The setup

One year ago, today, the financial markets broke with the repo market. This is what piqued my interest about the subject, and I’ve gone down so many rabbit holes with research and how we got into this mess.

Long story short, a lot more should have failed in 2008 and didn’t because we chose to support systems “too big to fail”. The idea was, at the time, to use tools to provide liquidity and at some point down the road we will raise rates again and get back to “normal”. What I’ve learned is, that they tried that a few years ago and everything almost came down with a credit crunch.

Right now, our entire economy is acting like a junky needing a fix, and each dose becomes less and less effective, and makes our long term health that much worse.

And, it’s bad. Cat 5? Could be much worse – but all of our leaders know this and the idea is they are planning cleanup and recovery now.

I’m not writing this to stress you out, I’m writing this so you can understand what is going to happen, and what dominoes could fall. The idea is you can recognize some of these events and act accordingly.

I could write you a 100 page dissertation on all of this, but you won’t read it and I don’t have the time to do all of it. Instead, I’m going to give you an overview of what’s going to happen, and then drill down.

Phase 1: Party is over, get back to work

The republicans are trying to pass a “skinny” bill to try and force the hand of states to allow everything to re-open and get people back to work. The democrats are pushing for a bigger bill to essentially keep paying people to not work and “keep them healthy”. I don’t want to get into this battle too much – only to point out the $600 weekly checks ended awhile back. People are months behind, and we still have 20 some million unemployed.

This liquidity helped a lot of people play on Robinhood and speculate on the stock market while they were home. Unemployment has gone down, but this injection of capital via people into the markets has been cut off.

Phase 2: Tech goes down

With Robinhood traders chasing bankrupt companies, they also have chased companies like Tesla. I love Tesla. But at one point 2 weeks ago, their PE ratio was 1100x. To put this into perspective, a healthy company on the S&P might be between 8 and 20. Somewhere in there. The ultimate problem is a lot of these companies had speculative money thrown at them. Meaning – they were betting on the stock price going up rather than the fundamentals of the company improving.

A higher than normal PE ratio can signal that investors want growth. Liquidity is injected into the company, and this can go into building plants, creating inventory, etc. But at 1100x, investors had lost their goddamn minds. The problem is, when people realize there’s no room for the stock upwards, the spec money is going to get pulled. Before all of this craziness, I had read a “fair value” for Tesla was somewhere around $300 per share (this was before the split). That’s about $60 today after the split. Currently, it’s about $450, or maybe 8x fair market value.

I also heard that the top 5 tech stocks on the S&P are worth more than the lowest 368 combined. If you take these 5 tech stocks off, the S&P is down for the year. As much as 38% of the S&P are now “zombie” companies.

The spec is due to stop, any day, week, or month now. October is supposedly a bad month for the stock market. Given a lot of companies don’t have earnings even a fraction of what their PE ratios should support, this is not a good recipe

Phase 3: Re-distribution of funds

A few weeks ago, Buffet made headlines by not only pulling a lot of his investments out of banks, but also put in about a half a billion into Barrick Gold mining. He’s about 6 months later than me, but I’m not going to hold that against him.

There’s a couple of takeaways from this:

  • he’s running from banks. Many of these are about to go down. See below
  • he finds mining stocks cheap
  • he sees good value in mining stocks

As I’ve been pounding the table for the last 10 months, to all of my friends’ dismay, THIS is where money is going to go, fast and hard. The spec money will flee tech in a matter of days, weeks, or months. And when it does, where does it go?

Follow the Oracle of Omaha, of course.

Why?

The last 9 years has not been kind to mining. In 2011, at the height of gold and silver mania, miners spent stupid killer money on acquisitions and paid dearly for it. They have spend those last 9 years improving their business models, reducing costs, and doing a better job of taking capital and getting the shareholder massive returns.

I am an investor in Newmont. Both Barrick and Newmont are scary similar on the books, but Newmont has a massive, massive exposure to silver than Barrick doesn’t, and I’m planning on $50 silver prices upcoming. Barrick has better exposure to copper, which is much better when a recovery finally does happen.

