I Haven’t Seen a Stock Market This Mispriced in 40 Years

[Money Trends with Andy Krieger]( Welcome to Money Trends! If this is your first time reading one of our issues, learn more about us [here](. And if you have any questions or comments, shoot us a note anytime [here]( or at feedback@andykriegertrading.com. I Haven’t Seen a Stock Market This Mispriced in 40 Years By Andy Krieger, Editor, Money Trends The disconnect between Main Street and Wall Street has reached epic proportions. In our Big Trades advisory, I’ve been writing for some months about the bubble-like conditions in the stock market. So the collapse in March made perfect sense. Cyclically the market was ripe for a vicious sell-off, fundamentally the numbers looked worrying, and technically it was also ripe. But the recent rally in stocks is totally absurd. I understand corrections. In fact, in Big Trades on March 23, I called for a significant technical bounce. But a 34% rally based on false premises is a different story. Let me explain… Rivaling Japan’s Great Bubble I have only seen one other market that was more severely mispriced than the recent stock market highs – the Nikkei and Japanese real estate bubble in the late 1980s. I remember when the emperor’s palace in Tokyo, some five kilometers of land, had a greater value than all of California. To compare the recent rally in stocks to that bubble is really saying a lot. Why do I feel so strongly that stocks are mispriced today? To start, more than 38 million people have filed for unemployment in just nine weeks. That includes more than 40% of the workers in America who earn $40,000 a year or less. These are the people who are most vulnerable. They’re the people living from paycheck to paycheck, worrying about paying their bills and feeding their children. Meanwhile, the federal deficit this year is on track to reach about $4 trillion. That is staggering. It’s more than three times the worst deficit of the Great Recession of 2008-2009. (In 2010 and 2011 our annual deficit topped out at roughly $1.3 trillion.) As far as GDP, by some estimates, we could see a 37% decline in the second quarter. Without getting into the weeds here… to recover those losses, we’d need to see 59% growth in the next few quarters, since we’ll be starting on a much lower base. But based on the state of our economy, that kind of growth is unlikely anytime soon. Long-Lasting Consequences of COVID-19 If we have a drawn-out economic recovery, the impact on society will be devastating. Over time, liquidity issues will become solvency issues. Sadly, we will see this fact play out at both the individual and corporate level. The latest surveys show that more than 50% of the nation’s small businesses could become insolvent over the next six months. The economic, psychological, and emotional impact from that will be catastrophic. Critical sources of employment will be eliminated, and many local community leaders will be living shattered lives. However, forcing people to return to work too soon will only ensure a second wave of infections. And I am afraid that a second wave could be more damaging to us than the first. People are already very tentative about going out. A second wave would convince people that it’s absolutely not safe to go out. It would further ensure that people reduce their consumption for as long as possible in order to try to improve their personal balance sheets. As a result, travel would be sharply reduced, and tourism would be badly hurt. But, believe it or not, it gets worse. The World Health Organization recently announced that it expects this pandemic to persist for four or five years. That would be catastrophic at so many levels. Companies will follow the same playbook as individuals. They will focus on improving their balance sheets. They’ll only start rehiring workers slowly. They’ll also try to find lots of ways to cut costs going forward. Remote working will likely become a bigger part of business practices, and this will reinforce the already heavy, downward pressure on commercial real estate. Airline traffic will not recover for years as people travel less for a variety of reasons – not least because companies find they can get their deals done with a lot less travel. In short, the effects of the coronavirus will reverberate through the economy for many, many years. Consider this: After the Great Depression in the 1930s, spending patterns changed for over a decade. We can expect the same this time. I expect unemployment to remain stubbornly high for a very long time – probably still above 12% at the end of 2020. (Compare that to last year’s unemployment levels of 3.5%.) And sluggish growth will become the norm after an initial spurt of fast growth for a quarter or so. What to Do Now People often tell us to always bet on the Federal Reserve. In certain ways that is true. In this instance, however, we need to bear in mind that the Fed lends money – it doesn’t spend money. The Treasury Department can spend money, but it is already pushing the limits of tolerable levels of debt. It already increased its debt by $3 trillion! Heaven help us all if the market decides that U.S. debt (in other words, U.S. government bonds) is no longer a safe investment. Then we could look at interest rates spiraling higher and tax rates exploding higher as well. We can look at Japan to understand how simply printing vast amounts of money doesn’t result in either economic growth or sustained levels of modest inflation. The Japanese economy has been practically stagnant for 30 years! It takes a long time to turn a big ship, and our economy is a huge ship. Sure, we will slowly recover. Some companies will even flourish while others go bankrupt. That is the nature of capitalism. Expecting miracles, however, is dumb. For now, I recommend holding only very light exposures to stocks. Instead, traders should focus on owning safe-haven currencies like the Japanese yen and Swiss franc against a basket of weaker currencies – such as the New Zealand, Canadian, and Australian dollars, as well as the British pound. We should get much better levels to buy stocks after a significant move lower. Regards, Andy Krieger Editor, Money Trends [Money Trends with Andy Krieger]( Andy Krieger Trading 55 NE 5th Avenue, Delray Beach, FL 33483 [www.andykriegertrading.com]( To ensure our emails continue reaching your inbox, please [add our email address]( to your address book. This email was sent to {EMAIL} because you subscribed to this service. If you no longer wish to receive emails from Money Trends with Andy Krieger, [click here](. Andy Krieger Trading welcomes your feedback and questions. But please note: The law prohibits us from giving personalized advice. 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