Note: This is not financial advice.  I’m not a financial advisor and I’m wrong 100% of the time.  Investments are risky and nothing mentioned here should be considered financial advice.  Invest at your own risk.  What you see below is an analysis and not meant for investment advice.

 

The coming downturn…

I hope I’m wrong.  In fact, I hope I’m wrong about everything.  Seeing what I see and feeling what I feel provides a sense of dread.  I didn’t sleep for 3 hours last night and I can imagine those who are far worse off than me must be feeling some really bad times.  I went through an extended loss of job in the “dot com” bust in 2001 and then a brief loss of employment in the housing crash of 2008.   I had run through 12 months of unemployment.  I used to make “too much” so people would not hire me at jobs that paid less because they were worried about me leaving the second I got a better offer.  I had to take a job back in the mail room, so to speak, but it was a really good thing for me to rebuild my career with.

I would love to write about unicorns and rainbows at the minute.  What I’m seeing is another hard down coming.  What I have been saying is that I’m expecting a “W” shaped recovery.  But that second V might be more of a prolonged U. So – a “V-U” recovery?

The closest I’ve been able to approximate in what it visually looks like is after the recession/depression of 1921.  I’m going to go over the case for and against some different scenarios coming up.

1921

If you look at the above chart, about half the stock market was lost over about a year after the Spanish Flu.  Then – credit became easy and many of the weak businesses went out of business.   We don’t have a credit issue.  We have a “no consumer” issue.  While you can provide all the stimulus you want, you cannot get people on planes until you open up Disney World – I’m stealing that from the American Airlines CEO.  The problem though is at some point credit may have to tighten up – just as we want people spending.

But – this move upward is a trap!  You’re going to see points on a chart increase, possibly.  For now, at least.  People who invest and have 401ks may see numbers go up – for a time.  But those numbers are without context.  Spending POWER is the key here.

Your fallacy is measuring things in dollars as opposed to what those dollars can purchase.  What you don’t realize is that with inflation, your dollar is losing purchasing power every year.  Future value concepts of money.  I learned about this in my finance class at Villanova and never really shoved that one out of my brain.

I’ve given this example before, but I’m going to add some dollars to the mix.

In 1964, if you had two silver dimes, it was $.20 face value and you could buy a loaf of bread or a gallon of gas.  Had you had a dollar bill, you would have been able to buy 5 loaves of bread or 5 gallons of gas.

In 2020, if you had those same two silver dimes, you could exchange them for fiat currency at $2.20 and buy a loaf of bread or a gallon of gas.  That same dollar bill would buy you 1/2 a loaf of bread or about 1/2 a gallon of gas.

The question then is:

A) did the silver dimes appreciate in value by 1000% or

B) did your paper currency lose 90% of its value?

The answer is B.  This is what inflation is, and this is why the silver held its SPENDING POWER with VALUE over time.  This is why the precious metals become a BIG DEAL when currency printing goes out of control.

One other thing to add to my thoughts on the silver example.  In reality, the dollar has lost 97% of its value since then.  The truth is over the last 50 years, we have become much more efficient at making bread and gasoline.   New technologies.  Getting ingredients cheaper.  Improving supply chains.  Computers to do things warehouses of people would do, decreasing employee costs.  I use this example because it’s easy to visualize the numbers – but the truth is, the dollar didn’t lose 90% of its value, it lost 97% when you account for the efficiency gains in the processes.

Let that sink in.  Let it also sink in that the silver has the same PURCHASING POWER it did 50 years ago.  Same with gold.

So right now, you are seeing the stock market come back up.  We have 25 million people who are unemployed (that is the official number, but other estimates may have this at 30-45 million when you account for self employed and those who work for cash).  Business are closed and many are failing.  The oil industry is in a free fall.  But Kohl’s is up 25% this week?  One of my stocks, Norwegian cruise lines (NCLH) is up like 25% in one day?).  No one got the memo?

I want you to critically think about what your eyes are seeing.  They are seeing these charts go up.  It is giving you the “feels”.  “Everything will be ok when we get back to work“.  This is the confidence in our markets being artificially propped up now by trillions in stimulus.

SP

Look at that nice V shape recovery.  “So we are on a path to recovery!!” .  This is what your eyes are telling you.