So with Barrick, Newmont, etc, you have the following:

  • Each take about 5-6 million ounces of gold out of the ground each year
  • Both have “all in sustaining costs” about $800-$950 per ounce of gold. Meaning, this is what it costs them to get it out of the ground
  • Both of them are able to produce decent dividends at $1200 gold.
  • Gold is now at $1950 and is projected at $3000 in 2021 and could go as high as $10,000 by end of the decade.
  • Record profits for Q3 are coming in for ALL MINERS
  • Profits look to continue at exponential rates for the next 2-3 years, at least
  • Gold prices do not seem to be coming down anytime soon due to record debt, low (near zero) interest rates, higher than normal inflation, and massive “money printing”

What I’m trying to tell you is that when all of these Q3 profits come out, and you are seeing “company ABC beat their earnings by 3%”, and you have a company like First Majestic that “quadrupled their earnings”, you start to see market caps that are extremely low for the free cash flow these companies are generating.

This is a magnet for investment into the sector. And, Buffet now has given you, and others, to follow him.

This time around, there’s been a little lag on the gold miners. Why? First, the liquidity injected into the system appears to all get dumped by the people into 5 tech stocks. In 2016, it was the “start” of the gold bull run, but Powell legitimately tried to take the balance sheet down and increase interest rates. He was called by the banks and essentially told that if interest rates aren’t knocked back down, the entire credit system will freeze overnight. So when interest rates got pushed back up, it sent gold back down. Now – people are dipping their toes into mining to ensure this isn’t going to be another false start. Powell has now come out and said there’s no real thought of an interest rate hike for 5 years and they will be letting inflation “run hot”. This is a superior environment for gold. Also, with gold mining in the 2000-2010 range, oil was $120 per barrel. Given fuel is about 1/4 of all of mining’s costs, we are looking at $37 per barrel today.

Mining has all of the stars aligned, and are CHEAP to buy in.

Consider Newmont’s PE ratio is 13.76. Tesla is 1157x. Consider that we are nearly $27 trillion in debt and the next 3 years are setting up to be the best scenario for gold miners in 50 years. Tesla is overvalued by at least 8 times, maybe more. When spec money leaves tech, where is it going?

As the money leaves Wall st, it might temporarily go to cash and thus strengthen the dollar. This may hit gold and silver like it did in March. However, gold recovered and went higher in 2 weeks. So – this can also temporarily hit the miners.

Phase 4: Mass evictions and mortgage defaults

Renters rejoiced at not having to pay rent for a few months!! Problem is, behind each one of these, we probably highly leveraged landlords. I’m also a landlord and was not affected by this, but by summer of next year my plan is to not have ANY leverage on my properties. And – this is what may have to happen down the road as well for a lot of landlords.

There were also exec orders passed that kept people from being evicted, and the CDC somehow weighed in and forced no evictions until like January. Don’t quote me on that, heard that on a podcast yesterday.

Well…with lots of business still closed, the fed is frustrated because it has done a lot of what it can do and has pushed back on congress to pass laws to then add more stimulus. Even with more levels of stimulus, there’s just not enough to go around to help everyone.

Look for massive levels of evictions and defaults probably December/January/February. This is also going to go around the same time the stock market starts to recede. Because of liquidity, I don’t see a 90% drop in a week. I do see this going back again to 18,000-20,000 over the course of 2-3 months.

Phase 5: Bankruptcies

We saw a decent amount of these in the summer, mostly with retail. I just heard yesterday that banks are now resuming layoffs. Kohl’s announced they are laying off 15% of their back office. While we are trying to get a lot of small businesses to open back up – and get those people back to work, we will now see a lot of the big companies finally react to the recession and lower demand with less employees.

