July 22, 2021
Two months. That’s the length of the recession triggered by the pandemic, from February to April 2020, making it the shortest economic downturn in U.S. history, according to the National Bureau of Economic Cycle Dating Committee of Economic Research (NBER).
For those who scratch their heads, the NBER specifies that this does not mean that the economy “has returned to functioning at normal capacity”, only that the expansion started (very) slowly shortly after the whole world came to a screeching halt in early 2020.
Indeed, the shock waves of these two months are still being felt: the first jobless claims remain at high levels. Commercial air transport, especially business travel, has not quite recovered, although it is showing signs of improvement.
And then there is the unprecedented government spending and money printing, which continues to this day. Due mainly to stimulus measures, the US deficit is expected to reach $ 3 trillion this year; Meanwhile, total assets held by the Federal Reserve are on track to hit $ 9 trillion.
Much of that money has been invested in stocks and other risky assets. According to Morningstar, mutual funds and ETFs posted net inflows of $ 722 billion in the first six months of the year, the largest half-yearly amount dating back to 1993. At the end of 2020, a record $ 5.4 trillion sitting in funds that passively track the S&P 500, reports Axios.
Take a look at the table below. Investor appetite for risk is at an all time high. Inventories as a percentage of household financial assets surpass 40% for the very first time. Plus, Americans are trading on margin like never before. At the end of June, margin accounts totaled an unprecedented amount of 882 billion dollars, up 50% from the previous year.
Much of this story is who made the investment. Thanks in large part to the checks for $ 1,200, there has been an explosion in the number of retail investors. Ahead of its initial public offering (IPO), Robinhood reports that it now has up to 18 million users, almost double the number of 2019.
As many of you know, Robinhood is favored by younger, less experienced investors because trading is free and it does a good job of making investing fun. The average age of users is 31 years. Many of them are first-time investors.
Obviously, there is nothing fundamentally wrong with anything I have said so far. There is no reward without taking some risk. I am delighted that more Americans are participating in the stock market, which has worked very well since the crater in March 2020. Many young Robinhooders have made incredibly profitable investments in recent months, including airline stocks.
At the same time, the money-printing rate we’ve seen since the pandemic hit is unsustainable, and if investors aren’t careful, I’m afraid tears will flow when policymakers take the bowl off the table. punch.
Do you remember the 2013 “taper tantrum”? In May of the same year, then Fed Chairman Ben Bernanke hinted at a reduction in the pace of the bank’s bond purchases. Treasury yields immediately rose and stocks fell. And that’s when the Fed’s balance sheet stood at just over $ 3 trillion, two and a half times less than it is today.
For now, current President Jerome Powell has said the reduction is “still a long way off” as the economy continues to recover. But I urge investors to prepare for the end of the party, whether it’s buying real estate, increasing your exposure to gold and precious metals, investing in Bitcoin and other cryptos or whatever.
Remember the golden rule of 10%
As you have heard me say on several occasions, I recommend a 10% weighting in gold, with half of it in physical gold (bars, coins and jewelry) and the other half in high quality gold stocks, funds. mutual funds and ETFs. I also think it might be safe to have between 1% and 2% in Bitcoin and Ether, including crypto mining stocks. Remember to rebalance regularly, at least once a year, but you might see additional benefits by rebalancing quarterly.
Speaking of gold and Bitcoin …
On Wednesday, August 18, I will be participating in a Gold and Bitcoin webcast, and will be joined by none other than Bitcoin Evangelist Michael Saylor, Founder and CEO of MicroStrategy. It’s a webcast you don’t want to miss! To get the link to reserve your place for this exclusive conservation, email me at [email protected] with the subject line “Michael Saylor webcast”. The enthusiasm has already been very high.
Hope you can join us!
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The S&P 500 Index is a market capitalization weighted index of the 500 largest publicly traded US companies.