We’re going to start the week the same way we have the last four. That’s with a falling stock market.
Dow Jones futures are already limit down. The Aussie stock market is taking another hammering today.
Technical analysts often talk about levels of ‘support’ where previous market action suggests a potential area of strength.
COVID-19 is slicing through such notions like a samurai sword through rice paper.
‘Buy when there’s blood in the streets’ goes the old saying.
I’d rather wait right now.
What to do in the meantime? Prepare for the inevitable…
A cash ban and the release of central bank digital currencies
My colleague Vern Gowdie tells me he’s hearing whispers of ‘silent’ bank runs happening right here in Australia.
I don’t doubt it. Naturally, those that do so will discover that the bank does not have cash enough to pay out all their liabilities.
They never do and never have from the get go. It’s been the same for hundreds of years.
The RBA printing press could be about to go into overdrive.
However, I suspect COVID-19 is going to ramp up something else too…that’s the release of central bank digital currencies.
We know the central banks have already been studying digital currencies. China was considered close to launching theirs even before this outbreak.
I’ve said a few times in these pages that this was already on the agenda of the financial elite.
COVID-19 ushers in the perfect environment.
Cash could be banned under the pretence it facilitates further transmission of the virus.
The panic and fear behind a bank run can only be stopped from wholesale guarantee of the money.
The Australian government cannot backstop every dollar out there.
The RBA, however, controls the printing press. It can create as many dollars as it likes.
You don’t have to believe me on that.
The governor, Philip Lowe, just said so himself.
Who goes first?
China? Japan? Europe?
I don’t know. The only thing we can do is watch this space.
You should be listening to my colleague Jim Rickards.
For several years he has told anyone you would listen to expect something called ‘Ice Nine’.
That’s where bank accounts are frozen, capital controls put in place and financial lockdown is exerted everywhere.
He even wrote a book on it — long before COVID-19 came along.
There are no easy answers right now. The extreme volatility everywhere is relentless.
Only one way to turn this to your advantage
However, don’t let the chaos around us distract you from one important task during the bear market.
Keep watching the stocks you want to own long term. Now is the time to study business models, cash levels, balance sheets and outlook.
For example, an old recommendation of mine, Chalice Gold Mines Ltd [ASX:CHN] is up 75% today as I write this.
It’s just announced a very significant strike in one of its exploration leases.
Perhaps another wave of selling drives it back down again if we get total liquidation of stocks from distressed sellers.
In the case of Chalice, the ‘hard asset’ they’ve just found in the ground will still be there when the worst of COVID-19 is behind us.
We still need nickel in the future.
It’s lucrative assets like this one that become available in bear markets at a discount or near book value. The key is to have cash at hand to pick them up.
At some point — and I can’t say when exactly right now — the disruption from COVID-19 will be priced in and the markets will begin to look beyond it.
That’s when you and I might consider accumulating some long-term plays.
A lot of stocks are getting so hammered right now they’re effectively priced for a depression.
Anything less than that and lots of upside looms relative to your downside risk.
But each stock needs to be judged on its individual merits.
Just as the cream of the Australian equity market will rise to the top of the next bull run, so will the dregs be exposed at the bottom.
We’ll see bankruptcies soon as companies start running out of cash.
It’s going to be a rocky time for a long time yet. I’m sitting on the sidelines for the moment.
No one can get a firm view yet on what the virus numbers might look like in a month. They swing from wildly pessimistic to quite optimistic.
Regardless, the pure panic selling is not abating. Stepping in now means stepping in front of a bus with no brakes. We must tread cautiously one day at a time.
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