Where’s the Safe Haven?

The global economy is facing unprecedented challenges. We are simultaneously experiencing a demand shock, a supply shock, a stock market crisis and a debt crisis.

Making things worse, we don’t know how long the COVID-19 crisis will last. The longer it lasts, the more severe the damage will be.

It makes for a challenging investment environment, to say the least. Here’s how various assets have performed over the last month (February 18 to March 18, 2020).

  • iShares 20+ Year Treasury Bond ETF (Nasdaq: TLT): +2.8%
  • Gold: -6.7%
  • Silver: -32%
  • Bitcoin: -41%
  • S&P 500: -29%
  • Nasdaq: -28%
  • Russell 2000: -40%
  • Vanguard FTSE Emerging Markets ETF (NYSE: VWO): -30%

U.S. Treasury bonds have been the strongest performer during this crisis so far. But yields can’t go much lower without going negative. That means that Treasurys have limited upside moving forward. At current yields, investors are losing more than 1% per year in U.S. bonds (due to inflation).

I don’t invest in bonds. So I’m not going to speculate on their outlook. But I buy only things I want to hold for five to 10 years, and U.S. government bonds are certainly not on that list.

Gold

Gold continues to be my preferred safe haven investment.

In this crisis, the only thing I am certain of is that an incredible amount of money will be printed over the coming year and beyond. Modern Monetary Theory is a near certainty at this point.

The upside for gold here is substantial. I believe gold prices could top $3,000 in the next year.

In my opinion, if you own an exchange-traded fund (ETF) like the SPDR Gold Shares (NYSE: GLD), you don’t own actual gold. You own a paper claim on gold. If you can, I strongly recommend owning physical metal.

If you can’t do physical metal, a good alternative to the SPDR Gold Shares is the Sprott Physical Gold Trust ETF (NYSE: PHYS). It’s fully backed by allocated gold held at the Royal Canadian Mint.

If you’re willing to take on more risk, check out gold miners. Gold miners have been hit harder than most other sectors. But I believe the outlook for precious metal prices is bright, and gold miners should benefit more than most companies from low fuel prices.

If you don’t know a lot about the gold mining space, I recommend going with an ETF here. There are a lot of indexes to choose from.

I strongly suggest avoiding any leveraged precious metal funds. They are incredibly risky. And once again, you don’t own real gold – just a paper claim.

Stocks

U.S. stock indexes are down roughly 30% over the last month. In the short term, it sure seems like we’re due for a bounce.

But I remain bearish over the longer term. The primary problem is the incredible amount of debt companies have stacked up over the last decade. The chart below, which I highlighted last May, shows corporate debt as a percentage of gross domestic product (GDP).

Nonfinancial Corporate Debt as a Percentage of GDP Exceeds Prior Peak

Here’s what I wrote 10 months ago.

We are in the late stages of a large credit bubble.

But sometimes it’s hard to perceive something when you’re stuck in the middle of it. I keep hearing people on TV say how amazing the economy is, but I see a much more mixed bag.

I suspect these folks have confused the stock market with the real economy. It’s an easy mistake to make. The stock market is doing great – for now.

And the bull market could indeed continue for a year or more. But we are almost certainly in the very late innings of this credit cycle. And the overall economy looks ill.

Today, the picture is obviously grimmer.

We will get past the COVID-19 crisis. But the debt problem looms larger than ever. A lot of companies are likely to go bankrupt before this is over.

Just look at highly indebted companies like Boeing, which is down a whopping 73% over the last month. Yes, the company would be in trouble regardless. But with its current $28 billion debt load, it likely needs a bailout (and is already seeking government assistance). It doesn’t help that management repurchased $43 billion worth of shares over recent years at far higher prices.

At some point, U.S. stocks will become too attractive to ignore. But I don’t think we’re there yet. In the meantime, I am working on my “buy very low” list. At the top of that list will be great tech companies with strong balance sheets.

Companies like Google and Apple look good relative to the rest of the market. They have huge cash flow and gigantic amounts of cash to deploy during this crisis. However, I suspect we will get a chance to buy them, and the rest of the market, at much lower prices.