Century’s catastrophic events

Posted By Darren Winters on Mar 8, 2020


Century’s catastrophic events

Investing during the century’s catastrophic events is challenging for even old hand investors. The greatest monetary easing financial experiment in the history of finance followed by COVID-19 has given rise to “one of those once in 100 years catastrophic events,” said hedge fund king Ray Dalio. 

So now may not be a good time for bold moves, bearing in mind that the stock market takes no prisoners. 

Investing during the century’s catastrophic events could be more about preserving your capital rather than trying to grow it

Century's catastrophic events

In other words, it is not about the return on your capital but rather the return of your capital.

Footnote, if you have shorted this market then please donate a percentage of your wins to charity-there are going to be a lot of people in need. 

As I write this piece a news flashes on my screen entitled, British airline Flybe goes bankrupt. I now realize the great corporate earning recession. is about to get a lot worse.

There is absolutely nothing that emergency monetary policy, already years in implementation, or fiscal policy can do to prevent the now inevitable, a global economic recession/ depression. 

The recent Fed rate cut by 0.50 percent to a range of 1-1.25 percent was anticipated, in the wake of the COVID-19 black swan event becoming a reality. 

But the Fed rate cut was a symbolic move which failed to impress as the yield on the 10 year Treasury yields continued falling below 1% amid renewed haven inflows.

10 year Treasury yield is the holy grail for forecasting the trajectory of various financial assets and could help investors navigate this century’s catastrophic events

Falling 10 year Treasury yields suggest that bond investors are buying a 10 year Treasury, bearing in mind the inverse relationship between treasury prices and yields. Capital inflows into the haven 10 year Treasury, which causes their price to rise and corresponding yields to fall, suggests a risk-off sentiment in the market.

In another word, when the 10 year Treasury yield falls stock prices tend to fall also, due to capital flows into haven assets and vice versa. Falling 10 year Treasury yields also mean that the opportunity cost of holding precious metals, gold falls which increase the demand for gold and its price. 

The next chapter in this century’s catastrophic events is about to commence as investors/traders get pounded by waves of profit warnings, lower revenue guidance, and high profile bankruptcy

Next month’s business headlines could be occupied with stories about corporate distress and the “red zoning” of the population to contain COVID-19. 

Bond investors are already positioning their capital for the worst-case scenario as they pile into a 10 year Treasury at any cost sending yields below 1%. 

This century’s catastrophic events will certainly lead to financial contagion

The Repo market crisis back in September, when rates spiked 10%, was for me the red flash warning on the dashboard that trouble was indeed looming. 

The Repo market is a market for short term funds that financial entities use to purchase collateralized assets. When the rate skyrocket to 10% it was a sign that no one was willing to lend and the obvious question was why? 

So highly leveraged companies, junk bonds, and peripheral sovereign bonds are likely to take a big hit in this century’s catastrophic events

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