The Coronavirus is the pin that will prick the bubble

What a wild week on Wall Street with thousands of points just gone! Needless to say, it was stressful trading, but I managed to lose less than I usually do. Thank God it’s the weekend, and I can rest. I started my Saturday with some power yoga and a green smoothie. This afternoon I hope to get outside and enjoy the sunshine. We don’t get a lot of sunshine here in the winter, so today is a special day for me. I plan to leave the house, walk along Lake Michigan, and meditate on God and nature. I also get to read some library books, which I’m excited about. But first I have a few thoughts to share about what’s behind us and what might be coming.

I gathered from the street that people are expecting the Fed to react this weekend with more “stimulus” (rate cuts, bailouts, currency printing, whatever it takes). Based on what they’ve experienced in the past, and what we all have seen time and again, people think that this stimulus will cause a huge buy-the-dip rally. There’s only one problem with this logic…it assumes the market is nothing but a game bound by rules which don’t change. The game which has evolved over the past 12 years, is the market gets high on liquidity. It got really high and tripped hard a few weeks ago, when it convinced itself the coronavirus would bring another round of liquidity. It was surreal to watch.

Nowadays, it doesn’t matter if companies make money, what matters is cash. As long as the Fed keeps printing (borrowing to bail out the big guys), the market will keep going up. That’s the talk on the street. This, my friends, is craziness! People KNOW that the market is no longer run by free trade and the rules of supply and demand. They know that fundamentals don’t matter anymore, and they are still willing to commit their money to make it grow. There are all kinds of trading tricks you can play in this market to generate cash, which has nothing to do with the companies or their values, products, services, costs, sales, earnings, etc. The market has become a MONEY MACHINE led by the Fed who keeps borrowing more and more currency to keep it running upwards. There are a lot of moving parts in this machine but the gist is that the lenders are lending more and more of what they don’t have and the borrowers are spending more and more of what they can’t pay back…a recipe for disaster.

The coronavirus is a big deal, but it’s not the source of the market’s problem. The market’s problem is it’s no longer a market, but a money machine fueled by debt. Companies borrow money to put it in the machine and make more (by buying back their own stock). People put their nest egg in the machine to make it grow. Banks take what the Fed gives them in bailouts to buy stocks and bonds. There’s too much borrowing everywhere, and that only works as long as the lenders keep on lending and don’t want or need to use their money. Coincidentally, back in September before any knowledge of coronavirus, something broke in the repo market; lending froze up between the banks, and the Fed had to start printing massive amounts of currency to keep the entire financial system from collapsing. This is a very scary thought, but market kept chugging along, up and away.

The repo market is the “repurchase” market where banks lend and borrow to keep their operations afloat. I was thinking about all this and how the coronavirus surfaced shortly after, and it’s certainly intriguing. The rate at which currency is exchanged in the economy is called the velocity of money, and it has been in decline. This is why economic growth is stagnant. If you consider the problem and what’s needed to solve it, the stock market must be sold off. People have to take their money out of the machine and spend it into the economy. Companies need to stop putting their money into the stock market and put it into production. This is what makes an economy healthy and strong: spending. BUT here’s the other problem—if they take their money out, the market will collapse and leave others with much less or nothing, because it’s a giant pyramid scheme built on leverage and debt.

Why is the coronavirus so scary from an economic perspective? Well, countries are closing, businesses are on standby, and the global distribution chain is slowing down considerably. It won’t show up right away, but it’ll hit us and hard in a few months (if things don’t change). A normal economy could probably hunker down and handle this, but an economy built on a leveraged credit bubble? If Apple can’t get it’s parts to make devices and it can’t sell devices, it won’t make profits, and it won’t pay back the debt it took to buy back it’s own stock in the money machine. If this happens to many companies at the same time, it has the potential to completely crash the financial system. So people may think it’s just the flu, and deny it has the potential to wipe out millions of lives, but it can’t deny the economic disaster that’s on its way.

This is why the market started selling off this week…it’s like an old feeble man who has survived on junk food, and just caught the coronavirus. He doesn’t have the defenses to fight it off. The market’s days are numbered. Last week I talked about acts of God, and I believe this is event is one of them. It’s God’s way of telling us, “Hey guys…may I interrupt your chatting and gaming? Guess what? I am God, not you!” There’s no denying the stock market may rally on old rules that revolve around interest rates and liquidity, but I don’t think it’ll be sustainable. Don’t get me wrong—I hope it works, that everything will be okay, that we can get a handle on this virus and stop all the damage, and I pray for humanity and our world. But somehow, I don’t think it’s going to be easy this time. We’ve had it too easy for too long and that’s never the nature of history and God.

On a positive note, change brings growth, and all endings bring new beginnings. While unpleasant, and downright painful, the only thing that’s going to solve the major systemic problems that prevail is an outright disaster. Our country, our world, has gotten too far away from humanity. It needs to step back, find its soul again, and return to God. I need to do that myself, and I’m going to start today.

Comments are closed.