stocks to prop up the stock market, but that hasn’t worked either.
The BoJ is a massive owner of Japanese stocks today. In fact, it’s on pace to become the top shareholder of companies listed in Tokyo by the end of 2020.
This buying has all been part of the BoJ’s failed efforts to stimulate an inflation rate of 2% in the economy.
Despite all their buying, however, the stock market is still well below the levels we saw in the 1980s. And the government’s misguided policies have affected Japan’s currency, the yen, as well.
With a lousy stock market and zero – or negative – interest rates, Japanese investors have been forced to invest massive amounts of money overseas in search of returns.
This steady stream of foreign asset purchases has prevented the yen from going much higher.
Japanese investors have sold massive amounts of yen to make these overseas investments. Last year alone, they invested over $200 billion in foreign markets, and they have done this for years.
The last time they repatriated investments from overseas in a meaningful way was 2016… and the dollar dropped about 20% against the yen that year!
When Japan has another economic downturn, such as the one it is now going through, we can expect the exporting of Japanese capital to slow down, or perhaps even reverse.
That could lead to a dramatic strengthening of the yen if Japanese investors start to bring their foreign capital home.
With that in mind, let’s turn back to the U.S. economy. Then, we’ll look at what all this means for the currency markets – including the yen.
As you know, Congress and the Fed have already taken some aggressive fiscal and monetary steps.
If the U.S. has a very slow, tepid recovery despite these efforts, we need to brace ourselves for much more pain ahead.
My biggest concern is that the Fed and Congress might make what I’d politely call “imprudent” decisions. That is, they might push people to rush back to work too soon to trigger economic growth in the U.S.
Going back to work too soon would almost certainly lead to a fresh surge in viral infections. That would increase the risk of an L-shaped recovery for us. And that, in turn, would be devastating for our society.
I currently rank an L-shaped recovery as a low probability. But the odds of it occurring are higher than I would like.
I believe a U-shaped recovery is far more likely. However, the shape of the U could prove to be quite flat, with a meaningful economic recovery not starting for a long time.
A V-shaped recovery, which is what many expect, is looking less and less likely.
Without massive, widespread testing and an effective vaccine, I just don’t see people rushing back to a lifestyle similar to the one we had before COVID-19. And people’s fear of a modern-day plague and self-preservation instincts are more powerful than the exhortations of government officials!
In short, we need to be realistic about future growth prospects.
We also need to brace ourselves for massive bankruptcies, widespread defaults in commercial real estate, weakness in the housing market, problems with airlines, weak hotel numbers, and weakened consumption overall.
In 2010, for example, 10 million Americans lost their homes as a consequence of the Great Recession that began in 2008.
Today, banks are tightening loan standards for fresh loans and refinancings. We’re also seeing massive new levels of unemployment.
Over the next 18 months, we could potentially face numbers similar to the ones we saw during the Great Recession.
I hope not.
Chris here – Our mantra here at The Daily Cut is “Hope for the best… but prepare for the worst.”
That’s why my team and I have put together a special report for all paid-up Legacy Research readers.
It’s called the “Coronavirus Crisis Playbook.” It contains timeless defensive strategies you can use to protect yourself in these turbulent times. And it’s yours to print out and keep as a Legacy reader.
So download your free copy now by clicking this link.
In today’s mailbag, your fellow readers respond to the threat of ramped-up mass digital surveillance in the wake of the coronavirus.
As I showed you, governments and corporations are using the pandemic to test out ever more invasive digital surveillance tools. This includes tracking your location 24/7 using data from your smartphone.
And that’s not all they want to track. As our tech expert, Jeff Brown, explained in these pages, plans are now afoot to use your phone’s Bluetooth receiver to track and trace who you’ve come into contact with.
Some readers say there’s only one option – throw away your smartphone…
The only way to beat that bunch of nosy officials and advertisers is to leave your phone at home or in the dump. I don’t think a lot of folks would be able to do it, but if it’s in the operating system, what else?
– Leland S.
Why are people so addicted to cell phones – and to sticking them in my face to show me something ridiculous? If you don’t want the government to know where you are, throw your cell phone in the lake.
– Doug C.
Many Americans are concerned about being surveilled. To them, I ask, “Why do you cooperate by carrying around the means of doing so?”
If you leave your cell phone at home, or otherwise disengage its effectiveness, it is not possible. Buy a throw-away phone if you must.
But drop your whining – wear your mask when out and no one will know where you’ve been, who you’ve met, and what nefarious schemes you’re up to. That’s what the criminals and terrorists do.
And if you are not concerned, enjoy all the benefits and safety afforded to you by technology. Your choice. After all, that’s what liberty is all about.
– Peter A.
Most people do not realize that if you have Alexa in your home, you are under surveillance 24/7. Everything you say and do is reported back to Amazon. If this is not total surveillance, what is?
– James C.
I’ve stopped using social media because even though I’m not doing anything wrong, I definitely feel like the government is monitoring this when they want information about people. I like Apple phones because no matter what happens to you, they won’t use the technology we know they have to open your phone for the authorities.
Don’t kid yourself – Big Brother is definitely watching. I turned Siri off on my phone because she listens and butts into conversations. I have experienced this and it was creepy. I have lost the respect I had for Google because they admit they listen to people. And I would never have a smart house, NEVER!
– Michele B.
Anything that can track private citizens without our express permission is very dangerous. We have allowed the government to erode our rights for the last 50 years with impunity.
The people in this country are no longer educated as to the founding of this wonderful place in which we live. They don’t understand the sacrifices our forefathers made in order to create a place where everyday folks can succeed, no matter their background.
We’ve allowed the power-hungry to shape our world to benefit themselves and their political objectives.
– Stephan N.
Virus vs. liberty? I take liberty over surveillance any day of the week. It is not a necessary tool to combat COVID-19.
It’s all up to our CDC. It needs to keep us up to date and instruct us about what we need to do to eradicate this virus. It’s not the same as controlling people – the people will listen and do what needs to be done. If the government tries to control the people, they will revolt and remove those in power.
We, the people, are not stupid dolts that don’t know the difference between asking and telling. All I’m saying is keep it civil and we will beat this pandemic.
– Peter A.
Some people think this kind of thinking is paranoid. For those folks, we’ll wrap up today with a message from a reader whose father taught him otherwise…
My dad was an Army Ranger. He once told me: “A little paranoia goes a long way towards keeping you alive.” I think more than a little paranoia is more than warranted in this age.
– Mike M.
Are you willing to give up your smartphone to avoid digital surveillance? Is paranoia an appropriate response, as Mike suggests? Or are we overreacting?
Let us know at [email protected].
Regards,
 |
Chris Lowe
April 20, 2020
Dublin, Ireland
Like what you’re reading? Send your thoughts to [email protected].