Prepare Yourself for Round Two of Crisis
The #1 question I’m being asked right now is…
Is the crisis over?
I would argue that it is not.
Yes, stocks are up. And yes, they could continue to go up for some time. But we need to be clear about what has happened in the U.S. in the last six weeks.
The economy was shut down almost completely.
The Federal Reserve and the federal government threw trillions of dollars at the issue… but that doesn’t fix the economic damage the shutdown has caused.
After all, do these large–scale bailouts, loans, and quantitative easing (QE) measures:
- Negate the fact that many businesses are gone forever?
- Negate the fact that these businesses will default on their leases, thereby hurting the $16–19 trillion commercial real estate market?
- Negate the fact that several large states (NY, CA, IL) are insolvent and will need bailouts soon?
- Negate the cultural effects of people being scared out of their minds by a pandemic?
We don’t know the answer to any of the above. And it’s going to be months before the economy/financial system has fully digested the damage caused by the shutdown/meltdown.
So while stocks are up and could indeed go higher from here… there are several large nasty problems lurking in the financial system.
And from what I can tell, the Fed cannot fix them.
Warning Signs from the Bond Market
Take a look at the Junk Bond ETF (HYG) to see what I mean.
The junk bond market in the U.S. is a little over $2 trillion. This is a relatively small market. And the Fed has announced it will be buying these bonds with unlimited funds.
This announcement lead to a large bounce in the Junk Bond ETF. However, HYG has since rolled over and is struggling to move higher.
This is happening because the junk bond market knows that even if the Fed spends trillions of dollars buying junk bonds, it can’t fix the underlying issues for the companies that issued these bonds.
After all, if the companies that issued these bonds go bust, it doesn’t matter if the Fed is buying their bonds. Those bonds are still worthless.
This is why I know the crisis is not over. If anything, Round Two is coming in the next few months.
Be careful out there!
Editor, Money & Crisis