18.03.2020 – Special Report. Most brokers currently compare the corona crash with 1987 or 2008: massive slump, rapid recovery. But maybe everything is really different this time – because it’s not “just” the financial sector that is going down. But the entire real economy on the globe. The warnings of a new, major depression are mounting. Some experts believe that despite the sharp bear market we have just experienced, we are only just beginning – and that the bottom of despair is far from being reached.
The light must not go out
This crash is far more threatening than “just” a financial crisis. Richard Baldwin, Professor of International Economics at the Graduate Institute in Geneva, recently warned in his publication VoxEU.org that the crisis triggered by Covid-19 was different. For it hit the economic giants all at once – the G7 and China. And in these countries, many sectors of the economy at once. Literally: “It is not a credit crisis, or a banking crisis, or a sudden-stop crisis, or an exchange crisis. Today’s crisis is a bit of all these. His advice: Governments should take expensive but quick measures to maintain the money cycle. That’s what he said: “keeping the lights on”.
Warning from Crescat Capital
We take a similar view and repeat our assessment from the Special Report of 12 March – the stock market is threatened with the biggest crash ever. It’s probably not over yet… The hedge fund Crescat Capital also sees it that way, we have already noticed it positively several times with clever analyses. Crescat supports our warning of a new 1929 – and drastically.
The time to buy is when there’s blood in the streets
The investment house reported yesterday for March to date a yield plus of 31 percent and wrote a warning to its customers, this was published via the blog “ValueWalk”. Crescat reminded of the legendary banker Baron Nathan Mayer Rothschild. He once said, “The time to buy is when there’s blood in the streets, even if it is your own.” Rothschild had organised gold smuggling for London during the Napoleonic wars in order to supply the troops on the continent with pay. Legend has it that he made a fortune in British government bonds through his own messengers, as he was the first to learn of the victory at the Battle of Waterloo. Translated to today, Crescat said: “Even after an almost 30% fall in the S&P 500, we are still a long way from the “blood in the street” valuations that mark the bottom for stocks.
Crash from a historic top
Letztlich stecke der Markt erst am Anfang der globalen Rezession. Konkret heißt es: “Was die US-Aktien betrifft, so ist es nur der erste Monat nach einem, wie wir glauben, historischen Markthoch. Das Problem ist, dass die Pandemie zufällig zur Zeit des am meisten überbewerteten US-Aktienmarktes aller Zeiten zuschlug, der auf einer Zusammenstellung von acht Bewertungsindikatoren basiert, die von Crescat verfolgt wurden und sogar höher als 1929 und 2000 waren. Sie traf auch nach einer rekordverdächtigen Hausse und wirtschaftlichen Expansion. Der Aktienmarkt war bereits reif für einen großen Abschwung, der auf einem Ansturm von sich verschlechternden Makro- und Fundamentaldaten basierte, noch vor dem globalen Gesundheitsnotstand”. Kurz: Der Absturz in einem überbewerteten Markt war überfällig, selbst vor der globalen Gesundheitskrise.
Only the beginning of the crash
And then it gets really drastic: the recent corona shock was probably just the beginning for the US stock market. For a global recession is looming, corporate earnings are likely to collapse and unemployment to rise. As always, the economy and the market would have to be cleansed of their sins to make room for new growth.
56 percent below average
Crescat went on to say that from the February top it would take a 56 per cent drop to even get to the long term average. And a 74 percent loss to further subtract one standard deviation. But in the worst bear markets, Crescat said, prices even slid two standard deviations south. This is what happened in the Great Depression, the bear market of 1973/74 and the double dip recession of 1982.
1929 revisited – minus 89 Percent
And that’s how we ended up in the Great Depression. The current bear market is comparable in speed and severity to 1929, Crescat continued. In 1932, there was an 89 percent drop from the top. Of course there will always be bounces to the top in between.
12 Trillion Dollar Margin Call
By the way, Crescat is not alone. JPMorgan has just warned that the world is facing an unprecedented dollar margin call – and that shorts worth $12 trillion, or 60 percent of US gross domestic product, will have to be closed. The dollar is sliding towards deleveraging, as three-quarters of cross-currency funding is greenback. Not to mention all the assets that have to be sold.
Save everything and everyone
And Zoltan Pozsar, the Credit Suisse repo king already quoted at this point, advised the Federal Reserve to save everything and everyone. As set forth in “Global Money Notes #28: Lombard Street and Pandemics.” Incidentally, the Fed has followed the expert’s earlier recommendations exactly with its latest steps – interest rate cut, billion-euro injection for the repo market.
Two years of epidemic possible
Drastic requests to speak therefore everywhere. But there is still a lot of hope on the stock market, as the rebounds show. And even in real life there is still little sign of “Blood on the Street”. Indeed, in the meantime hamster purchases have begun. But carefree pensioners sit around in groups in cafés, arrogant little students celebrate corona parties. The Robert Koch Institute (RKI) has just issued a harsh warning: The pandemic could last for about two years. And in extreme cases, the restrictions for people could remain in force for that long. This sounds as if there is no short-term cure and no resistance.
Imminent mass insolvencies and state of emergency
We ask ourselves: How many airlines, hotels, restaurants, retail shops, advertising agencies, car manufacturers and banks will topple over in such a permanent crisis? And further: Only when supermarkets and petrol stations close down in the end, when the supply of electricity, gas and water runs out because nobody shows up for work anymore – then the real emergency will prevail. Then we will see the army in the streets – plus soup kitchens, riots, looting. And only then will we have Blood on the Street.
Junior Miners already now buying opportunity
But let’s end this bleak outlook on a potentially impending Armageddon with a light of hope, presented by Crescat Capital. There is one corner of the stock market that already offers historically low valuations and an incredible buying opportunity: “small cap gold and silver mining companies”. Last Friday, the sector had fallen 84 percent since the Bull Market Peak in December 2010. And with that a double bottom has formed, as the market last recorded a minus of 87 percent in January 2016. And on Friday the “precious metals juniors” also reached a record low in valuation compared to gold. This against the background that a run on gold always starts in the crisis. It remains to be noted that Crescat itself has invested in these stocks.
The Bernstein-Bank wishes you successful trades! And to all of us soon an antidote to Corona – or the realization that humans do develop resistances and that everything will not be as bad as feared in the worst case.
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