A warning for every investor and the actions you should take right now
Through my financial services career spanning almost two decades, I was once responsible for supervising an entire company of financial advisors who invested billions of dollars for clients.
As such, I have never been more concerned about the fundamentals of the US and global economies than I am right now.
The coronavirus pandemic has caused a global recession and struck particularly hard here in the USA. Yet, currently, the US stock market has almost completely recovered from its coronavirus-induced plunge.
What does this mean for you and your money?
This is a good time to reevaluate your investment holdings and position yourself for the coming crisis.
Perception drives the stock market; think of perception as a rubber band that constantly expands and contracts around the fair value of the market, driven solely by positive or negative investor sentiment.
At this very moment, that rubber band is stretched well beyond the US stock market’s reasonable value; it will inevitably snap back to reality. Many factors will contribute to the next US stock market crash.
For example, unfortunately, the result of the coronavirus pandemic is that some businesses will close their doors for good. Predictably, we are already seeing an acceleration in corporate bankruptcies (recently highlighted by an article in The New York Times).
No matter how much money the US government prints to stem the flood of unemployment: those jobs will not come back.
It is 2008 All Over Again Except Worse This Time
Rampant unemployment will lead to the failure of tenants to pay their rents, as well as many homeowners to default on their mortgages (this is happening right now but the US government CARES Act Mortgage Forbearance legislature has delayed the inevitable).
Shortly after these government mortgage forbearance options run out, the real estate market is going to collapse, fueled by foreclosures. As Mark Twain once said, “History doesn’t repeat itself, but it often rhymes.”
We have witnessed this cascade of events before in The Financial Crisis of 2008 and, therefore, we have a good idea about the subsequent effect on our financial institutions (and your investment portfolio). The difference this time: the worldwide impact of the coronavirus pandemic will increase the severity of the economic downturn.
In contrast to the most recent financial crisis, the coronavirus pandemic is not a localized, US stock market-driven event limited to just a few mortgage or financial-related companies.
This is a broad economic collapse driven by a wide swath of diverse sectors on a global scale.
Furthermore, 70% of the US economy is driven by consumer spending. High unemployment and fear of job security always result in less consumer spending, which will keep the US economy from rebounding quickly.
Once investors realize the US economy will not fully recover for years, investor sentiment will turn negative and the US stock market will fall.
Hang in there; we are headed for a white-knuckle roller coaster ride.
What can you do to prepare yourself?
Now is the time to reposition some of your money into assets that offer both protection and appreciation during this phase of the economic cycle. Before further elaborating on the best assets to own during this economic downturn, it is important to stress the need for extra cash on hand.
Significantly Increase Your Readily Accessible Emergency Cash
Unbeknownst to most of the public, there already were underpinnings of a financial collapse in the money market sector.
Most people are unaware their money market mutual funds could be at risk, become illiquid, and even lose money.
The main reason the US government stepped in during The Financial Crisis to bail out Bear Stearns, thereby facilitating its sale to JP Morgan Chase (with a $25 billion US government tax-payer-funded loan), was to keep money market mutual funds liquid for investors.
About money market mutual funds and the problem the US government was trying to prevent during The Financial Crisis, a recent CNBC article states,
“That system generally worked well for many years until the 2008 financial crisis. That’s when one large money market fund that held millions of dollars worth of debt from bankrupt Lehman Brothers went under when its net asset value dropped to 97 cents — called ‘breaking the buck’ — and it was forced to liquidate.
‘No one thought money markets had risk to them,’ Hennessy said ‘People lost their marbles because it was supposed to be safe but then it wasn’t.’”
Furthermore, the possible collapse of money market mutual funds is happening right now during the coronavirus pandemic.
This same CNBC article documents the steps the US government took, in March 2020, to shore up money market funds:
“The Fed announced a new program that will make loans to financial institutions that buy shares in ‘prime’ money market mutual funds, whose investments include corporate bonds. It’s the latest move by the Fed to prop up the U.S. financial system as the fallout from the coronavirus pandemic continues to run roughshod over the economy.
…We need to avoid a situation where issuers can’t access liquid short-term capital and investors fear their cash could lose value…
…Money market funds, which hold roughly $3.8 trillion, often serve as a place for both large institutions and individuals to keep assets away from stocks but where they’re likely to earn more interest than a standard bank account.
However, as is the case with all mutual funds, they are not FDIC-insured like traditional checking and savings accounts.”
What would happen if you suddenly did not have access to the cash in your money market funds?
It just makes sense to have more physical cash available in case of an emergency.
Inflation is Coming
The US government cannot print (and borrow) trillions of dollars for government programs and stimulus packages without causing the deflation of the US dollar (substantially more dollars equals less value per dollar simply by the law of supply and demand).
The decreasing value of the US dollar will ultimately make imported goods more expensive leading to inflation in the US for consumers.
Every time I think about difficult economic times, I am reminded of my dearest client, Bernard, who passed in 2015.
