Take a breath. The stock market has reached a level that is “average” for a bear market, a decline of about 30 percent from the peak. Now, we must look at two other numbers that could spiral out of control.

The first is the number of new cases of Covid19 — now that we have the tests to reveal the truth about the spread of the virus. That number is likely to be shocking.
The second number is also rising to what would have been considered shocking levels. It is the amount of money the government will spend to help businesses and individuals.

There will be a huge amount of money at stake. Suddenly, representatives from industries ranging from restaurants to automakers, from airlines to energy companies, are descending on Washington DC with their hands out.

Plus, there is a sudden awareness (election, anyone?) that the public — individuals — will be voting soon. This time around you can be sure there will be a response to the needs of people who don’t have a “lobby” in Washington.

It’s literally “dialing for dollars” — as America reaches out to the government to make up their losses. (By the way, stock investors are last on the list, along with real estate investors who will no longer receive their expected rents.) There will be an important effort to keep the structure of the economy alive, to keep small and large companies from filing bankruptcy, so that when this health crisis passes Americans can go back to work.

Creating the Money

Suddenly, we are hearing government plan numbers in the trillions — money created out of thin air. Well, not actually out of thin air, but the process is fairly transparent. The government must borrow the money by selling bonds. The Federal Reserve will oblige the government by purchasing the bonds — paying with newly-created money/credit injected into the system.

The Fed is helping create liquidity in other ways — already injecting new liquidity by purchasing outstanding government bonds, and mortgage-backed securities, even commercial paper (short term IOUs that large businesses use to fund their operations) — and which are the main investments of many money market mutual funds.

I was asked on TV earlier this morning whether there is a “limit” to the amount of money the government/Fed can create. The simple answer is “no limit.” But eventually –and that could be a way down the line — people are going to start wondering what this new money is “worth.”

But that’s down the road. You can see the light at the end of that road, and it is shining like gold. In fact, as you can see from the gold market, right now people value liquidity — paper — more than gold. And I’m not talking about toilet paper!

Meanwhile, in the here and now, the emphasis is on trying to offset the horrible loss of jobs and economic growth. That will be done through a series of government programs — providing cash to individuals, lines of credit to small businesses to make payroll if they promise not to fire workers, and subsidies to chosen important industries.

Your Investments

The implications for your finances are clear. If we can get out in front of the crisis, the economy — and your stock investments — will bounce back to some extent. But don’t try to “time” the market or pick the bottom, or buy the bounce. I hope my earlier advice has given you a cash cushion to hunker down for a while and not sell in a panic. Yes, depending on the numbers, the market could go lower. No one knows for sure, but we will get through this.

Once more on bonds: Bonds are a a promise to pay you interest in the future. Right now there is a concern about downgrades or bankruptcies in sectors like airlines, energy and retailing. Those bonds are in your bond fund! Take a look. Of the bonds are downgraded below investment grade, your fund will have to sell the bonds, pushing prices down farther.

But even if these industries are “bailed out” by some form of government/Fed action, what will be the value of those interest payments in the future when we tally up all the money that has been printed? I see no good outcome for owning bonds. And I don’t think there has been a full realization by the general public of the potential losses in bonds. That goes for corporate bonds, municipal bonds (what are the costs to cities/states of this health crisis) — and even longer-term government bonds.

Please don’t own bonds. At this point — my opinion, and painting with a very broad brush — bonds and bond funds have more risk than you might realize. The slightly higher yields are not worth the risk. And that’s The Savage Truth.