Volatile Markets - Is this It?

With a variety of markets in turmoil it seems appropriate to comment and ask if we are seeing the beginning of a long predicted "next financial crisis". It's a bit too early to say, but obviously it is prudent to monitor events closely and have a plan of action in mind should we see indications that this is more than just a short term disruption in market stability.

Below is a Q&A style of analysis to try and offer some thoughts on the current situation in the markets.

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Q: Are seeing the "snowflake that will trigger the avalanche" to use a phrase coined by Jim Rickards to describe the next major finanicial crisis?

A: We have covered this topic extensively over the years here and our position remains unchanged. Due to the extraordinary monetary policies that have been used by the Fed and other central banks around the world to stave off a major deflation, the conditions for another new major financial crisis basically exist all the time. No one can be sure what event or combination of events might actually trigger a major deflation event where world markets basically blow up monetary stimulus bubbles that have been created. Events like these we see right now certainly could lead to that. But we have seen a number of similar potential triggers arise and subside. So, only time will tell us the answer. But clearly this a time to pay very close attention to what is happening.

Q: What impact will crashing oil prices have on the system?

A: An ongoing collapse of oil prices where the price stays below $40/bbl for an extended period of time absolutely could significantly impact systemic stability. While consumers will obviously benefit from lower energy costs, the US oil industry could see severe contraction with many of the shale based operators going under because they cannot generate positive cash flows and are over leveraged with debt. Not only would that create massive loss of jobs in the industry, millions of other people are impacted. Millions of elderly royalty owners who depend on royalty checks to supplement social security for example. Banks holding debt on some over leveraged companies could suffer significant losses and then there could be spillover into the financial sector. The suggestion here is to monitor oil prices. If they stay too low for too long, expect this to be another potential trigger alongside the current global virus pandemic. Also, the Fed continues to do unusual repo market operations. All these are things to keep an eye on.

Q: What about gold?

A: We have long advised readers here to monitor gold prices and the US dollar. Sharply rising gold prices are an indication that money is moving into safe havens. For now, money is moving into both gold and US government securities. At some point if gold keeps soaring and US debt securities start to lose investor confidence, that would be a clear signal there are serious threats to systemic stability in play.

Q: Why isn't silver moving higher with gold?

A: Silver has an industrial commodity component. At this time investors likely think of silver more like they do oil and that industrial silver demand may fall off if things keep going downhill due to the virus pandemic and the other factors in play at this time. So silver is more likely to lag gold under those kind of investor assumptions. If at some point a shift occurs and a full fledged move out of paper assets and into hard assets were to unfold, silver likely catches up to gold and more in line with the historic price ratio between the two metals. In that case, investors would probably be viewing silver more like an alternative currency as they would gold under stressful conditions. Silver is almost always much more volatile than gold.

Q: Is all this (virus scare, oil price collapse, etc) a "planned event" to trigger a crisis so that the old system can be replaced with some kind of new one? Or just a series of coincidences?

A: This is a question I am seeing out there quite a bit and also from some readers by email. It is really impossible to answer. I have no evidence to provide an answer one way or the other. I would suggest that readers simply monitor how events unfold over time and then draw your own conclusions. If the pandemic fears subside in a few weeks and markets return to normal behavior, this will all be viewed as more like just normal market correction activity. Some are viewing the oil price collapse as part of a geo political strategy by Putin to exact some revenge on the US for sanctions. Jim Rickards is pointing out on his twitter feed that Putin has been piling up gold and may believe he can accept oil income losses to be offset by gains in his gold holdings. So there are lots of theories out there as to what is driving things.

If this situation drags on and continues to impact markets over time, we are more likely to see the potential for a new major crisis. If that happens, the blame game will begin in earnest. In the political arena, both sides will blame the other for the crisis. We can expect a lot of disinformation coming at us from many directions as everyone attempts to shift blame to someone else. In a scenario like that, we may never really get a true answer. And conspiracy theories will abound I have no doubt. I would have no way to determine fact from fiction in a scenario like that. I simply just hope it doesn't happen. But hoping does not mean I don't think people should have some kind of plan in mind in the event another major crisis does emerge.

Q: What should people do?

A: There is nothing new to say in answer to this question than what we have said here for years. Another major financial crisis is always in the background as a possibility. People like Jim Rickards have been predicting it for years. The average person will not be able to impact the macro situation one way or the other. A prudent plan is to have a backup plan in mind in case another major financial crisis were to unfold. Being as diversified as possible is always wise. Having an emergency cash fund is always a good idea. Having some of that in precious metals is a good idea. Having some extra provisions around is a good idea, especially if the virus pandemic worsens and distribution is impacted or people are confined more to prevent spread of the virus.

Whether this event turns into a serious financial crisis or not, it should be telling you that having no backup plan in place is a very poor idea. Having no emergency fund or any hard assets of any kind is simply foolish and is NOT a diversified portfolio. Having no extra provisions on hand in the event of any kind of emergency is also not prudent behavior.

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Added notes: One reader sent an email providing some helpful information on the virus and ideas on how to help your immune system be as healthy as possible. So I am linking those below for anyone interested in the info. An important part of dealing with any potential crisis situation is to try and be as informed as possible.

https://www.youtube.com/watch?v=qqZYEgREuZ8
(Strengthening Your Immune System)

https://www.youtube.com/watch?v=gmqgGwT6bw0
(Can Vitamin D be helpful?)

https://www.youtube.com/watch?v=Eeh054-Hx1U
(Can Zinc be helpful?)


I was also forward the link below to an article which talks about the impact of the virus in China on Bitcoin mining:

https://decrypt.co/21710/chinas-pending-bitcoin-mining-catastrophe