Today the unemployment figure in the USA hit the 30 million people, an incredible and horrifying number. As already explained by Fabian Wintersberger this is partly due to the high unemployment benefits as part of the corona stimulus. In some cases the benefits are higher than normal wages creating a lack of incentive of going to work during these times. Combined with the ongoing struggle for entrepreneurs this will have negative effects on the long run. As markets seem to price in a V-shaped recovery, the actual figures point to a different path for the global economy. Many investors forget that the global economy was already slowing down before the corona outbreak. Markets are tested and stretched to extremes; the oil price faced the biggest demand shock in history, and supermarkets around the world face supply shortages due to closures of factories. But still financial markets act like the reopening of countries and states is going to bring everything back to normal.
The 2020 Central Bank Crisis, Probably Will Be Dubbed The Corona Crisis
The Golden Investor wants to point out that it isn’t going to be like that, we face the biggest existentialist crisis for financial markets in a century. Today Allianz Chief Economic Adviser Mohamed El-Erian told in an interview with Yahoo Finance that he expects that the coming crisis will be the biggest since the Great Recession of 1929. When top analysts start making these statements you know it’s time to take a break from financial markets and watch the chaos unfold. Where quantitative easing already was unconventional, we’re now in a scenario where central banks are stepping into high risk equities in order to safe the economy. The same economy which is already scattered to pieces. There’s no endgame, central banks are the last resort, if central banks fail, the whole economic system fails. Such a crisis is bound to happen. It is questionable what is the best step to take, The Golden Investor puts his faith in gold, since gold is the ultimate last place of resort for central banks.
“We’re going to come out of this with a massive entanglement of both the Fed and the government in private sector activity. The fact that a central bank is willing to selectively go into high yield is revolutionary. Remember, central banks are not supposed to take on credit and default risk.”Mohamed El-Erian – Yahoo Finance
Increasing Gold Reserves By Central Banks
Central banks across the world have been buying large amounts of gold, especially the Turkish and Russian central banks. The Turkish Lira has depreciated massively since the start of the corona crisis and the Turkish central bank will be happy that it increased its gold reserves last year. The question is what they will do with these increasing reserves, will there be a point where they are going to use these reserves to back their currency or is it just a way of showing the strength of their central banks?
Biggest Bull Trap Ever
The current bull trap not only shows how the real economy is more than ever disconnected from financial markets, it further demonstrates our increasing dependence on big giant cap companies. Although many of the gains in the last month have spilled over to smaller cap companies, the good mood was served by the giants. These companies thrive on the demolished competition, with a bigger lobby and extreme market power the companies are able to steer fast amid the corona mayhem. With massive cash positions, companies like Apple (AAPL), even though they are burning through some cash, are far from afraid of spending money in order to secure supply chains. The too-big-to-fail narrative is in most cases used to show overconfidence of big companies, in this case I want to point out that companies like Walmart (WMT), Facebook (FB), Amazon (AMZN) and Google (GOOGL) are in fact too big to fail. Nothing new you would say, but the current bull run is fed by good results of these companies. Yes, these companies will be able to restart and see a V-shaped recovery and because these companies make up such a big part of the market investors expect the whole market to recover fast. But they forget that the current social distance society is going to have a lasting impact on society, a society with an economy which is far more complex than the business model of these companies. Investors think it’s just a matter of turning on the switch of the economy along with some additional fuel provided by central banks. In fact it is more like starting up an old Volkswagen Beetle which has been standing in the garage for years, only to flood the engine after it doesn’t start the first five times. We’ll see how far it can be towed further by the FED.
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.