Navigating The Markets During And After COVID-19

Hey, The Investor’s Podcast Network Community!

Markets are not functioning as you’ve seen in prior decades. Globally, fiscal spending and monetary policies are warping free and open markets into Franken-Economies. This means, as things move forward, the performance of stock and bond markets is going to be highly dependent on government policies (globally). Governments are fighting price deflation, which is caused by over-used inflationary monetary policies with no currency peg.

Once real interest rates reach 0% globally and there’s no fiscal responsibility for fiat nations, policymakers effectively have two tools remaining to fight the price deflation (in fiat terms). They can use QE (been doing that), or they can use Universal Basic Income / UBI (just getting that one started).

There are many paths to push fiat into these two ports (QE and UBI). UBI is fiat insertions straight to the masses, while QE is fiat insertions straight to the fewer at the top. UBI increases the price of commodities the masses demand the most (in nominal fiat terms), while QE increases the value of bonds, stocks, and real estate (in nominal fiat terms). If balance between both of these insertion ports (QE and UBI) are not managed perfectly, extreme moves in asset prices and/or in CPI will occur.

The more these inflationary monetary policies (combined with fiscal irresponsibility) are exercised, the more violent the moves become over time. This is because the manipulation is accelerative or exponential over time. It’s easier to see with its overuse. Without a pegged currency, governments will continue to pursue this path.

The navigation of these waters will be extremely difficult for people participating in financial markets.This is because their performance is highly dependent upon the decisions of policymakers. For instance, which port will the policymakers decide to infuse with fiat next (to the masses UBI or to the top QE)? It’s extremely difficult to know and understand the lagging impacts and factors. In the end, a new, globally pegged currency will need to be established for REAL capitalism and free and open markets to occur in the future. I have opinions on what that is, but many are quite animated and have different takes. Regardless, if a new currency does emerge, the results for stocks and bonds over the long haul are quite predictable.

At the end of that currency transition, bonds denominated in fiat will be completely impaired. This will likely happen abruptly and with nearly no notice. This is because global governments will continue to exercise QE up to the point where the tool has a catastrophic failure. This is done in practice by pegging yields at zero percent. The government can do this by simply swapping cash for bond, selling once a particular yield ceiling is met. This will appear like the bond market is fine, because it’s not demonstrating any volatility in the yield. But in reality, it’s a VERY sick puppy. This will persist until trust starts to dissipate from the market due to social unrest. Remember, QE makes asset prices go up for the wealthier population — not the masses.

Stocks throughout this period will be a mixed bag, but in general, they will underperform pegged currencies like gold and Bitcoin. The companies that will outperform other stocks are the ones that will save consumers money and also offer essential goods / services during depression-like hardships. Companies that are very lean in operations / manufacturing and that have strong balance sheets will be able to weather the churn much better. It’ll be very important to be open to a very wide array of potential outcomes moving forward, because so much is dependent upon the enormous policy responses that are yet to come and the timeline of social responses that are very unpredictable.

Many blessings to everyone as they safely navigate through these difficult and volatile times.

Your Friend,

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P.S. Please make sure to check out the latest episode of our podcast where Stig and I talk about the current market conditions and how COVID-19 is impacting the stock, bond, and commodities market.

P.P.S. I’d love to hear your thoughts. Make sure to post your comments here so that we can help each other understand this complex situation better.