Some feel this will be like the Great Depression – take a look at the second plunge that happened.  That was the result of a liquidity crisis – which is why I feel it is irresponsible for people to call this a depression:

1929

Where that circle is, is roughly where we are right now.  I do not believe there is a cliff coming that is as steep as you saw over a 2 year period from 1931-32 – but I do feel a correction to this run up will happen.  The bank runs and lack of currency in the system in 1929 stopped the wheels from moving.  Mnuchin has come out and said, “infinite liquidity”.  This is the backstop to keep that second giant cliff from happening.  What you worry about in that case is some sort of bank run – but they now have policies in place at banks to prevent this.

However, you cannot cheat the system.  There will be a second drop off- but I feel it will be somewhere around the depth of our first dip, give or take a few thousand.  When it is estimated the GDP will drop by possibly 40% this year, that means stock earnings are in the shitter.  People stop giving dividends.  Companies – FAIL.  Mergers and acquisitions will happen.  Bankruptcies will happen.   This is being delayed as long as humanly possible – perhaps until after an election?  Who knows.  I do know that you can’t cheat shitty earnings, and people will take their dollars out and put it into something that earns them money.

All that being said, I think employment numbers will snap back to maybe 3-4 million unemployed but get better, quickly.  This administration has been saving an “infrastructure deal” for a rainy day – and to me, that is the final stimulus that will get a lot of people employed, and rapidly.  The velocity of currency will pick back up….

But inflation/hyperinflation is on the backend of that – and at that time or before is when you will see silver dance upward.

They aren’t going down with the ship.  

But the problem right now is invisible to you.  The fed has just injected the country with a pain reliever and everyone is feeling good with another rally.  The money that was taken out of the system in panic sell offs is coming back in.

I ask you this….what happens when the money you are putting back in results in the worst quarterly reports in company history while they are hemorrhaging $1 billion per month in overhead where demand has only come back 50%?  How long until people decide they do not want their investments shrinking and pull it out before losing more?

That time is coming.

So where do you put your currency?  Some options:

  1. Stock market – ehhhh…sketch and is about to see a double bottom in my opinion.  Many equities are in for some pain.  I’ll show some equities that I like that are “defensive positions” rather than aggressively chasing the hot stock out there.
  2. Bonds/treasuries?  You want to give the government your money for 10 years for a “risk free return” with 0.6% interest and 2-4% inflation each year?  How long can this sham continue?  Years ago, these might have been 10, 12, 15%.  THAT was a good deal.  0.6% is not a good deal.
  3. Cash under the bed – see my example about 1964 above?  I feel cash is going to lose a lot of value, and quickly.  I just heard yesterday that the high in the silver price of $49 in 2011 was actually $87 in today’s prices.  And – the high of $50 of silver in 1980 was $180 per ounce in today’s prices?  Point is – cash is losing value and with inflation coming – cash is a losing proposition.
  4. Metals – this is the “safe haven” and “protection from inflation”.  These have been money for 5,000 years and every time a paper money system falls apart – they reset to these.  Every.  Time….in 5,000 years.

 

My crystal ball is telling me this is probably going to happen when we get numbers for the 2nd qtr for companies.  Right now, we’re getting dismal 1st qtr reports and this may only account for a week or two of the shut down?  Maybe July/August is when we get worse numbers that takes into account the full shut down?  It could be sooner if we get reports of horrible re-outbreaks of COVID worldwide.  When this happens, it’s going to be swift and merciless.  Right now, do you think companies are trying to make you a profit or use your capital to put themselves in a better defensive position for when the shit does hit the fan?

I think many people are oblivious to the fact that in the fall of 2019, all analysts were in agreement that the stock market was completely overbought.  There was no “value” anywhere to be found in equities.  What people were (and are now) buying are stocks that were overpriced at the peak and corrected.  Perhaps some were over sold after the crash, which is where you could then find value.  But now – people are pumping right back into this system.

A system of 2 months of zombie apocalypse numbers.

While infinite liquidity will definitely help from the visual of that Great Depression bottom, the fact remains that 25% or so of our workforce will be unemployed at one point while the government “borrows” roughly $6 trillion into the economy to try and keep it going.

