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Checks, Recession, and a Panic Bottom

Written by Briton Ryle
Posted March 18, 2020

Treasury Secretary Steve Mnuchin needs to settle down. On the one hand, he is saying that a recession for the U.S. economy is still avoidable. On the other hand, he is saying that if the Senate does not approve the president's plan to drop $1,000 checks from helicopters, we could see unemployment spike to 20%...

I'm not opposed to the government sending people some loot. In fact, it should help people — two weeks or more out of work will be a serious burden for hourly workers, especially at a time when airlines and casinos are already asking for government handouts.

We're barely into this thing. Casinos have pretty sweet profit margins and available cash (Las Vegas Sands sports 20% margins and brags about $4 billion in cash) and they need a bailout?

Pretty outrageous, but that's what happens when both the government and the Fed condition companies to expect that the government will step in any time things get dicey.

But, hey, at least we aren't socialist, right??

The fact that it's casinos(!) that are first in line with their hat in one hand and the other open for government cheese is an incredible irony. 

Will any bailouts come with provisions about keeping people on the payroll? Doubt it. Just like the bailouts in 2009, this isn't really about the employees. It's about votes and this good 'ol boy network we have running the country...

"Someday, and that day may never come, I will call upon you to do a service for me. But until that day, accept this justice bailout money as a gift on my daughter's wedding day."

And please, please let's not fall for the implicit threat that the U.S. will avoid a recession if we don't approve this $1 trillion in checks plan. 

Recession Is Inevitable (And Probably Already Here) 

U.S. GDP is over $17 trillion a year.

Many Americans are already being advised to pay only essential bills. Pretty much the entire service sector is closed. Many factories are closing for a week or two because demand has dried up. 40% of Americans don't have $400 cash on hand for an emergency expense...

I can guarantee my spending will fall at least 10% this month. I bet your situation is similar.

So, recession? It's here now, and $1,000 to every American isn't stopping it. 

This isn't a hoax. There's no orchestrated plan to make the president look bad. The simple fact is: It's gonna be a couple months before we can hope to get back to life as it was...

That's mid-May, by the way. And I might be too optimistic on that. But the issue is clarity. Until there is clarity about the progression of the virus, cash on hand will be king. Stock valuations don't matter. That is both a blessing and a curse.

It's a curse because stocks will continue to sell-off as investors would rather have the cash than the shares. So the value of your stocks right now is only relevant in terms of the cash you can get for them. Given that not many want to be separated from their cash, this is what you'd call a buyers market. If you're selling, it's like walking into a pawn shop with your grandmother's engagement ring — you're not gonna get close to what it's worth. 

But these prices are a blessing for long-term investors who have a little time on their hands. All the more so because there is no rush to act. We are, what, a week or two from any possibility of clarity on the progression of the virus? You can pick your spots...

How to Recognize a Bottom

Here's a headline that just crossed my Twitter feed: "11 Pandemics That Changed the Course of Human History, From the Black Death to HIV/Aids — to Coronavirus."

I wouldn't call it a panic headline, exactly. But I will say that it is inflammatory. It is real "sky is falling" kind of stuff. And it tells me that fear is still on the rise and that people are going to be making increasingly bad decisions.

Use this to your advantage as stocks are on the verge of wiping out four years of gains. 

I'm paying particular attention to areas where demand was already weak. I talked a little about brick-and-mortar retail on Monday. We have had an oversupply of retail square footage for over a decade. The coronavirus is pushing the endgame forward dramatically. 

It is not too soon to start writing the obituary for Kohl's, Macy's, and Nordstrom. In fact, Kohl's has fallen from $75 to $15. That obit has gone to copy editing for final approval.

I would put oil and LNG in the same boat. This event is fast-forwarding weakening demand stats that have been in play for some time. And I gotta say, I wonder how Saudi Arabia's MBS is feeling right about now. It's hard to imagine making a more stupid move than opening the spigots into a global recession...

Market's are always emotional. That fact is sometimes obscured by numbers, but the fact remains. The market will be hitting its lows at about the same time that emotions are hitting their highs. It doesn't seem like we're quite there yet...

Just look at Mnuchin's comments. I'm not gonna say he's panicking, exactly. But he is seemingly grasping at any phrase that might be reassuring. He's failing.

And that headline above — changing the course of human history???

Testing is only now getting started in the U.S. It's reasonable to think that we will see some pretty big and surprising numbers sometime soon — a week maybe? 

Stay tuned. Max panic is coming soon. 

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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