In This Episode
The day has finally arrived.
The Bull Market is officially over.
The DOW dropped 1,400 points yesterday ending the longest bull market in U.S. history.
Ordinarily, Dan has a guest on the show to discuss some aspect of the finance, but because of the unexpected turmoil and volatility this week, we decided to do something different.
Today, Dan is here to talk to you – one-on-one – about the end of the bull market, about the Coronavirus, and about what it all means for your money.
Also make sure you tune in to the emergency briefing Monday March 16th to help protect yourself from a further decline in the market click here
NOTES & LINKS
- Emergency Briefing Monday March 16th to protect yourself from a further decline in the market click here
- To follow Dan’s most recent work at Extreme Value, click here.
1:50 – The coronavirus has been officially declared a global pandemic. Where do things go from here? Dan discusses the drastic developments that are happening every hour. ”My best guess is that two weeks from now, the U.S. will look like Italy…”
3:20 – Dan compares how other countries responded to the situation to the United States’ poor response, and how that likely accelerated the recent crash. “This is going to get worse before it gets better…”
9:02 – Could 40-70% of the population eventually get the Coronavirus? Dan talks about a worst-case scenario being floated by a prominent Harvard professor.
13:25 – “This is not the type of thing that you can fix with lower interest rates…” Dan discusses why some quick fixes in the past may not be enough this time around… and the one asset class talks about the one asset likely to soar.
17:20 – Dan answers the question, “Is now the time to jump back in?”
27:00 – Is inflation or deflation a greater threat to equity prices? Could there be a freeze on capital gains taxes on the short term? What about a payroll tax? Dan answers questions from listeners in the mailbag.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I’m your host Dan Ferris. I’m also the editor of Extreme Value, published by Stansberry Research. It’s an interesting day and interesting week, and I got a lot to say so hang on. And that’s my message today, hang on... hang on for a wild ride. For the last, I don’t even know how long, three years I’ve been by far the most bearish analyst around the Stansberry organization. And now everything that I was afraid of seems to be coming true. As I speak to you, the market is down like 10%, worst day since 1987, worst week since 1987, and it’s ugly. So markets are very obviously anticipating major economic damage as a result of the spread of COVID-19, the illness you get when you’re infected with the coronavirus that started in Wuhan, China, in December.
From everything I have seen in the press, heard from physicians and seen on social media from various people, including some physicians, my best guess is that two weeks from now the U.S. will look the way Italy looks right now. In case you missed it, Italy is basically shut down – it’s closed for business. The government expanded the quarantine measures which were in the north of Italy. Now it’s the whole country. They’ve canceled all public gatherings. They’ve shut down all public transportation. Then they’ve also shut down all the businesses, all the shops except for grocery stores and pharmacies. And I saw some stuff on social media where the guy was saying, “Look, I’m from Italy and it’s very orderly, actually. You can go to the grocery store and you have to stand in line.” I don't know how close they’re standing together in these lines... I hope not too close. And he said, “One guy comes out, one person goes in. One person comes out, one person goes in.” And it’s very orderly – everyone is very calm.
And you know this is going to be an even worse hit to their economy. I already thought it was going to be terrible because they get as many tourists in one year as they have people in their country, about 60 million. Isn’t that crazy? But yeah, everybody wants to go to Italy, and through the course of the year you see that. So if it sounds crazy, I know it sounds crazy but it is true – you can look it up. And the economy is like a $2 trillion GDP economy, so pretty big. And I already thought they were going to get a hit from the tourism problem and now they’re going to get a hit because their whole economy is basically shutting down. I think the only reason they had to do this was because they didn’t act decisively and aggressively early enough. Like South Korea, they did the right thing. They rolled out massive virus testing – they were testing tens of thousands of people a day. They have a website where you can see the virus-infected people, where the virus-infected patients have traveled, depending on what area you're in.