Here’s your miscalculation.  The world is sick of our shit.  

This is not Anti-American.  On the contrary, the creation of the Fed and going off of the gold standard is what is anti-American.  Many people are only seeing what is in front of them.  “Free money”.  In fact, this is worthless toilet paper being printed and thrown at you.  You see, paper fiat currency has no intrinsic value – there’s no “store” of wealth.  It is simply a modicum of transporting value from one asset class to another.  If you want to buy value in stocks, you use paper currency.  If you want to buy a house, you liquidate your stocks and turn it into paper fiat notes to then purchase the house.

The value is not in the paper, but what the paper can BUY (the value).  And as we speak, the more and more paper that goes into currency, the less value each of the ones that exist have.

Quick history.

  • In the 1930s, we didn’t get out of the depression because we joined world war 2.  It was because we supplied Europe with goods and took payment in gold.  We also took payment in leases worldwide to put our military bases everywhere.
  • In 1944, the Bretton woods accord happened to ensure the world was using the British pound and US dollar and they would be pegged to gold.  This would allow the world to use the US dollar as the world’s currency.  The US dollars was then “as good as gold”.  Unfortunately….we took advantage of this.
  • In the 1960s, we overspent our budget in the Vietnam war and France called us on our shit and started to exchange dollars for gold.  This forced Nixon to go off of the gold standard in 1971
  • The more and more fiat dollars that were printed, the more the value of gold went up because it would take more and more dollars to buy an ounce of gold.
  • We have been printing the US dollar at will since 1971 and using those dollars to buy $700 billion in US defense items yearly.  At one point in 1980, we could have gone back on the gold standard – instead, we printed more.  As of today, there are $19,000 US dollars in existence for one ounce of gold.  This means gold value has been suppressed over the last 40 years.
  • The US then uses their dollar as a weapon to create sanctions on those we are in conflict with.
  • More and more countries are actively trying to go off of the US dollar as the US reserve currency.
  • All currencies are actively TRYING to devalue their currency versus the US dollar.  This has all of these countries at all time highs with gold prices.  The US is approaching its all time high – but adjusted for inflation, that might actually be closer to $2200.

 

When the dollar value goes UP, gold goes DOWN.  Here’s the problem – all countries are trying to devalue their currency against the US dollar, artificially making the dollar go up.  This has an effect of “pausing” gold going higher – for now.

 

At face value – some inflation seems good.  Your house you bought at $200,000 in 30 years is worth $700,000.  You paid $400,000 in mortgage during that time.  But the question you then have is – does that $700,000 have more or less spending power than $200,000 did 30 years ago?

The problem then can be with wages that don’t keep up with inflation.  Maybe an IT tech 10 years ago made $45,000 years ago, but now makes $48,000?  This is where it’s hurting the American consumer.

Houses are a lot more pricey, but at cheaper borrowing rates.  Cars cost a lot more.  Medical costs go up 8% per year.  Food prices go up yearly.   But wages do not keep pace with inflation because they haven’t really measured inflation properly.  They say the CPI is “2% yearly”.  This is completely a bullshit number.

Six trillion reasons to worry

So with above, you see that inflation is a real thing.  When you add $6 trillion to the system, you are artificially keeping the system on life support.  People see the pretty chart go up and the CONFIDENCE is there to continue to re-invest.

But does this spike have the VALUE suggested?

I hope so.  But what I fear is the confidence game is coming to an end.  We are printing our currency into oblivion and may be hitting $30 trillion in debt very soon.

This six trillion may be the end of the road.  While over 100 countries are in dire straits right now and begging the IMF for $1 trillion in loans, we are printing at will here.  This is not going over well with other countries.

Oil pressures – now that the Saudis and Russians forced oil to go negative – they have effectively eliminated a lot of income for countries.  The Russians do oil and natural gas.  The middle eastern countries…have nothing but oil.  What the hell are they going to do?  We are just printing currency.  They are going to starve.  This is how civil wars start.  At the very least, lots of civil unrest

From what I read, other countries are searching for alternatives to the US dollar as the reserve currency.

Hyper-inflation?  Deflation?

Right now, we’re in a situation where 25 million people in this country (and probably hundreds of millions in other countries) are going to have to sell their houses, cars, everything not nailed down.  This has the net effect of a glut of supply (like oil) depressing the prices in the 6-12 month near term.

