Resuming the March Decline ahead

The Past 

What a year!  Back on January 30th I posted "ACT NOW!, Sell the market!", on Feb 4th President Trump asserted America's economy is stronger than ever and the future is blazing bright and the years of economic decay are over!   Please keep in mind in 2019 the deficit was 984 Billion dollars.  The deficit in 2016 was 585  billion.  Therefore at the greatest economy ever, our debt spending as materially higher than the new administration took over.   

Note: We now know that the President was briefed on the impending pandemic, which makes sense he would know if I knew.

The market rallied a bit more before the decline.  Shortly after the President addressed the nation, the USD dollar was valued at 99 against other fiat currencies. The SPX market top was shy of 3,400, for this post lets call it 3,375.   I then went net long March 30th.

The SPX closed at 3,669 today, but the USD is valued at 91.  So to adjust the current market to the world, the close to the valuation of the USD back in February we are at 3,375.  So today isn't a new high, but a little under the high in February.

The USD has been declining, and we may continue to see the USD fall.  The USD was valued at 149 in 1985, and achieved a low of 72 in June 2008.   So we have room for the dollar to continue to fall and the market to appear to rally.  However things don't usually go in a straight line so I expect the dollar to rally, that means fear is ahead.

The Present

We still have record unemployment, record deficit spending, an estimated 100,000 businesses have failed, 12% unemployment, and potentially 19 million people losing their homes in January.  the US Federal Reserve created 3 trillion dollars circumventing the money creation process in place since 1913, by simply giving itself 3 trillion dollars with no bond collateral.  The US government has spent in 2020 2 trillion with COVID relief programs, on top of the already high deficit spending, forecasted at 1 trillion before the pandemic.  In 2020 we are adding 18% to our debt to GDP and forecasted 10% in 2021 before any new COVID relief plan is passed.  It is expected the Federal Reserve Bank to buy up about one third all home mortgages before the year is out.  When normal returns we expect material shifts in human behavior including commuting, which will affect commercial real estate and commerce.

The current forecast of ROI on the stock market over the next 10 years is -1.7%.  Yes, you read that correct, if you keep your money in the market based on the last 100 years of stock history, you should see your ROI be negative over the next 10 years.  (Full article here)

The stock market valuation does NOT reflect the health of the nation, rather the froth of the money creation give away.

The Future

Lets assume Trump doesn't have a coupe and end democracy, but rather Biden does take office.  There is a material number of Americans who view the Democrats as stealers of the election, are communists and/or running a pedophile ring.   When Biden takes office the assault of conspiracy theories will continue.  Trump will continue to tweet, and do everything in his power to make Biden fail, along with loyal Trump Republicans.   There is a possibility Trump is prosecuted and the negative emotions escalate even more. The Democrats must convince Republicans to double the deficit annually over the next four years to 2 trillion a year even after COVID ends to match the deficit spending increase during the best economy ever between 2016-2020, in addition to trillions more to soften COVID impact.   If they can't, the economy will solidify its downturn for years to come.  Raising taxes into a downturn is suicide, we should have been saving 'in the greatest economy ever' instead we doubled down on debt.

What looks ahead is pretty grim, and there really isn't any low risk options.  Bonds are yielding 1% for a 10 year, and with a backdrop of the USD falling 10 ~ 30% more it isn't a great option.  Stocks with a historical norm of -1.7% ROI in the next 10 years isn't great.  This will cause problems with pension failures and other groups relying on ROI.  The only option I can see is to divest from the USA, but other countries are really not a great investment either.

Anther option is to print our way out of all debts, which will risk a dollar collapse and to lose world reserve currency status we have enjoyed  since WW2.    In this scenario the market may advance as the dollar continues to devalue, but I would expect inflation to cripple most of the American economy.

The middle ground is to have the FED continue to destroy capitalism by privatizing all assets with the banking system with 'granting' itself trillions of dollars.  Japan has done this for 30 years and still hasn't hit a new high in the market.  The Japanese Central bank owns about 80% of all ETF's. (article from 2018 at 77%)

The easy button is create new bubbles.  I have been planning for this easy button dating dating back to 2014.  Granted I was way too early on this call , but here we are.   GDX has moved from 18 bucks in 2018 to 45 in the summer.  I expect it to resume the rally and may hit GDX 100.   It also, shouldn't move in a straight line, but future looks bright in the near term.  It should fall if the market falls but at a lower percent.  Recently I have written about how 2020 is the year Crypto currency came to age, and since then Bitcoin has taken off.  My favorite stock GBTC has moved from 10 to 23 in the last few months.  I would not be shocked to see GBTC move to $1000 a share in the next 10 years.

What to do?

At anytime President Trump could initiate a war either via attack (like this assassination) or by troop withdrawal, or some other act to send the markets down.   Even if he doesn't, I expect between now and February the market to decline materially from the high (unlikely the day I am writing this is the high, but who knows!)  The setup for next year is not good.  The market will need to lose 40-60% of its valuation to be a good buy once again, and will likely take years to play out and fully recover. (a decade? 30 years like Japan?) 

This is excluding the print our way out option as I expect Republicans to enforce fiscal discipline much more than they did with in 2016-2020 during 'good times'.  With a crippled economy they will double down the pain in hopes of winning elections.  The easy money train will end in January, unless Democrats takes the senate in Georgia.

I think hedging out of the market and fixed income in the next 6 months is lower risk than dollar devaluation in the near term.  If you hear a new FED bazooka, like now printing 6 trillion dollars, then that maybe the end of bonds and cash as a safe haven.

Paying off debts is paramount, lowest risk with highest secured ROI.  Individual companies like Amazon are good bets, as their competition fails.  Companies like Exxon are bad  borrowing huge sums to pay their dividends, as Democrats won't like oil and companies, I expect Exxon to fail in the next 10 years.  So be careful to not buy historically good companies but instead forward looking companies.

I do think diversifying into GDX now at 36 and GBTC now at 23 is a way to hedge out of USD and the US overall market.  I don't think GDX has a 10 year bright future as crypto will win. (disclosure my primary play is stock GOLD/GDX (miners), Cryptos are second)   

If the government decides to resume mailing checks directly to Americans, then all best are off, the stock market will be fine and the economy recovers in record time.  I really doubt Republicans will let this happen.

IMPORTANT!

PLEASE don't invest blindly in what I said here, I am an IT guy, not a financial advisor.  Use it to prompt understanding that inaction is actually an action, a choice to remain invest in the most over-valued market in US history.   Instead look at your finances, pay down debts, take a conservative stance, and invest a little (10-20%?) in alternate plays (cryptos, gold, global ETF's)

Good luck,  it will be a wild wild ride into and through early 2021.