Zoom has changed everything, and I feel there will be a mass exodus from a lot of these big cities that have ridiculous rents. This is going to plunge countless REITs into bankruptcy. Malls. Local eateries that relied on foot traffic from massive corporate buildings. Massive corporate buildings may find their vacancy rates at all time highs.

This then leads to unprecedented banking failures. There’s just not enough liquidity out there to protect all banks. After the last crisis of 2008, the government wrote provisions of “bank bail ins”. Meaning, instead of the government bailing out banks with taxpayer money, banks can use their deposits from customers to bail them IN. I believe this protects anyone under $250,000 FDIC, but people with millions in the banks might have a hell of a time.

Phase 6: Credit cut off

I believe many credit cards have began to pull back credit lines. But that’s the least of the issue. With banks failing and their assets a big steaming pile of shit, I believe that the banks will start to cease lending a lot out. Record low interest rates are killing their profits, and the layers of defaults are going to crush a lot of them. Many people may pull deposits worried about bank bail ins, and all of this capital leaving banks is going to hurt their ability to lend – somewhat. I thought I remembered hearing Trump sign an order allowing banks to lend more than the 10:1 ratio now.

I believe this will manifest in a lot of different ways:

  • business expansion plans will be axed
  • inventory will be drawn down
  • less people can borrow to buy houses due to higher down payment and credit score requirements
  • less new businesses can start due to higher down payment requirements.

Phase 7: Real estate nuke hits

By late Spring 2021, the real estate market will be in huge trouble. There will be a massive amount of people leaving the big cities (leaving them a LOT less tax revenue), too many houses will be on the market, and credit requirements to buy new houses will be very high – this could therefore depress the real estate industry.

One video I saw on YouTube suggested if you are a landlord, it’s now the time to INCREASE the credit score you need to rent it. You may have to reduce the rent payment, but you will reduce your risk of a tenant who cannot pay. Because of this, a renovation I plan on doing to one of my properties I’m trying to appease to a higher credit score renter. For the area it’s in, there’s really good amenities. A garage, a washer/dryer, a nice yard, plenty of parking. I’m even planning on adding a security system.

Anyway – sorry for the side note, but landlords need to really work on reducing their leverage, if possible. Maybe sell some now, take those profits and pay down existing homes. You sacrifice the leverage, now, for security in a really shitty market coming.

Look on the bright side. If you are de-levered, and prices of houses fall by 10-50% in certain markets by this time next year, YOU will be prime to then be able to borrow if you want, OR you can be de-levered and have cash on hand for 1-2 years out and buy properties at significantly discounted prices. When markets heat up again, you can then raise your rents or sell the properties for two times what you paid for them.

This may also present housing issues. Where are a lot of people going to live? What about all of the vacancies that cannot be filled? One of my properties is section 8. It’s a pain in the ass with regulations, but the government more or less guarantees the income and the tenant who qualifies for this also doesn’t want to lose it. So – if I were to make suggestions, which I’m not, but it might be to try and see if your properties can do section 8. My guess is when really bad times hit, more people will be applying for this and if your properties can pass this test, then you might be able to get some good tenants going through a rebuild of their lives who treat your property well.

Phase 8: Inflation and scarcity

Remember above I talked about inventories going down due to credit? Less expansion? I do think it’s very possible that sometime in the next 6-18 months we start to see more store shelves bare – or less supply – and higher prices. Instead of having bins of avocados at $1 each, maybe they have half a bin and charge $2 each. This is what you see in many countries where the inflation starts to get out of control and the value of their currency sucks. Two things:

  • we print money not to infinity and beyond, giving everyone more dollars in their pocket, for now. Most people are using these for necessities, but this inflates the monetary system and now there are more dollars competing for the same scarce resources. This is why you are now seeing real estate and tech stocks melt up. If you have a limited amount of inventory and many people competing to own that inventory, the value goes up.
  • As we print more money, it gets devalued against other currencies. So before it might cost us $.90 to import an avocado, now it costs $1.35. Given our credit line is truncated, we can only buy half a truck load instead of 6 truckloads.