In 6-12 months, the net effect of printing currency is going to lead to inflation.  Meat shortages are about to happen here, raising meat prices.

In 6-12 months, it might be a good time to exchange profits from stocks/metals to housing.  There may be a lot of distressed sellers.  The problem then is – are there an entire class of people not able to pay?  One of my properties is Section 8 – which helps a ton to guarantee rent in the harshest of times.  Maybe renters down the road might need first/last/middle instead of first/last?  I have a second unit I’m thinking of spinning up down the road – but this also might be a great environment to re-finance?  Maybe labor is more affordable to get houses fixed up?

Cheap oil and mining stocks

Maybe I’m wrong and the stock market goes on a tear up to 35,000.  I just don’t feel it in my bones.  I feel there is about to be a lot of carnage with financial reports for thousands of companies.  When restaurants re-open, they can probably only do half the amount of seating as before.  They may only hire 60% of staff back.  Think about summer – concerts, festivals, markets, carnivals – ALL cancelled.  Think about all of the new homes that people were going to buy that aren’t now?  That’s a lot of construction people out of work.

I believe BIG money is going to try and get profits…until they can’t.  And the Vanguard and Fidelity money will move swiftly.  Where will it move?

In times of uncertainty and inflation – you see currency move towards gold.  With inflation, in particular, you see it with silver as well as gold.  Silver lags gold in performance to start – but towards a recovery, silver snaps and snaps hard – supremely outperforming gold.  What happens a lot is your big banks drive up the price of gold.  When the common man wants to get into the game, he walks into a bullion dealer and wants to buy gold.  They plop one ounce in his hand and demand weeks worth of wages.  He cannot afford that – so he looks to silver.  And this ultimately is what gets silver to pop.  Additionally, the silver industry as a whole is only worth $44 billion at current prices. Apple could snap their fingers and use the cash they have to buy all known available silver on the planet, 4 times over.  So – what happens with silver is when you start to get bigger purchases, it moves the needle violently upward.

My contention is that world currency will start to move from paper in vaults to hard assets.  Metals.  I feel real estate is a destination that this wealth will ultimately move to – after a bottom has hit.  I don’t have time to get into it here, but Hong Kong and Australia are in housing bubbles right now that make our 2008 bubble pop look like child’s play.  HSBC has 34% of all of their business in Hong Kong and most of those over-inflated houses are on ARMs.  In Australia, they never really had a 2008 pop and the problem grew.  I saw charts that show their bubble may be 3 times worse than ours.  Point is – there’s about to be a lot of defaults on loans that may affect some global banks.  These banks may….do BAIL INs.  Read about bail ins.  The government made it legal for banks to seize anything over $250,000 in your account if the bank is about to fail.  This should terrify your soul and get you out of cash at a bank anything over $250k, immediately.

But right now, are you going to pay $1700 for an ounce of gold with the hope it gets to $1800?  Bank of America projected gold to $3000 in 18 months.  But these calls – you hear them a lot from the metal pumpers.  $2000 gold!!  $2400 gold!!  $10000 gold!!!  The problem with this is their personal opinions (or interests) may cloud their economic sound advice.  Jeff Clark works for goldsilver.com and with Mike Maloney – their job is to get you to buy metals.  I get it.  This is not a gold seller.  A gold hawk.  A gold pumper.  This is bank of America.  It does not get to $3,000 per ounce because it is suddenly more rare than last week.  

The thing is….it’s raining outside and they are the people selling you umbrellas.  When the stock market is in historic territory, maybe you have a portion of your assets in metals.  But now?  Ass in.

See – the metals game for the institutional investor are means of transferring their wealth.  Yes, they want gold to go from $1700 to $3000 – but that is just a means of fighting inflation like the silver dimes example above.  This holds the purchasing power.  I’m part of that game on the silver end.

But where it gets interesting is mining.  Why?  Right now, there’s the perfect storm happening – with a cherry on top of low fuel prices.  Get this…

You are a Newmont or Barrick executive.  You made BANK in 2011.  The gold market has been bearish the past 8-9 years with recent resurgence.  But – you spent the last 8-9 years cutting costs.  Closing non-profitable mines.  Investing in new technology to get better returns.  You shelved exploration.

