As days go by and the amount of worldwide confirmed COVID-19 cases piles up ( as I predicted a few weeks ago), it is looking more and more likely that this coronavirus pandemic may be the black swan event that sets off a global recession — a recession that may even cascade into a full blown fiat currency crisis.
2 months ago, China implemented a large scale lockdown, restricted transport and asked citizens to stay home. The West did not yet feel the gravity of the situation and were instead making memes or simply casting skepticism over reported data and social media footages. The severity of the situation was clear based on the measures China undertook, with Spring Festival extended and economic production not resumed until March — non-essential businesses and manufacturing have just started to return to normal since 1–2 weeks ago.
Now, the outbreak is approaching peak in Europe and the US, and lockdown measures are just starting to be implemented — with some countries still reluctant (see: USA, Germany, UK, Netherlands, Canada, etc.). Fortunately, the general public are starting to feel the severity of the situation and have started self-induced social distancing, as well as raiding the supermarkets of supplies. It’s starting to look like a repeat of what happened in China in early February, basically with a 1-month delay.
Now, with the similar progression we are seeing in Europe and the US, we can expect a similar effect on the respective economies. Earlier this week, we already witnessed the bloodiest few days in US stock markets in several decades, and that was only in anticipation of impending effects COVID-19 will have on the economy. The worse parts (in real life as supposed to market speculation) are yet to come.
This COVID-19 pandemic has come as a systemic shock that has practically annihilated several major industries, including:
- Airlines (global air travel reduced significantly)
- Cruise ships (basically going to zero)
- Events, including spectator sports and entertainment (majority if not all events and sports seasons are being cancelled/postponed — damage example)
- Entertainment and tourism venues (cinemas, amusement parks, shopping malls, casinos/Vegas, resorts and ski lodges, etc.
- Food and beverage industries
- Commercial real estate (offices and co-working spaces)
The majority of these are industries running on slim margins (airlines, F&B, etc.), and a few weeks without income is enough to put people out of business completely. Major airlines in the US are already discussing bailouts by the Federal government as we speak, and more will follow suit. But again, what’s more concerning is that the worst is yet to come — remember, social lockdown in the West has just started (a week ago in Italy) or not even started yet (other countries mentioned above). The economic hit will be widespread and inevitable — let’s not forget the oil industry also got absolutely crushed recently, which will also have domino effects.
Even the product retail and supply chain industries are being affected, despite China resuming its manufacturing capabilities. Mass panic and a shortage of essential and medical supplies means that some retail platforms such as Amazon have shifted to prioritize those products. As an Amazon FBA seller, I received the notification below from Amazon yesterday — basically nobody is allowed to ship anything to Amazon’s US warehouses unless it’s an essential item or medical supply. This means that FBA sellers who are running out of inventory could potentially be without revenue for a few weeks if not more — for those who have taken on leverage/loans to fund inventory purchases, this could end badly.
To ease the potential shock on the economy and impending layoffs, governments and central banks have started printing money again, like crazy. These so called “stimulations” coupled with lowered interest rates are supposed to prop up the market and encourage renewed spending from banks and corporations, but it’s not working anymore. In these times of crisis, liquidity is king and people are selling whatever they have to pay bills and meet redemption requirements. The panic flight to cash is even less surprising given the fact that more than 70% of Americans live paycheck-to-paycheck. Things are looking so grim that we are now hearing some serious talk about the US government potentially implementing an Universal Basic Income (e.g. $1,000 cheque a month for every citizen) just to get money into the hands of the common citizen. These are all just temporary solutions though — the system is severely flawed, and a shock to the system like COVID-19 will leave long lasting damage.
Such drastic monetary measures by the central planners will no doubt lead to inflation and severe devaluation of fiat currencies and the savings of common citizens. I reckon that we’ll come out of the upcoming recession/depression with a brand new world order — one in which the majority of people will have lost faith in fiat currency and the legacy banking system.
This brings me to my next topic — what to do in a turbulent year like 2020? The simple answer is of course, cash. When the world is in flames, cash is king, and you can buy assets on the cheap when things start to recover. However, with the crazy money printing central banks are doing, I no longer hold much confidence in the long term value of a dollar. Hyperinflation is starting to look like it might be a possibility in the developed world and not just some phenomenon reserved to third world countries with unstable governments anymore.
With that said, I am more bullish on bitcoin than ever. When fiat money becomes worthless or unreliable, people will lose faith and put their trust in what has always been the hardest money throughout history — gold. But since we are now living in a digital age where everything needs to be digital and instant, it will be only natural that people will choose digital gold — bitcoin. On top of that, bitcoin is more traceable than gold and much easier to store and move — not to mention far less confiscable. This upcoming financial crisis and potential fiat crisis may be the event that truly pushes bitcoin mainstream.
Now, you may look at the charts from this past week and say BTC price dumped by 50%. This is true, but if you observe the charts — EVERYTHING sold off. The entire market was a bloodbath and nothing could escape, not even gold. In times of crisis, the liquidity crunch becomes severe and people run to cash, and being a highly liquid asset, bitcoin is one of the easier investments to sell off. Imagine trying to liquidate your mortgage in 5 seconds (hint: you can’t). Remember the Maslow Pyramid of Needs — things on the bottom (food, shelter) come first. Long term thinking and investing are an afterthought at times like these.
From a more technical perspective, bitcoin sold off so much because many traders were in overleveraged positions. The crazy volatility we had last weekend led to a cascade of liquidations for overleveraged margin and futures traders, which kept bringing the price down further and further. Now that billions have been wiped out and things have calmed down, I believe we’ll see people accumulating BTC at these discounted prices again soon. In fact, I am buying some BTC in this $4–5k price range as we speak, while keeping enough cash to survive an extended period ( disclaimer: this is not financial advice). It might go lower still — but at these price levels the upside is too great to not be dollar cost averaging in.
If you look at the charts from the 2008 financial crisis, equity markets and gold both sold off sharply, but gold steadied and recovered long before equity markets had bottomed. Stocks then lagged behind gold by almost a year before it finally started recovering. Whether or not we are already at the beginning of the next great financial criss, I’m expecting a similar scenario this time around, but with bitcoin included alongside gold.
2020 has been a wild year, and the world is in flames. I anticipate the pandemic situation will get better in a month or so (with the aid of summer and warmer weather), but I would not be surprised if it returns in a second wave for next winter’s flu season. In any case, everything points to a bleak road ahead for the global economy.
No matter what you do, set aside some cash and stay prepared. At the meantime, take the virus seriously, stay home, and keep both yourself and your loved ones safe.
PS: R.I.P. Kobe.