Between the combination of those two items, costs will start to go up for real goods at a much faster rate than the 2% target the fed is talking about.

And – for the reasons mentioned above, all of the available cash laying around starts to buy in to things like gold and silver to protect against inflation. By the time the American public a year from now even realizes inflation has hit, gold may be up 50% from now and silver up 100%.

Phase 9: Hyper inflation and rebuild

By now, most people are seeing their chicken at 2-3x cost. Maybe 8-18 months from now. Apples might be $3 each. Prices are now visibly higher on everything.

However, the only way out of this mess is to hyper inflate everything. Our debt is so high, you cannot raise taxes to even service the debt, it’s so bad.

We will default on some items, but the idea is to hyper inflate out of debt, like they did in World War 2 to pay off those debts. You owe $300,000 for your house, but those gold coins in your family vault that were worth $30,000 are now worth $300,000. You cash in your gold coins and pay off your house. That’s essentially what the government plans to do with their outstanding debts. Meanwhile, all of us are going to start seeing crazy high costs for things, and our wages will be stagnant.

When a rebuild does happen, it’s going to be the biggest commodity boom of our lifetimes. Copper will be huge. A lot of my gold miners have copper upsides. This is when things like 5G goes everywhere. Think about how many people can work from home and how we can rebuild a highway system properly without ridiculous traffic. Battery chargers everywhere for electric cars. Nuclear. Solar on houses.

Phase 10: reboot of the system

The only way out is to default. And this is going to be hard for a decade. Those with pensions? Gone. Those promised a pension? Gone. 401ks will be a safe haven, as they initially crashed, but hyper inflated with everything else to keep pace. Many of these entities invested in gold, silver, and mining companies as a hedge, and did very well to protect their wealth.

Social security will be a thing of the past. There will be some social programs for those who are the poorest. Yes. But of you are sitting on 3 mil in a 401k, the government will revoke your social security to re-allocate. If you are sitting on a 5 million 401k, your pension is gone. Those with multiple homes? Tough luck, sell one. There’s a lot of pain coming.

All of this, is to say, at some point the ONLY way to get credibility back into the system is to return to a currency system backed by gold.

Most people alive today don’t even know that our currency was backed by gold for hundreds of years, and only since 1971 did we go off of it. As what happens to EVERY currency system, in the history of mankind, ALL fiat currencies go to their actual value. Zero. And, as in the case in all of history, currencies collapse after they stop being backed by metal and then revert.

Conclusion

All of this above seems scary – but it’s mostly because many of us haven’t been through the hard times our grandparents and before them all went through. We just lived through an era in history where we essentially ran up $27 trillion in credit cards and $250 trillion in unfunded liabilities we promised to pay people that we cannot. The bill is coming due, and not many people have a clue what to do.

Let’s go back in history, and let’s try and focus on what you can do now. HEDGE.

This is not being a prepper alarmist. The idea is this – if you’re wrong, you have some extra supplies. If you’re RIGHT, you are probably in the top 5% in the country to be prepared for this.

Here are some tips I have for anyone making it this far, right now. Many of you might already be in a tough spot. They talk about how well this V shaped recovery is doing, and it’s not adding up with the food banks running out of food and the millions of people behind on rent and mortgage.

Tips:

