MONDAY MORNING WRAP UP

A message from David Beahm

President and CEO

Depression Ahead?

The streets are eerily quiet. Traffic jams are non-existent.

A record 75 million Americans are under lockdown or shelter in place orders this Monday morning as the government goes all out in the fight against the COVID-19 health crisis. Experts agree this is the worst pandemic facing the world since the Spanish flu outbreak of 1918.

Yet, the morning paper is still delivered, the sun is shining and the birds are still chirping. We are living in unprecedented times in America. Medical science will ultimately prevail.

We don’t know how long it will take or how long this crisis will last. But, rest assured, this pandemic is temporary and we as a nation will recover. Eventually.

Facing reality, however, the extraordinary shutdown of economic activity will have ripple effects for the U.S. economy for potentially years to come.

This isn’t just a health threat. It’s a massive economic threat too.

Industries like restaurants, entertainment, tourism, airlines, and hotels are being crushed by the social distancing requirements in place.

Already the toll on workers is high as the world’s largest economy grinds to a halt.

It will get worse as citizens without jobs can’t pay their rent or mortgages, car payments or utility bills. Last week alone, over 281,000 Americans filed for unemployment insurance. That marks a 33% jump over the previous week and the highest level in two and a half years. It will get worse. Some economists peg the unemployment rate at 20% in the months ahead, the worst since the Great Depression in the 1930’s.

Shocking Second Quarter GDP Forecasts

Brace yourself. Second quarter GDP could shrink by a record 10% or even more.  

JP Morgan forecasts a shocking 14% decline in the second quarter. Deutsche Bank predicts a 13% contraction in the second quarter, while Oxford Economics forecasts a 12% decline. Goldman Sachs now expects a stomach-wrenching 24% drop in the second quarter.

Numbers like that far exceed even the worst performance of the Great Recession in 2008, which registered an 8.4% decline in the fourth quarter 2008. And, you probably remember. That was bad. This will be worse.

Using Goldman Sachs economic estimates, this could translate into a loss of 14 million jobs this spring. Again, the 8.7 million jobs lost during the 2008-2009 Great Recession number pales in comparison.

The economic devastation that will lay in the rubble of this fight to save human lives could easily become the most serious economic crisis to face our nation since the Great Depression of the 1930’s.

Economists are divided on when the U.S. economy could begin a recovery, but there is none of the Pollyanna optimism exhibited by the Administration in its daily press briefings. Economists are much more sober.

A Growling Bear Grips Stocks

The S&P 500 sold off 32% from its all-time high peak on February 19 into Friday’s low.

Yes, the U.S. stock market has already lost over a third of its value.

The sickening declines over the past month wiped out all the gains achieved since Donald Trump was elected to office and more.         

The percentage decline this far in March for the Dow Jones Industrial Average ranks currently as the second-worst in history after the 30.7% monthly collapse in September of 1931. But, wait. The month isn’t over yet.

Don’t expect a bottom in stocks just yet. The Dot.com bear market in 2001 saw the S&P 500 crash 49.1%. The global financial crisis in 2008-2009 sank the S&P 500 by 56.8%.

Using history as a guide, the 32% decline in stocks we’ve seen so far, likely has more to go.

Gold Swings Wildly As Investors Liquidate to Meet Stock Margin Calls and Need for Cash

 Physical gold and silver demand skyrocketed in recent weeks as individual investors rushed to the safety of gold. As Americans woke up to fully face the threat of the coronavirus and its devastating impact on the economy and stock market, investors rushed to the safety of gold.

Massive gold and silver buy orders deluged Blanchard in recent weeks as investors seek to buy insurance through tangible asset ownership. During these unprecedented times, you can count on Blanchard as your trusted tangible asset partner. We can deliver your needs, although supply chain disruptions are creating a minor delivery delay in some instances.

Like the run on toilet paper and hand sanitizer, there has been a run on physical gold and silver in recent weeks. Some bullion dealers are out of stocks.

This may seem confusing to some investors to hear that bullion dealers are running out of supply while gold prices are falling on the world market.

The reason is that gold has been used to raise cash to cover margin calls amid the crash in the stock market. Gold is acting as the insurance policy that it is – a financial instrument that provides liquidity during times of crisis.

Yes, Gold Remains an Effective Portfolio Hedge

The recent volatility in gold is to be expected in the early days of a crisis as investors sell gold to raise cash. In the months ahead, new all-time highs above the $2,000 an ounce level gold are expected. Gold remains an effective portfolio hedge. Here’s what the World Gold Council said last week:

“We believe that, so far, gold has played an important role in portfolios as a source of liquidity and collateral. And we expect it will serve as a safe haven in the longer term.

Gold experienced pullbacks at the onset of the global financial crisis too, falling between 15% and 25% in US-dollar terms a couple of times during 2008. But by the end of that year, gold was one of the few assets – alongside US treasuries – to post positive returns.”

Gold Is Set To Soar

From a low at $680 an ounce in the fourth quarter 2008, gold more than doubled as it raced higher into the 2011 all-time high above $1,900 an ounce. We expect the same during this crisis. From current levels that could mean gold as approaching the $3,000 an ounce level in the next three years.

This Is Still Just Getting Started

The global spread of the coronavirus continues at a fast pace. Over the past week, confirmed cases infection doubled in a week to top 310,000 as of Sunday. The Imperial College of London, considered the world’s most renowned health modeling experts estimate the pandemic could unfold in waves over the next 18 months.

Government Response

In the months ahead, there will be waves of Federal Reserve quantitative easing and massive fiscal stimulus packages in the trillions.

The government will print and borrow money in efforts to stave off another Great Depression. Will it work? The jury has not even heard the case yet. These efforts, while necessary given the magnitude of the crisis, will degrade and devalue paper currency.

The fiscal rescue packages will mortgage the next generation of Americans with ever-greater debt levels. With the nation’s debt already topping $22 trillion, it seems foolish not to add a couple trillion on more now. Yet, this could unleash great inflation, double-digit interest rates and a destabilization of our financial system in the years ahead.

The Fed and the U.S. government are between a rock and a hard place. They have to act.

Many fiscal and monetary ideas will be tried. Some may work, others may not. No matter what, there will be a financial reckoning in the years ahead.

In this environment, gold remains one of the few assets that is recognized around the world as a store of wealth and value. Throughout history and in the future, gold has and will continue to provide investors a safe harbor in the storm.

Be safe,
David

What Questions Do You Have?

This is the first installment of a new weekly message from Blanchard. In the weeks ahead, I will provide a wrap up of the key events of the previous week, along with commentary to keep you informed. Count on us for insightful news, perspective and analysis along with recommendations to protect and preserve your wealth. Blanchard is here for you.

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