Half of your costs are in fuel.  If anyone has ever seen “Gold Rush” they know how this works.  Giant rock trucks that get like 1 mile per gallon and plants that operate on generators that suck fuel.

Now – over the last 8-9 years, these mining companies have been lean in order to make a good profit on $1150 per ounce gold.  Recently, prices have gone up.  The past 3-4 months, it’s been $1600-$1700 gold.

But the sales of the product at that price are only 1/2 of the equation.  Profit, at a simplistic scale, is gross revenue minus costs.

Gross revenue for metals are up 50%.  And…with printing trillions – this could easily go over $2000 per ounce.  While the all time high in 2011 was $1900 per ounce, adjusted for inflation that might be $2100 or $2200 today.  And that was over $1 trillion or so in fed bailouts.  How does gold react to $6 trillion or more?

The other half of that equation is half of their production costs are…halved.  For arguments’ sake, let’s take some 2019 numbers.  Roughly.

Gold miners – All in sustaining costs (AISC) at $800 for $1150 gold.  Gross profit of $350 per ounce.  Next month, it could be $1800 gold with AISC at $600.  Gross profit of $1200….PER OUNCE.  This shows you then how profit can be 4x.

Silver is the same story – sort of.  With First Majestic, you have an AISC at $11.50-$13.00.  For the first quarter, they are using $17 per ounce as the avg sales price.  That gives them roughly $4 per ounce gross profit.  Now – silver can skyrocket.  Like – shoot the moon.  It has done it a few times before, and this financial disaster is setting up the perfect storm for silver as well.  What if….silver goes back up to $19 like it was last summer with reduced fuel costs?  This could then have maybe $10 AISC with $19 in, to provide double profits.  But….silver shooting the moon – or at least getting to $26?  $35?  $60?  $100?  All of those numbers are POSSIBLE.  I’d say $26 more likely in the next 8 months and it could shoot within 12-18 months to maybe $50?  $100?  It hit $50 in 2011 under less egregious circumstances and that is apparently like $70 adjusted for inflation.  So what about $70?  That now has $60 profit on ONE ounce of silver.

That is a 15x profit.  Meaning, share prices SKYROCKET.

How this apparently goes is this…..

  1. Stock market rages!!
  2. Recession signals happen.  Companies have been overbought.  You find many companies with a P/E ratio of like 80x.
  3. Big money starts to look for places to put their currency as stocks start to sell off.  Historically, this is treasury notes, bonds, etc and some gold.
  4. Big money evaluates miners and goes for undervalued BIG miners.
  5. As big miners get up to normal value, money starts looking for JUNIOR minors.

 

So – the secret appears to be timing with this.  Who are the right BIGs to buy?  Who are the right juniors?  How to evaluate?  One of the junior mining stocks I’m big on is set to have production start in fall 2020.  These mining projects take years to develop.  Then – there’s a period of time when production starts when they do their first pour.  THIS is the time to buy – at least for me.

Of interest – with the junior miners, finding the right ones can easily be a 10-100 bagger.  The problems are the glut of junior miners out there and the rate at which they burn through cash.  My hope is that with elevated metals prices and decreased production costs, we may see a lot more juniors survive this cycle.

So – when to sell?  That is up to you.  I’ve made mistakes and have been greedy recently.  I had a plan to get out at 50% profit on options and my eyes lit up with possibilities.  I was over 50% profit and then shit went sideways.  Down about $500 on that trade and could kick myself.  I wasn’t wrong on the play.  I was un-disciplined about an exit strategy.  I’m glad I’m learning this on the small scale before I ever make huge plays and lose out.

I think on my option plays, FOR ME, if I’m hitting 50% return I can call it a day.  In this economy, things turn on a dime.  Up 1000 points one day, down 2000, up 500, down 2500.  In this day and age, if you can put $x into an options trade and get 50% out in a week, take your chips and go home.  I think there are a lot more risk tolerant people out there than me.  On stocks?  A strong hold is good – until you feel they may be undervalued.  I bought in at Norwegian Cruise Lines at like $12…they used to be $60.  Can I hold for 2-3 years with the hope they get back up to 60 and have a 5 bagger?  Yes.  But if I buy options for 6 months out expecting that price to go up rapidly – and another dip happens in the economy – or another outbreak which delays cruises for another 6 months – that could be a 100% loss in the options.