If you’re in an area where they just discovered a bunch of cases, you get a mobile phone alert. And it’s a model that I think the whole rest of the world ought to follow. Unfortunately, we haven’t done that in the United States. President Trump and let’s face it lots of other people in the United States didn’t take this seriously enough soon enough, and so Wednesday night he gives this speech that’s kind of – you know he made a major step in the right direction. He said all European travel is canceled. Yay, too late, but yay. And otherwise, it was kind of tepid I think, and the stock market was looking for a lot bigger stimulus. And of course, the futures were hopeful into the speech and then it was like screw this, we’re out of here. And then the day after that of course was Thursday, the 10% route.
Overall though, you can see what I’m saying is starting to come true. We’re in the early phases of being like Italy, right? Even just that thing in New York where they called out the National Guard and they went to New Rochelle. New Rochelle is two miles from New York City – I don't know if you knew that. New Rochelle is two miles from New York City, and they’ve got a one-mile perimeter, one-mile area, around several new cases of COVID-19. And you know lots of other things are happening. National Basketball Association they’ve suspended all their games indefinitely. Major League Baseball they’re not going to play, suspended indefinitely. National Hockey League, suspended indefinitely. And until very recently, the NCAA was actually going to go on with their March Madness college basketball tournament to empty arenas, but they canceled the whole thing. And you’re going to see that a lot, people are just going to be shutting down everything.
In Ireland, Saint Patrick’s Day was basically canceled... all the parades and festivities are all canceled. And this is the right thing to do and you’re going to see a lot more of it. And you know like school closings, I can’t go through all that but like Harvard is a good example. Students have until March 15 to get out of the dormitories and all the classes are going to be online. And I’m sure you have friends who say, “Hey, the kids’ school is canceled.” And I just heard somebody who knows some folks in San Francisco, which is kind of a crowded city, and like school is canceled and they’re all working from home and their kids are driving the parents nuts and they can’t get anything done. I think we’re going to learn something. People are going to learn something about how to live together from this event. And you know the World Health Organization this week they finally moseyed on in and declared a global pandemic, like we didn’t already all know that.
It is not the tiniest bit controversial to say that this is going to get worse before it gets better. I think you know the spread of the illness will get worse before it gets better, or to be more accurate, it’s a lot worse right now and we just don’t know it. Harvard epidemiologist Marc Lipsitch he got on Twitter and said, “Look, the number of new cases reported daily in the U.S. are not new. They’re newly discovered because you know as we start to test more, we discover them. The testing is still completely inadequate, and actual case numbers are much larger than the numbers we’re hearing because most cases never get tested.” So probably millions of people are running around with this thing and they don’t even know it. I think I might have it – I’m serious. It’s a dry cough and a fever are the two symptoms, and then the really bad thing is when it descends into your lungs and it’s hard to breathe. But I’ve had fever in the past week and I’ve got a dry cough, and I’ve traveled across the country – dumbass – earlier this week.
In other words though, the official statistics like if you go to that John Hopkins control panel that I think I mentioned on a previous episode, those numbers are just your cases that are discovered. They’re not the number of cases that exist. We don’t know that number and I’m sure it’s many, many times that. This guy Lipsitch he estimates that 40 to 70% of the world’s population – well the way he put it was 40 to 70% of the world’s population may become infected, okay? And he said, “Yeah, it’s a projection and we’ll see how it goes.” But they study how viruses spread – that’s how they make those kind of projections. And it’s based on models, right, and we’ve all learned to be suspicious of models, you know financial models and climate models and who knows, maybe even model of viruses.
But in the case of the virus, we can’t take chances with our health, right, and our loved one’s health. So we gotta be careful. I think if the world’s governments do what’s right – here’s the thing, two scenarios. Either the world’s governments do what is right and they all get on this and get really aggressive and wind up shutting a bunch of stuff down and slow this thing and stop it in its tracks, which will get us a really much slower global economy and we’ll probably get a global recession. Or they don’t get ahead of it, everybody goes the way of Italy, right? So they don’t get ahead of it and then they have to get really super aggressive, and then in that case more people get sick than should have gotten sick and we get maybe even worse economic damage. So it’s like pick your pain. You can have sharp pain up front and maybe deal with that, or you can ignore it and have a lot worse pain down the line.
