I’m the most bullish guy out there. I love stocks and America. And I believe we’ll be fine – eventually.
But what’s happening now is unprecedented. While I’d like to give an exact playbook, there simply isn’t one.
On Sunday evening, the Federal Reserve made an emergency announcement that it would cut interest rates to zero. It also said it would inject $700 billion into the economy to facilitate liquidity through asset purchases and lending.
The move was meant to calm markets. Instead, as I write, they’re in free fall.
Generally, pumping liquidity into the markets would cause a massive rally. But this time, it didn’t.
You see, the markets believe the Fed is worried about the coronavirus pandemic. And that’s never a good thing.
To kick off Monday morning, the S&P 500 went down 11%, gold fell 3%, and even bitcoin dropped 5%… So nearly everything is selling off.
Look, I’ll be honest with you. This situation will get worse before it gets better. But in the end, it will get better.
So today, I’ll tell you why this outbreak is causing the world economy to grind to a halt – and what you should do in the meantime…
The Liquidity Crunch
The liquidity crunch we’re seeing today is similar to that of the 2008 financial crisis. Just like back then, the monstrous market moves of the last 10 trading days are causing margin calls.
Let me explain…
The big, smart money we follow in Palm Beach Insider often uses leverage. This means it borrows money to buy assets.
Here’s an example…
Let’s say a hedge fund buys $100 of ABC company and earns a 10% return. That’s a $10 gain.
But if it borrows $100 and adds it to its own $100 instead, it would have a $200 position in ABC company. And if it makes a 10% return, the gain would be $20. That’s double what it would make on its own.
That’s leverage. And when it works, it’s great.
But when stocks fall – like they’re doing now – leverage can backfire spectacularly.
For instance, using the previous example, if the hedge fund’s position loses 10%, the added leverage means it also loses $20. So it can double its losses just as easily.
But it gets even worse…
When the markets go south, banks that lend (provide the leverage) to these big-money firms begin issuing margin calls.
This means the banks require additional money to ensure that the smart money’s accounts meet the minimum required amounts for borrowing.
Basically, the banks are saying, “Send me cash to balance your accounts, or we’ll be forced to close your positions.”
And we saw this happen in the 2008 financial crisis. Between 2008 and 2009, 2,494 hedge funds were forced to close when they couldn’t maintain enough cash to fund their positions.
You see, invariably, all the margin calls come at once. So the funds have to wire cash immediately. But many funds have illiquid products that they can’t easily trade.
So they’ll trade whatever they can trade to raise cash – including equities, gold, and cryptos. And sometimes, even that’s not enough.
Now, this liquidity problem already existed in the financial system. But when an economy is humming along and doing well, the leverage is acceptable.
It’s only once the market trips and falls flat on its face that the problems come to light. So the coronavirus outbreak is merely exposing an ongoing issue.
And I expect a lot of funds to go out of business, just like they did in 2008. Things will get pretty ugly. But we’ll get through this.
So what can you do right now?
Keep Cash
Last year, I told my Palm Beach Trader subscribers to prepare for a pullback. And we sold several positions to offload some risk.
Plus, it allowed us to raise cash. Right now, our portfolio is 40% cash.
The second thing you need to do is be patient.
The coronavirus outbreak is disrupting the global economy – and will have huge impacts on company profits… not to mention our everyday lives.
But remember, this will be temporary. This storm shall pass.
As Americans, we’ve endured much worse over the years. And we’ll endure this, too.
Those who are patient and have cash will be able to bargain-hunt for great companies. Stocks that we all know and love will rebound… and we’ll benefit.
But for right now, here is my advice to you personally…
We all have to be home for a while. And there’s big fear about what will happen to businesses, both big and small. But you need to take care of yourself and your family.
I advise you to hunker down and go into conservation mode. Look over your budget and find areas where you can trim and save.
Sure, the drastic actions our government is taking are inconvenient. But it’s necessary to preserve the thing that matters most: human life.
I believe these actions will limit the spread of the virus and minimize casualties.
Expect the U.S. government to step in and help everyone from mom-and-pop businesses… all the way up to big financial institutions that may have risk exposure.
We don’t know how deep this will all go. But what we do know is, Americans have an excellent history of overcoming great challenges.
We will get through this – together.
Patience and process!
Jason Bodner
Editor, Palm Beach Insider
P.S. Once this passes – and we get through this together – patient investors with cash on hand will be able to pick up high-quality stocks on sale.
As I mentioned, stocks that we all know and love will rebound. That’s why I’ve developed my “unbeatable” stock-picking system to help us benefit.
It took half a dozen years and hundreds of thousands of dollars to create, but it’s highly accurate and effective. You see, my system uses specific algorithms to look for this big-money buying activity – regardless of what direction the market’s going. And it can predict this activity up to 10 days in advance.