So – as my friend says, be VERY careful with options.  I feel this is PARTICULARLY important with the metals.  I feel, for me, these plays are going to happen.  If you find the right big miners, maybe you are getting 2x-3x in 1 year.  With the right junior miners, maybe you are getting 10x?  Maybe if silver shoots the moon, you are looking at 15x?  I have some options I bought on First Majestic a few months back after silver shit the bed and they look really nice right now.  But what happens if there’s a double bottom and ALL equities are sold off?

Yes…miners stocks are equities.  They will be sold off.

But what you see is the good ones bounced back.  If there’s a big sell off in July – this can hurt miner stocks as well.  But my contention and thesis is this…

  • If most major stocks on Dow, S&P, and NASDAQ are down and entering a recession with major sell offs and cutbacks ahead….and the mining stocks are showing record profits with significantly higher metals prices and decreased expenses – WHERE do you see the money that’s getting pulled out going?  negative interest rates in the 10 year?  Cash and losing value every day?  I see it going to metals and metals equities.  This also drives up share prices.

Take a look at Barrick, Newmont, First Majestic stocks in 2011.  THAT setup is presenting itself once again.

Barrick – look at the build up to 2011.  This could suggest we are maybe a year from peak gold given our bottoms possibly hit.  Maybe?  Look at where it went for $1900 gold.  Translated to inflation adjusted prices, that is looking at a $2100 gold target to hit these highs?

Barrick 2011

What you are seeing is potentially a lot of room for Barrick to grow upwards.

Looking at Newmont, maybe this crushes their all time high?  Maybe there’s not a lot of meat on the bone there?  Maybe they have grown a lot since 2011?  I had seen some videos suggesting the management at Barrick and Newmont may not be the greatest.  Don’t know.  But this shows that if we are going to $2100 prices, there could be some meat left on the bone here and may break all time highs.

Newmont2011

What I’d like to really show you though is what a big silver producer can do when there’s price action.  Take a look at First Majestic in 2011 when silver was briefly $50 and then in 2016 when the price was $21.  First Majestic got more efficient over the years and look at their stock price for a $21 silver briefly in 2016.  I think there’s a very, very strong possibility of seeing $21 silver inside of 6 months.

AG2011

Look at that nice spike in 2016.  Get this.  First Majestic (AG) has done the following:

  1. Closed mines that had a high AISC.  This brings down their overall AISC to around $11.50 per ounce.
  2. Installed a HIG mill.  High intensity grinding.  To mine for silver, they have to crush the pay.  They normally do this with ball bearings.  This gets expensive.  This new mill took their recovery of silver from pay from 65% to 90-97%.  What this means is you can run a lot less material to get the same amount of product.  This is cost savings and efficiency.

One other thing about AG.  They have 60% silver and 40% gold in their pay.  So – when the price of gold goes up, they benefit hugely from that as well.  With most silver mining, it’s a byproduct of other “base” metals like lead, zinc, and copper.  Primary silver miners are all but extinct.  What this means during a recession is that at some point silver has less of an industrial demand – but a higher investment demand.  Also – less base metals are being mined, so this reduces the supply.

With the three mining companies above – they are also going to massively benefit from lower fuel prices.

If silver was $21 and AG was trading at $18.33, why couldn’t it be up in that realm again? Bare in mind, I have no idea about number of shares then versus now, but you get the idea.  The idea is that these mining companies over the last 8-9 years have been getting more and more efficient in order to make profits on low metals prices.

Well…they are about to see much higher prices.

Or – it might not launch.  There is counterparty risk here.  What if the US government orders people to turn in their gold and silver?  They ordered people to turn in their gold in 1932 for $20 per ounce, and then turned around and changed the price to $35 per ounce, devaluing the US dollar immediately.

What if the world gets together and says there’s a worldwide crypto currency and all other currencies are void?

In the long term history of money – ALL FIAT CURRENCIES DIE.  All have a tendency to return to the gold/silver standard.  Maybe these cryptos are backed by gold/silver?