Before the pandemic, our life was filled with great options. You could choose to go to the theatre or a restaurant, train at the Gym, visit a friend, or spend time at home with your family. All options were safe, and it was a matter of preference and choice. The same applied to your investments. There were so many good options that were all doing well. You could invest in stocks, bonds, real estate, gold, startups, IPOs, your own business, your professional education, and endless other options.
Today, our lifestyle choices are extremely limited. Most of us are self-quarantining or have been mandated to quarantine. We have one option: We need to stay home. We can’t go anywhere without risk. “Loss” is now a term firmly embedded in our mind. We lost our freedom to leave our home. We’re quarantined for fear we may lose our health or our life. We have lost our job, or we may fear we’ll lose it. We see friends and family (my own sister as an example) losing their jobs or being furloughed, and for many of us, our retirement portfolio—our “nest egg” that we built over many years—has lost more than 25% of its value in a market that’s constantly going down.
There are great opportunities in extreme situations
When a person is bombarded with so much ‘loss,” so much pain, and so much fear of further loss everywhere they look, it’s natural to be unable to move. Even if you know a decision looks right, you can’t move because how can you judge your own instincts and decision-making process in such a foreign environment where nothing feels remotely familiar? This is what extreme and abrupt change feels like.
But if you don’t act on the GOOD options that are available, you’ll miss a great opportunity for both personal change and financial gain. Anyone moving fast in the right direction will come ahead of this crisis. The reason these times present great opportunities is that they’re so extreme.
Here’s a visual to explain your financial options: Think about mountain climbers. When they are at the foot of the mountain, they have so many options—just like we had until February 2020. They can take a risk and climb, or they can sit by the lake next to the mountain, or travel elsewhere with no risk. If they start climbing, on the steep cliff, they now have only two options: go up or down. When they get to the mountain top, the most extreme place on the mountain, the climbers have only ONE option: go down to safety. If they hesitate and stay on the mountain top, hoping for rescue, as night falls they will freeze to death.
This is where we are now financially. We’re experiencing a time with extreme financial conditions, and, like the climbers on the mountain’s peak, we have limited options that are good. If you don’t move while hoping to be rescued, you’ll freeze. And remember, you’re the lucky one: You’re the mountain climber who has shoes, gear, a retirement account with funds. You can be proactive. You can choose to move.
So, what’s your good financial option? How can you know you can’t lose by making a decision? What options make logical sense and present little to no risk? What options can you choose without relying on hope that a miracle will happen?
I believe the beginning of a good answer is knowing where you are bound to lose—where you can’t go or can’t stay. Just think. If you logically know where you’ll get hurt, then you’ll get the strength to move away from that place. So, let’s examine where you may get hurt.
The stock market
We’ve seen the market crashing as a response to the progression of the virus and the implications of the lockdowns for businesses, consumers, employees, and the economy. But then the market bounced back a bit… Is there hope? Should we listen to financial advisors that tell us to “buy the dip”? To “stay the course”? Should we “hold stocks for the long run”?
The Dow Jones Industrial Index
Here’s a fact. We know that public corporations will submit their earnings reports by mid-April. So, to know if you can get hurt by staying in a meaningful way in the stock market, ask yourself the following questions:
- Will companies meet their earnings targets?
- Will they meet their earnings targets in July when it’s projected that April and May will be the worst months in terms of the virus and the lockdowns?
- When car companies sell cars with no interest for 7 years, where are their profits? What will happen to their share price?
If your answers are not enough to convince you the market is freezing with you in it, let’s look at unemployment. Here’s a chart (by analyst Steve St. Angelo. Thanks, Steve!) that compares the Dow Jones index to our unemployment rate. At the 2008 crash, see how the Dow went down by 55% when the unemployment rate hit 10%. Today, the unemployment rate is projected to hit 15% or 20% or even higher. Since the Dow only went down by 25% SO FAR, wouldn’t it make sense for it to go down 30% more, like hedge fund manager Dan Niles announced yesterday? Or go down by a lot more than 30%?
It’s your logic, not emotions and not hope, that should lead you to believe it’s inevitable that the market will continue going down. If you stay on this mountain top hoping for a rebound, you’ll freeze.
The bond market
We wrote here extensively about the next bond market crash. It’s my and many analysts’ firm belief that bonds are extremely risky to hold at this time. This is a new kind of risk that the entire bond market fails and declines as the next domino piece to fall after the stock market. And there’s ample reason to believe it will do so soon. Companies that cannot reach the earnings needed to pay back their loans on time—or at all—risk defaulting, and we warned that the level of corporate debt is the highest it ever was. Once the bond market crashes, the value of your bond investments will likely drop too, no matter what bonds you hold. If you try to sell a bond prior to its maturity date, you’ll probably lose money on that investment. And if nobody’s buying, you’ll lose even more.
Let’s look at gold as an option
Last week, I wrote and explained why your gold investment will succeed. It is the option for both safety and financial gain. It can’t fail because our government and the Federal Reserve have already printed and added a tremendous amount of money to our money supply—and they’ll have to continue to print dollars—so the price of your gold should rise many multiples from what it is now, just like it did after 2008.
Now, here’s another way to look at gold as we sit here on the stock market mountain top that’s freezing over. Let’s compare the price of gold to the stock market’s S&P 500 over many decades.
Since the decision to move away from the Gold Standard in 1971 (and the decoupling of the dollar from being backed by gold), the relationship between gold and the stock market has been a relationship of opposites. This is why some of you have diversified into gold or considered doing so. As you know, it’s almost a given that when the stock market goes down in large historical moves, like it did after 2008, gold goes up and vice versa. After the amazing gold bull run of the 1970s, gold went sideways/down during the 1980s and 1990s, and the stock market went way up. You can see it very clearly in this chart, including the four distinct periods: 1970–1980, 1981–2000, 2000—2012, and from 2012 until last month. You can see that when one asset (gold or the market) goes sideways or down, the other skyrockets.
This is irrefutable history. You can ignore it but at immense financial risk. When stocks went down, or sideways over multiple years, gold always went up…by a whole lot. More than enough to make fortunes. Ray Dalio summed it up when last year he called for investors to “sell stocks and buy gold.”
Don’t get stuck on any mountain top
So, here is where you are now. You’re the lucky one. You invested in stocks and bonds over the last 10 years, and you did really well. Good for you. You have reached a mountain top. Now, it’s time to descend, with a good portion of your wealth, and I propose you start climbing the next mountain, which should be a gold mountain. You need to remember that your new gold mountain will also reach a top one day. But if you start climbing it now, relying not on hope but on logic—on how you project our economy to behave in the next few years with the consequences of the pandemic and on our financial history and common sense—you’ll thrive, you’ll be safe. Make your decision. Don’t get stuck on any financial mountain top with hope as your investment strategy.
My gratitude for all the COVID-19 warriors out there. Hospital Doctors and Nurses, Dentists, Postal Service, Fedex and UPS delivery man and women, Grocery store employees and anyone that is helping us receive and provide goods and services through this pandemic.
I wish you and your loved ones safety and health in these trying times.
Joseph Sherman, CEO