After big corona plays in March The Golden Investor continues to analyze the market to stay ahead of other investors. The Lakeland Industry (+100%) and Alpha Pro Tech (+750%) gains of last month provided some great back-up for other losses last week. Even gold stocks tanked after several stock markets saw their biggest losses in history. In today’s monthly outlook we discuss the current catalysts and developments on stock markets.
The first thing investors need to know is that the corona problems are just starting now. The biggest risk of the COVID-19 outbreak is not the sickness itself, but the impact it has on supply chains, especially out of China and South-East Asia. Companies all around the world are dependent of Chinese production and this production has been stopped or at least significantly decreased the last two months. Full production out of China is believed to still take a while. The damage is done already, inventories around the USA and Europe are starting to get empty. Many manufacturers face the problem that if they miss one part of their product, their whole manufacturing process faces a slowdown or even a stop. This is something we already saw in South Korea two weeks ago, where Hyundai closed a factory simply because of the lack of car parts coming out of China. This together with a threat of uncontrolled spread across the western world poses a huge problem for many companies. Airlines across the globe have seen sales go down tremendously. These same airlines provide many companies around the world with cargo. So if these airlines foresee big losses up ahead, the whole global economy faces losses.
The Trade War of Donald Trump has had one positive effect on the economy: many American companies already investigated and differentiated their supply chain and are slightly prepared on a Chinese extraction out of their supply chain. However, a standstill of Chinese production is not something companies are prepared on and many companies around the world will start to see disruptions in their manufacturing processes. Also tourism-dependent countries like Italy face a huge drop in tourism revenue which will severely hurt their economy.
Tuesday the FED made their biggest rate cut since 2008 to prevent the markets from tumbling down even further. Normally this would boost stock markets, but this time investors see it as sign that worse is up ahead. The Hong-Kong and Singaporean central bank already started to hand out so called “helicopter money”. The central bank of Hong-Kong handed out $1200 US-dollar to each person above 18-years old to salvage their economy. Furthermore, after the FED cut their interest rates from 1,5-1,75 percent to 1-1,25 percent the Hong-Kong central bank did the exact same thing. Both countries face the same downward trend, Hong-Kong was hit by the monthly long protests and now the coronavirus, while the USA saw manufacturing indices drop six months in a row and now face supply chain disruptions.
The Golden Investor thinks that worse is yet to come. A second wave of sell-offs is coming and nothing is safe, as investors seek liquidity and face margin calls even safe-haven assets like gold and silver aren’t safe. Last week gold dropped a big three percent after the Dow Jones lost more then 11 percent. The Golden Investors thinks a second sell-off in March is very likely and a financial crisis is inevitable. Many companies don’t even know where exactly all their supply comes from due to the very limited information they get from their suppliers. This is the exact same reason why companies and investors will be surprised by the impact this disruption will have. Along with the continuous spread of corona and empty guns of central banks a sell-off is inevitable and very likely the coming weeks. On the short term The Golden Investor stays bullish on Flow Traders (FLOW) which benefits from the increased volatility and big stock market drops. After this second sell-off it will become clear that nothing can be done by central banks. Gold will see a slight drop as stock markets plunge, before it exponentially increases in value as the best safe-haven on central bank policies. For now it is important to take a look at the gold price, if markets drop and gold starts to rally, it is time to step back in. For now gold is an as dangerous asset as other financial assets. The Golden Investor thinks that, starting from the end of March/beginning of April it will be time to go all-in on gold stocks.
Disclaimer: The Golden Investor is not a fortune-teller, be sure to make the right decisions in accordance to your own financial situation, this is not investment advise or anything like that.