COVID-19 – how things looks to one man in a mask….

Thursday, 5th March 2020

COVID-19 – how things looks to one man in a mask….

Don’t worry, you won’t catch anything. I am typing this issue in a face mask that meets all the strictest first-world manufacturing regulations….

But do please forgive any spelling mistakes – because I am also typing in the dark….

My panic-buy stockpiles of food, water and hand gel are blocking out the light from the single small window in my cellar, where I intend to self-quarantine and sit out the Coronavirus crisis – however long it lasts….

You can’t be too careful….

  • Bad year for Buffett….

Legendary stock-picker Warren Buffett has probably felt like reaching for the bug-out bag and going underground to hide out….

His investment group Berkshire Hathaway is worth $560 billion. Buffett took over the company back in 1965 and it has outperformed the market ever since….

Buffett’s consistently excellent performance across the decades has earned him stellar plaudits and lofty status in the investment community….

Deservedly so. If you’d put $10,000 in Berkshire Hathaway back in 1965, your stake would not be worth a whopping £215 million. The man knows what he is doing….

But this year has seen a reversal of fortune. The group has suffered its worst performance in a decade….

Has the 89-year-old lost his touch? You never know. But Buffett is renowned as a value seeker – and there’s been precious little value to be found in an equity market where prices have been at all-time highs and almost totally disconnected from the performance of businesses that underlie the stocks….

It is most telling that Buffett hasn’t closed-out any major acquisition for Berkshire Hathaway in more than 3-years. If the value isn’t there, he won’t buy. And a lack of activity has hit the performance of Berkshire Hathaway hard….

Maybe the events of the past week will help create an environment where Buffett – and other value pickers – can thrive again….

  • Turmoil, chaos and carnage….

Markets have been in crisis thanks to a global outbreak of COVID-19….

Panic is spreading, some people are getting sick, some people are dying, newspapers and TV stations are fanning the flames with lurid headlines and frightening predictions, politicians are wringing their hands and putting together crisis-management plans, scientists are working on finding a vaccine….

Nobody knows what is going to happen, how long this thing might last or what the consequences to the global human population are going to amount to….

Nor can we know for sure what the economic effects will be. Supply chains might fail. Normal economic activity might be curtailed. Businesses might go bust. Jobs might be lost. People won’t be spending money. GDP will suffer….

And the markets have been pricing this confusion in. Last week saw a massive sell-off – in markets worldwide. The stocks that comprise the FTSE 100 lost 11% of their value. That’s a whopping £206 billion in value gone up in smoke – just like that….

And it’s not just the British stock market. The effect was felt globally. CNBC reported last week that global stocks markets ‘lost £6 trillion in six days….’

At one point, the fear was that global markets would go into absolute freefall. But don’t worry, governments and central banks will not allow that to happen – at least not without the kind of fight John Wayne might have been proud of putting up….

  • Central banks to the rescue….

And the fightback has begun. Over in the US, the Federal Reserve has cut interests rates by 50 basis points – or 0.5%….

The message to stockholders is clear: ‘We’ve got your back, buddy. Buy this dip. Or, if you can’t bring yourself to buy in this environment, then at least quit selling….’

Markets have responded. The progress of the snowball has been halted. Markets are certainly nowhere close to regaining the lost ground. And things feel fragile – like the slightest movement could lead to the cliff edge falling away again. But the headlong fall into oblivion has been arrested – for now….

The Canadian government has also cut interest rates. The Bank of England is being encouraged to do so. This is an emergency – and central banks will be expected to ride in on their white horses and to save the day – and market values – for investors….

The trouble is that this new ‘emergency’ has arrived before the global economy has properly recovered from the previous ‘emergency’ – the one that occurred all the way back in 2008/2009 and is still going on….

That ‘emergency’ required central governments worldwide to cut interest rates to all-time low levels. And in 2020, interest rates have still not been normalized. They still sit at or somewhere near all-time lows….

So central bankers don’t have much rope to play with where interest rates are concerned. They might have to go to zero. They might have to go into negative territory….

But they might also have to resort to more buying of government bonds, more quantitative easing, more money printing. They might have to pump more liquidity into the system any which way they can….

But they might have to go further still. Might we see central banks buying shares? Might we see stock market trading suspended altogether?

Who knows? But you can be sure that government and central banks are not going to let the stock markets crash and burn without resorting to every tool and trick in the book – and some that even been dreamt up yet….

The alternative is to open the door to a global depression that will make the Great Depression of the 1930s look like a picnic in the sunshine of a glorious summer day….

And, regardless of what the central banks do, a depression to end all depressions might come to pass anyway. The world is awash with debt. Sooner or later the piper will come a-calling – expecting to be paid. He can’t be ignored or avoided forever….

  • Hold gold….

Gold is always a good place to be in a crisis. Gold is the classical safe- haven bet….

The yellow metal is going well right now – up 27% over the last 12 months. And it looks to me all-set to go better still in the months and years ahead….

Whatever central bankers decide to do to offset a devastating correction/crash in global markets, their remedies are almost certain to add fuel to an already in-train trend – the systematic devaluation of domestic currencies….

When you inflate the money supply – however you choose to do it – the effect is to devalue every unit of that currency already in circulation….

In other words, people holding dollars, pounds, euros and other major domestic currencies are entering a period where their asset (cold, hard cash) is going to be worth less and less as time goes by….

The alternative to sitting on a depreciating asset is to buy gold – and then sit on it. Now is a good time to do that. Gold is real money – as opposed to fiat currency. They’re not making any more of the stuff – and it holds its value over time….

The Russians and the Chinese know what’s coming and they’ve been buying gold in huge quantities for some time now. More and more money – government, institutional and private – is going to find its way into the yellow metal as time goes by. And that’s going to push the gold price up further. That’s my take….

  • One more thing….

The other thing I’d be thinking about right now is this….

The major stock markets are always the focus during times like this….

Commentators tend to forget the smaller, less significant and unfashionable stock markets. And that’s a mistake….

COVID-19 is having an effect worldwide. It has driven all stock markets lower. Including in countries like Russia, Turkey, Portugal and Greece….

Equities there were already cheap as chips compared to other markets. Now they are lower still. In other words, what were already bargains can now be bought even cheaper still. And that’s interesting….

More on that next time. In the meanwhile, keep well….

That’s how it looks from here….

All the best,

Dave Gibson

Money Truths