  • Harden the fuck up, and quick. This isn’t a drill. What I mean by this is you need to completely re-evaluate where your spending is going. Immediately, IMMEDIATELY stop purchases on “wants” and only focus on “needs”. I’ve been doing this for about 10 months now and driving my wife crazy. I still haven’t painted a lot of this house we are in. I’m estimating I’m going to have to pay $5,000 to get this painted. My take is, “I can put $5,000 on the walls, or invest this and get supplies now for when and if hard times come”. Stop bullshit purchases, immediately.
  • Build out extra supplies. We all saw the toilet paper shortage. I already had supplies when this shit hit, and got a few hundred nice “told you sos” out of it. Buy a shelf from home depot. EVERY time you go to the grocery store, get a few extra things. Some toilet paper, canned meats, meats to freeze. There’s something like a 6 month backlog on new freezers. If you can get meats and an extra freezer, go for it
  • Get gold and silver, and quick. Many people suggest a 5-10% holding of your assets. For those of you who don’t have much, get some. Try local coin shops first. Then you can try an APMEX or the like. People are like, “Nate, when will silver hit $30??”. My response is mostly short term prognostications, but many pundits are talking the likes of $300-$600 silver by the end of the decade. If you look at what the price of silver was in 1980, it was $49. However, if you use real inflation numbers over the last 40 years, that $49 is actually $600 in today’s money. With inflation coming, and the fed keeping rates low and letting inflation run – with the end goal of getting back to gold and silver as money, the idea is it will not take a lot to preserve some wealth. Remember, $600 might be in the context of a $23 apple. Keep that in mind, metals are not to get rich, they are to preserve your wealth.
  • If you are levered up, pay shit down. You want less bills. Why? If you have to take a job that pays 35% less, and you are upside down, how long can you survive? If you have a lot of real estate, you might be able to sell a lot now at ridiculously high values, pay shit down on other houses and have solid free cash flows but less leverage. On the other side of this, YOU will be able to then add more.
  • grow what you can in a garden. I’m trying. Right now, I have tomatoes out the ass. I eat giant salads every night, and I estimated I saved $100 just in tomatoes I buy. It’s not a lot. I’m obviously not homesteading. But next year, I plan to expand the garden to do some more things. If I can somehow get lots of lettuce and tomatoes there’s most of my meals for the summer with proteins
  • Store what you can. This is dry pantry, freezer, etc. Buying a can of chicken now which is good for 2 years might be a fraction of what the cost of it might be in a year. Worst case, I can then use some of these cans next year and re-stock.
  • Re-allocate some of your stocks to follow Buffet into mining stocks. Again – this is not financial advice. It’s something I have done. Perhaps as some stocks go down, you see mining stocks go up – this HEDGES your wealth.
  • Get some side hustles. I’m a part time landlord and part time trader. I have a primary job which pays the bills, and if that is threatened, I can up my percent time I do with the other two until I can get back into the work force. Whether it’s stitching repairs of clothing, canning, selling peaches, baking cakes, selling cupcakes, making fermented foods at home to sell, making toolboxes – whatever. If you can find some side hustles it might do you good now to pay off some of that credit card debt.
  • Sell shit not nailed down. I did this last fall. An old bike, an old exercise bike, an old server. Things you don’t need, get rid of. While other people may put value on them, it can not only help you de-lever, it can help you buy supplies, gold/silver, stocks.
  • Have some cash. Maybe $500 per person in your house. Whether it is a hurricane that takes power out for a few weeks, or like a Puerto Rico hurricane situation, it’s a good idea to have SOME cash available. If your bank closes its doors next week, how are you getting money out? You don’t need $10g, just some cash.
  • Ensure you have basic medical supplies.
  • If you don’t have a pew pew, get one. You already see angry mobs burning major cities down. Food lines over an hour long and running out of food. 20 million unemployed. It’s not unrealistic to imagine a near future where people are breaking into your house for stuff for them to sell.
  • Get fit. I think a very good way of proactively dealing with $1 million medical bills and inflated prices for medical treatment is proactive. Stop smoking. Cut the bullshit foods. Walk. Bike. Maybe we’re 6-12 months from bad stuff? Understand how to fast properly. It’s not hard to go a day a week without eating, I did it for 2 years. I’ve done 3 day fasts 3 or 4 times. If you have to go a few days without food, can you? Do you know what foods you need to live rather than those that give you pleasure?
  • Have shit to trade. Maybe you don’t smoke, but having a carton might be good barter. Extra booze? Extra TP?
  • Get a security system if you don’t have one. If shit starts to go sideways more, you need to be able to protect your family with many layers of defense.