And it’s interesting in the market right now because there is no place to hide except cash. Now bonds are acting nice but I’ll tell you what, the bond trade that we told you to do a couple weeks ago or at this point maybe a month ago, three or four weeks ago we were saying buy the TLT and interest rates are going to plunge and bond prices are going to go up. That all worked out and it was a great trade. But I gotta tell you, bonds were a bigger bubble than stocks, right? At one point we had 17 trillion in negative-yielding debt in the world, and I did actually say in public at the Stansberry annual event in Las Vegas maybe a year and a half ago that bonds were the biggest bubble in the world, and I think stocks were a huge bubble too. But this is like the everything bubble, and there’s no place to hide.
The way I think it plays out is maybe it’s similar to 2008 so we see gold getting hit because people are liquidating that. And eventually of course the worse this gets the bigger the response, right? So that’s my view on both halves of this, the public health half and the financial half, right? The worse you let it get, the more you have to shut down your country. The worse it gets in the market the bigger response by the Federal Reserve. And if I were them, I’d be trying to get ahead of it. But so far we haven’t heard anything from them this week. It wouldn’t surprise me if we did hear something before the weekend or first thing Monday or at some point, who knows, over the weekend, whenever. But I would think they would want to do it when the markets were open, probably in the morning to give everybody time to kind of relax and buy and feel better. But I think when they do it would strike me as it just makes all the sense in the world for stocks to rebound, gold to soar, but for stocks not to be able quite to get it together and continue downward, because this is not the type of thing where – and you’ve heard this in the press, I’m sure, this is not a new viewpoint. But this is not the type of thing where you can just fix it with lower interest rates.
The financial crisis in 2008 was essentially a balance-sheet problem, easier to fix with interest rate policy than this, which is like an income-statement crisis, right? It affects the topline of the income statement: revenues. People can’t do business, they don’t make money, that’s bad. They earn less, stock prices go down – it’s pretty simple stuff. And I think to an imbecile with a hammer every problem looks like a nail, so maybe they cut interest rates and try to do a bunch of other stuff. And they did that in the financial crisis too, right? They cut interest rates and did a bunch of other stuff. So that’s what I think we’re looking at. I think that with all this stuff closing and all kinds of – like my wife is giving me these announcements, “Did you hear this, did you hear that, did you hear this and that?” And I’m just getting people by email saying, “Oh, this is shut down, that’s shut down.” So with all of these things happening, I just think that – I’m trying to imagine what it’s like in the offices of the Federal Reserve. They have to be sitting there thinking you know I don’t want to be the guy who was in charge when it all went south and stayed there for five years, you know what I’m saying? And I’m sure they were thinking that way in 2008 as well.
And I know they believe, they’ve all studied the Great Depression and I know they believe that they didn’t do enough in the Great Depression, that they should’ve done more. So now when we get these events they’ll do more... they’ll do a lot more. But you know what that does? It weakens the currency, so we may end up with zero or negative interest rates, still be in a bear market and gold soaring out of sight. That’s how I see it. That’s what I think is happening. So what do you do right now? Well look, far be it from me to tell you to go into this market and buy gold, 'cause it’s tough, man. Gold was 1,700 like days ago and now it’s well below 1,600 – it’s in the 1,560s as I’m speaking to you and it’s just been plunging and plunging. So it’s tough to do that and I wouldn’t put all my money into it, but it’s not a bad thing to buy a little bit more gold here I think. And the metal as much as the stocks.
Yes, when gold really takes off and gets moving, I think the gold stocks will follow. But right now it’s just all getting liquidated so people are going gee, well I don't know. And worst-case scenario is that the metal is seen as a safe haven and the stocks are seen as funny paper money, electric money that you can’t hold in your hand that doesn’t go clank. This is tough times, man... There are no easy answers. And I hear a lot of people say, “Oh, I’m buying this and that, I’m buying all kinds of stocks, I’m buying all kinds of whatever.” It’s rough. It’s hard to do, and I’m not quite there yet. I need to be another probably I’m going to say 15 or 20% down on the S&P 500 before I start talking about buying really good businesses and hanging on and not panicking and not being full of fear.
