By Nigam Arora
The Federal Reserve and the Trump administration are jumping into action to counter the coronavirus crisis.
What do people make of that? Emails I receive fall, broadly, into two categories: Those who think Trump is doing an excellent job, and those who think he is incompetent to handle the situation.
This is not a time for partisan bickering. We must come together and defeat the coronavirus. With the exception of one very intelligent person, everybody who has written me has missed one of the most important points. Let’s explore with the help of two charts.
Please click here for an annotated chart of the SPDR Dow Jones Industrial Average ETF /zigman2/quotes/208954582/composite DIA -0.54% , which tracks the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.48% . For the sake of full transparency, this chart was previously published and no changes have been made.
Note the following:
• Let us imagine a household that is in debt up to its eyeballs and every month spending more than its income by a large amount. Then a disaster hits. Income goes down substantially, and expenses go up substantially. What will the result be — bankruptcy? The U.S. is a resilient, strong and rich nation. However, the example of the hypothetical household applies. The eventual solution may be demonetization of the debt.
• Yes, demonetization of the debt is ahead — the same debt that investors are rushing to buy for its perceived safety.
• The intelligent investor I referred to, above, has written twice asking, “Is there a limit to this?”
• The first chart shows that, in spite of massive efforts by the government, the stock market is about to breach a critical support level.
• I have previously written that if the top support level shown on the first chart is breached, the stock market is likely to fall to the second support level.
• The second support level has an 80% probability of holding. To learn more about the support levels and the time to buy, please read “Stock market opinions abound — here’s an objective way to tell when the market bottoms” and this article about stock support zones.
• The second chart shows that investors who rushed to the perceived safety of Treasury bonds have lost 17% from the peak in a matter of days.
• The second chart shows that bonds lost value after the Fed dropped rates to near zero. Many investors were expecting the opposite to happen.