This morning, I was asked by one of our clients two very important and good questions.  After I replied, I thought that others might have the same concerns, so below is our back and forth. 

 

Bo,

Hope all is well. First, I would like to acknowledge Montgomery for keeping in contact with us. Inquiring minds would like to know your thoughts on:

  1. Can we avoid a depression at this point? 
  1. How do we navigate scenarios of depression and/ or inflation and still get a real return adjusted for both?

 

Thank you,

****

 

Dear ****, Your questions are really good, and I’ve been giving these matters a lot of thought.

First off, it is probable that until a vaccine is developed, behavior will not return to normal.  People will still avoid large group gatherings.  This has positive implications for some (McDonald’s, Clorox, Wall Mart, Costco, etc. and other businesses that can still operate during such a climate), it will have very negative implications for other industries such as hospitality, airlines, cruise ships, etc.

So, while the depth and duration of an economic downturn cannot be fully known at this point, there will be some winners out there, not just losers.

Again, while it is currently unknowable, if the economy stays in a prolonged coma, I think you can expect the FED to move farther and more aggressively than anyone even imagines at this point.  Right now, the interest rate on the ten-year treasury stands at roughly 0.62% and on the thirty-year treasury it stands at 1.25%.  If a coma-induced economy persists, it is very possible that you would see the ten-year treasury bond fall to effectively 0% (as in Europe).  If the spread between the ten year and the thirty year holds (and I suspect that it will), you could see the thirty-year bond fall to maybe 0.5% – 0.6%.  Should that happen- from current levels – there would be a 50% return remaining in our long-term bonds.  Our current holdings of 10-year bonds will also rally strongly, if their yield should fall to 0%.

Now will any of this happen?  It depends on the economic trajectory from here.  But, if the worst case develops, the above bond scenario is very likely.

Additionally, all of this FED action, QE- Infinity, is actually very long-term bullish for gold.   To what extent, we cannot know right now, but I feel pretty comfortable stating that the trend for gold is likely to continue up.

Now you know that we continue to hold a 30% position in stocks.  We do that because, while the above is addressed to a worst-case scenario, the worst may not in fact happen.  So, we are trying to cover our bases to be ready for whatever comes our way.

I hope this answers your questions and concerns.  I wish I could tell you exactly what is going to happen, but I can’t.  No one can.  What I can tell you is that we believe we are prepared for a wide range of ultimate outcomes.  This will pass.  On the other side, we have aggressively taken measures to hopefully ensure that we can capitalize on this current mess.

If you have any other questions, please do let us know.