So you know like this month of my newsletter I’m not making a new long stock recommendation at all, and I’m happy for the one short position we managed to hold onto in that screaming bull market that proceeded all of this. And that is where I am, that’s what I have to say. So to sum up, it gets worse before it gets better. Pray that governments and other people who are in charge of things shut it all down fast enough to bring this spread of this virus to a screeching halt and get a really good handle on it. The more severe we do it sooner, right, the better it is in the long run and the better things will be in the stock market and elsewhere. The more life will get back to normal. All right? That’s the best I can do, folks. Let’s see if we can find some levity in the mailbag today.
But first, I do want to tell you, look, we at Stansberry... we’re in the business of serving our readers. We know that they are very concerned. The market is doing terribly and they’re really worried and they look to us for what to do and how to behave and what to think. So we’re putting together an event. It will be this Monday, March 16. I don't know the exact time but I don’t need to know it because if you want to participate just go to 2020crashalert.com. And you sign up there and they’ll let you know when it is and how to log on and everything, and we’ll have some of our editors on there who you know some of the guys are pursuing strategies that have worked quite well in this everyone, and they’ll be on there talking about them and helping our readers out the best they can. So 2020crashalert.com. Just go there and you can sign up for Monday March 16, and we’ll see if we can’t help you navigate this craziness.
All right. Let’s see if we can find something to smile about in the mailbag. This is where you and I get to have a conversation about investing and life and whatever else you want to talk about. Just write into [email protected] I read every single email, and I respond to as many as I can. This week we had some long ones. I had to do a little editing to get some of these in. So the first one is from Roger M., and Roger M. says he’s from London, U.K. Hello, Roger, from across the pond. And Roger says, “Thanks again for your great work with the podcast. I think one of the elements that make it so listenable is the fact that despite your experience you're still confident and honest enough to know that you don’t always have the answers and that sometimes you get things wrong. I think that resonates well with your audience, or at least it does with me. My question is, given where we are in the current economic cycle and with equity still at quite elevated levels despite the coronavirus, which do you think poses the greater threat to equity prices, inflation or deflation, and what’s the effect of both on stock prices?” Thank you in advance, Roger M.”
Hmm, inflation or deflation, which is the greater threat to equity prices? They’re both bad for business is my answer. Inflation is bad for business. We took gold off the gold standard in 1971, and then OPEC did its thing and by 1974 the stock market was way, way the heck down. And stocks kind of struggled in that decade, and they stayed cheap actually. If you were buying the whole decade and held for a long, long time, you did great. Warren Buffett back then in the early ‘70s said he was like a man in a harem or something. [Laughs] He was buying stocks hand over fist when they were getting crushed. But the point is inflation is bad for stocks. It’s bad for business. It’s bad for people planning and taking care of their money. It’s bad for your savings and it’s bad for your business. Deflation is not great either, but at least with deflation you get some increased purchasing power but you get this depressed, tends to a company like depressed economic activity.
So neither is good. Which is the greater threat? I don't know. I don’t think you have to predict this. I think that what you do is you pursue a strategy that can handle either one, and the best thing you can do for any of this stuff is to own a bunch of great businesses, because a bunch of great businesses will probably have gushing free cash flow year after year. They’ll have a wide economic mode around the business so that the competition they won’t have a lot of competition and the competition will not make a lot of headway against them. They’ll be run by a good management team that can manage the cycles of inflation and deflation and whatever is happening in the world. That’s really the answer. The answer is good business operators of great businesses will keep you in good stead through either of those. And of course, I recommended holding gold and plenty of cash. And cash will keep you looking good and feeling good during deflation, and gold will keep you looking and feeling good during inflation. Good question though. Very good question.