What My Dearest Client Taught Me
Bernard’s story epitomizes the rags to riches American Dream. He was a Holocaust survivor who arrived at Ellis Island with nothing. Yet, through hard work, Bernard would build a personal empire worth $200 million.
From time to time he would tell me about his horrific experiences during World War II, most of which is too traumatic to write about here.
However, what I learned from him is the ultimate lesson every investor should know about investing during times of crisis.
Bernard was born Jewish, living with his family in Poland when Nazi Germany invaded; he witnessed the collapse of his entire country first-hand. His mother, father, older brother, and younger brother were all hidden by friends in a countryside farmhouse after Poland fell to the Germans.
Fearful of the risk their friends were taking, as news trickled out about the imprisonment, torture, and murder of those caught hiding the Jews, his family decided to voluntarily surrender to the Nazis.
They had no idea what was in store for them (none of the Jews knew the atrocities they would suffer at the hands of their captors).
Bernard, his older brother, and his father were sent to the same concentration camp, while his mother and younger brother were separated from the rest of the family; he never saw his mother or younger brother again.
After enduring four different concentration camps over five years, Bernard, his older brother, and his father all made it out alive. He had seen the worst of humanity and survived the collapse of his society. Bernard told me his story for a specific purpose; he had an important lesson to share with me that is a valuable lesson for everyone.
The Best Assets to Possess During a Crisis
He told me his experiences taught him that no matter what happens to a country if its currency goes to zero, or even if it collapses completely, there is always a market somewhere in the world for certain hard assets.
These specific assets are the best hedge against inflation and become even more valuable during catastrophic societal and/or economic upheavals.
I will never forget what my client said and I am haunted by his words during these uncertain times, “After all, even in the worst possible scenario, gold and diamonds can be converted to cash somewhere.”
Bernard lamented that if his family had purchased gold and diamonds before the German invasion, which rendered their Polish currency worthless, they would have had the resources to escape Poland as a family, together.
As he told me, for this reason, he stockpiled millions of dollars in gold coins, bullion, and an additional three million dollars in loose diamonds. In his words, come what may, he was ready for any calamity.
Certainly, unlike Poland, I do not think the United States will be invaded anytime soon, nor do I think the US dollar’s value will go to zero (although no one in Poland thought they would be invaded or their currency would become worthless overnight either). Yet, Bernard’s story illustrates the potential power of being prepared for anything
Daily, when I watch the news, I am reminded that any number of events can occur where your life could be saved by having quick access to extra cash, gold, and diamonds.
Pros and Cons of Gold and Diamonds
Specifically, gold is the commodity of choice to own through economic downturns; it increases in value during troubling times (and whenever there is a crash in the stock market). Furthermore, as mentioned previously, it is the perfect commodity to buy as a hedge against inflation as gold also increases in value during inflationary periods.
Additionally, almost every single small village or city in America has at least one shop with a “We buy gold” sign.
It is relatively easy to convert gold coins or small gold bullion sizes into cash almost anywhere.
Similarly, diamonds are a hard asset that increases in value with inflation. In contrast to gold, there are comparatively fewer places to sell diamonds, although diamonds are still readily convertible to cash in most towns.
However, due to their size, weight, and overall flexibility (especially when fashioned into jewelry), diamonds are easier to transport.
For example, flying with diamond jewelry is less complicated than flying with gold coins or bullion (for more information, please see this USA Today article titled, “How to Travel with Gold Coins”).
Seriously, the TSA website currently states, “…Diamonds are a girl’s best friend and who wants to be forever separated from their BFF!?! Go ahead…leave the bling on through screening!”
As you can see from their website, presently the TSA has a very lax attitude towards jewelry versus gold coins or bullion; sometimes the best place to hide something is in plain sight.
Where My Clients Get Investment Advice on Gold and Diamonds
I strongly believe, as lessons from the past have proven, everyone should have some physical gold and diamonds readily accessible in case of an emergency.
Additionally, current market conditions make gold and diamonds particularly attractive investments due to the impending inflationary environment coupled with the coronavirus pandemic-induced global recession.
My clients often ask me about buying gold and diamonds. As I explain to them, investing in gold and diamonds is best handled by a specialist who can make recommendations based upon a person’s individual goals.
Even with my eighteen years’ experience as a financial advisor and managing principal, I defer gold and diamond investment decisions to the experts in their respective fields.
For this reason, I refer my clients to the following two companies (these are my affiliate links, as such, I do receive compensation whenever a client or referral makes a purchase):
Are you positioned to ride out the current global recession, imminent inflation, and subsequent stock market decline?
Bernard’s history lesson often reminds me, the best time to prepare for a future catastrophe is before it happens: that time is right now.
Keep extra cash on hand; pick up some gold and diamonds.
Disclaimer: This article was written solely based upon my opinion for informational purposes only, therefore, it should not be considered Financial or Legal Advice. Please consult with a financial professional before making any major financial decisions.