Posted at April 15, 2020 Posted In Uncategorized

So, here we all are in the midst of a pandemic.  By all accounts these are unprecedented times.  

I don’t mean to panic anyone, nor do I mean to be insensitive to what is happening.  This is a very real threat to certain people and we must all take precautions to ensure the safety of our loved ones.  

Financially speaking you may have taken a hit with everything that has happened over the last several weeks.  But even if you’ve been drastically affected there is still a lot to act on.  It is always important, maybe especially now, to keep a level perspective while making decisions.

While I am not here to tell you how to keep you and your loved ones safe during this viral outbreak, or how to teach a teenager proper social distancing while dating, I can however offer some predictions, in order to gain practical financial insights.  

Considering potential scenarios listed below have helped both clients and family members alike hypothesize their own strategies.

The world has never seen an event like this and there are no analysts models to adequately assess what the world is currently experiencing.  The hard truth is that there is no scientific way to say what will happen.

Now remember, PREDICTIONS ARE HARD.  When I first met Doug Duncan, the Chief Economist at Fannie Mae, he told me that the secret to giving economic predictions is that “it’s totally fine to give a number, and perfectly acceptable to give a date, but never, ever, under any circumstances… give both at the same time.” – lol

That said here are 2 sets of real-world predictions;

Pessimistic

  • When all is said and done this pandemic will bankrupt nations.  Italy for example was on the brink of insolvency prior to the virus.  In fact, the Italian government issued bond yields actually went up in the last few weeks!  Thus making it even more expensive for the government to pay back debt
  • The Federal Reserve will cut rates below zero and go into negative rate territory
  • Both small businesses and several large chains will go bankrupt
    • The median restaurant has an average cash-balance of 16 days.  Unfortunately several restaurants you personally frequent may very well never re-open.
  • MOST of these businesses owe A LOT of money to the banks, whether a small business line of credit, or a multi-million dollar equipment loan.  When the businesses can’t repay the defaults are going to be off the charts horrific.
  • Add to that people will begin losing their jobs, depleting their 401ks, defaulting on credit cards, auto loans and even mortgages
  • All of this leads to the conclusion that the banking sector will be entirely upended
  • The global supply chain, which is incredibly complex but not necessarily resilient will also be challenged and the weakest parts of the chain will invariably break
  • The vaccine that is supposed to be developed, tested and delivered within 12-18 months takes significantly longer than predicted by politicians and media alike
  • The Dow Jones trade between 17,000 to 23,000 throughout the rest of the year
  • Prices go through the roof when stimulus bill after stimulus bill get approved and “helicopter money” inflates the money supply.

Optimistic 

To be fair; all “Best Case Scenario” revolves around a quick and inexpensive treatment of the virus.  Without that, the rest of the hypothesis seems a moot point.  Luckily there may potentially be light at the end of the proverbial tunnel.

  • Hydroxychloroquine gets approved by the FDA for the treatment of COVID-19
    • This treatment has been effectively treating malaria for some time and used in combination with Z-Cap has shown significant promise in anecdotal cases.
    • Not only is the drug immediately available via prescription in the United States, but it has already been produced in mass quantities around the world.  
    • The drug is also fairly inexpensive as far as medicines go.  A 10 day treatment costs less than $100 without insurance.  
    • Test-kits for Coronavirus would only be necessary for those showing symptoms thereby rendering the need for mass testing pointless.
  • The Stimulus Package actually delivers on it’s promise to inject capital to small businesses, working families and those who need the funds most.  
  • The Dow Jones has a predictably dismal 2nd quarter, but picks up for the 3rd quarter and we see it trade between 25,000 to 28,000 by the time the 2020 election come around in November

The reason I am sharing potential scenarios is to consider your planning; move, counter-move.  For example, should we see interest rates decline further what does that do to bond prices and real estate values? 

Or if we see inflation potentially occurring, what types of assets do best in that environment?

These questions are meant for you to bring to the team of advisors you surround yourself with.

Next week we’ll go over some tips that work with any asset, whether it be stocks, bonds, real estate, metals, CD’s or cash.  And YES, cash is an investment.

Best wishes for your health, wealth and happiness,

Edward Cernobori

Founder and CIO, BlackTree Investment Group, LLC

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