Next one is from Ralph R. and he says simply, “Do you see a possible freeze on capital gains taxes for a short term?” No way, I don’t think this is politically doable. The payroll tax-cut thing is probably doable because you know workers are politically good. Investors politically less good, simply put. I’m going to leave it at that.
Next one is from Warren P. and he says that’s a pseudonym, and I’m going to use the pseudonym. He gave me his real name but I’m going to use the pseudonym, Warren P. The pseudonym is actually Warren Peace. “Hi, Dan, I had to write in just so you know how many physicists listen in every week. I’m a young guy with a decent job in mining, oil, and gas.” Now here is an unrelated sentence: “I don’t have anything to say about the climate.” Well thank you for that, Warren. I don’t really have much to say about it either. I’m just skeptical of all the people who are hysterical over it, and I know a lot of the models have been wrong, and other things too that I’ve said. Warren continues: “While I’m here, I have a question. Your consistent advice to buy good businesses and don’t overpay for them. How do I port this advice to asset prices?” Port is a word that technical people use, meaning translate. How do I translate this advice to asset prices?
Then he continues, “The real estate in my area is stupid expensive, and the few stocks I own are just about as high as they’ve ever been. I’m at a point where I’ve been ridiculously conservative when buying things. As you said, the Fed is juicing the system to the tune of low interest rates generally as to not elicit individual investment advice. Should one look for interest rates to rise before investing, or would it be wise to strike while the iron is hot? My gut feeling is this quickly turns into an optimization problem with interest rates and asset prices as inputs. Are my intuitions correct on this, or am I outside my circle of competence? Thanks for the effort and time you put into the podcast. Warren Peace.”
All right, Mr. Warren Peace, thank you for the question. Beware of optimization. Optimizing increases the fragility of a system and exposes you to bigger tail risks. Since you sound like a savvy physicist dude, you’ll get where I’m coming from with this advice. So don’t optimize around interest rates and asset prices. Optimize in the stock market around the quality of the business, the size of the economic mode around it, the consistency of the margins. Even a great business can have razor-thin margins like Costco, but they’re hyper-consistent over a long period of time. You know the consistency of free cash flow, these are just some of the markers. Not every business that has these will be great, but it’s just some of the things to look at. Good management team that behaves well throughout the cycle, focus on that. And if you focus on that and also keep plenty of cash. I think everybody should hold some gold.
Be a little less optimized and think more about being diversified among asset classes, and diversify in relation to value. Like nobody wants to hold cash. I’ve been talking about holding cash for three years as people wanted nothing but stocks, so I said, “Well, cash is underappreciated.” It may be undervalued, although it returns very little, right? So it’s hard to make a case it’s undervalued. But it’s certainly an underappreciated asset, so maybe hold plenty of it. And gold has been cheap relative to equities, so you want to hold plenty of that. And that’s still the case. And then aside from that, you find really good businesses and don’t overpay for them, and I think that’s about as well as anyone can do. Good question.
Brent D. is up next. Brent D., Brent you had a big long question about a particular trade that went haywire. I read the whole thing and I gotta tell ya, I got nothing. The behavior you described in this trade of the stock price up and down and all over the place, I have no idea what was going on. So I’m sorry, I can’t help you. But Brent D. otherwise says, “Dan, I enjoy the Stansberry Investor Hour, the questions and logical explanations about most everything.” Then he says, “About climate change, okay the climate is changing but it already has changed. The argument of men generating CO2 as the root cause sounds incredibly plausible but not proven. In my prior professional life, I was the navigator of a nuclear submarine, a calling where you learned a lot about many different fields of physics, astronomy and oceanography. I’ve been at the equator and under the ice. Here is my point. Think about the temperature extremes between the poles and equator, which only differ in distance to the sun by the radius of the earth with a bit lengthier atmospheric filter at the poles and realize that the earth wobbles on its access year does the exact distance of the earth from the sun. This is a first principles’ explanation that is just as plausible as manmade climate change. I have no way to prove this hypothesis, but if it was molded into a way to control the population, it is just as likely to be funded and _____ to an academic cottage industry.”
I don't know if he’s serious about this but there’s kind of a joke in it too. Brent D. continues. He says, “I’m with you. As soon as a scientist argues that the science is settled and there is nothing more to learn, they are no longer a scientist. Not talking about you here, Dan. No better than a wannabe social influencer with fancy graphs and a YouTube channel. Be sure to hit like and subscribe and pay your taxes. Paid-up Alliance subscriber Brent D.” Brent’s email speaks for itself. Thank you for that, Brent.
Then we have, what, two or three more. I had a lot of them this week. This is Mike B. “Hi, Dan, I’m really enjoying the podcast. Here’s a suggestion. Why not have Steve come on and talk about China and the Melt Up.” Then he says a bunch of other things and he said he doesn’t want to refer to us as Stansberry, pun intended, bury my head in the sand, etcetera. I hope that’s a politely worded criticism.
Mike B. Mike, Steve updates his readers on China and the Melt Up. I think he has a separate newsletter about the China investment opportunity and the Melt Up I think he covers just here and there but mostly in his regular True Wealth newsletter. So if you’re a subscriber of that, read what he has to say and that’s all that there is about the Melt Up. So he's writing about it. I’m not sure what it is you’re looking for. Maybe you’re looking for some kind of daily message from him when the market is down 7% one day. I don't know if you’re necessarily going to get that from him – he’s pretty sanguine about these things. But if he thinks it’s necessary, he will do it. He’s been around a long time... he's seen a lot of stuff. So if you're not hearing from him, I think that’s a reason to not worry so much. He’s got a trailing-stop strategy that he invented this in our industry, so yeah.
Mark P. is next. Mark says, “Hello, Dan, I enjoyed your last podcast and agree that the market may in fact turn out to be understating the effects of the coronavirus.” Then he says a bunch of stuff and he says, “I think it is rather ironic that the media blitz by overhyping the health dangers of the coronavirus could potentially do more harm to millions of people around the world not infected with the virus through economic fallout that they helped to cause than the actual virus may do to those who are infected. Do you think the media will ultimately take responsibility for this? Yeah, right. Mark P.” Mark, I’m sorry, I disagree. People say, “Look at all this panic,” and I say, “What are you talking about? People are still getting on cruise ships.” We need a little more panic, not less. I disagree.
Next is John R., and John R. he also enjoyed the Dave Collum interview. And his question is this. He says, “What about the alternative uses for the money spent on share buybacks in addition to paying dividends?” And then he discusses the things people could do with it... R&D spending, etc., and says wouldn’t that be better, basically. Granted, from the perspective of current management share buybacks will provide benefits much more quickly than R&D, but is that what’s best for the company? So my answer to you, John R., thank you for that question. Yeah, I think that is the point here. The point is they’re trying to goose the share price because they got options as compensation, and maybe if things were a little different they would think about spending to benefit the long-term growth of the company. That is the point – you do understand it right?
One last question. “Dan, just had to say you are still batting 1,000 on your comments on climate change. Keep up the good work and great podcasts. The consensus of science used to say that the earth was flat... the sun revolved around it, too. Awesome point. Best regards, John A.” Thank you for that, John. I appreciate the support. That’s it for another episode of the Stansberry Investor Hour. As you can tell, I have a lot of fun with the mailbag and a lot of fun with the opening rant, a lot of fun with the interview, and I hope you do too. It’s my privilege to come to you this week and every week. And remember you can go to www.investorhour.com and you can listen to every single episode we’ve ever done since the beginning. And you can see a transcript for every episode we’ve ever done. Transcripts will take a few days to show up when there’s a brand-new episode up, so just give us a little time there.
But what you really ought to do is go to iTunes and subscribe to the Stansberry Investor Hour and hit that little button that says "like". If you hit like, you’ll push us up in the rankings, attract a lot more likeminded people like yourself, and they’ll ask a lot more thoughtful questions and we’ll get to have an even better conversation than we’re already having each week. Thanks a lot. Can’t wait to talk to you next time. Until then, bye-bye for now.
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