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Lunada Bay Corona Closed, Now What?

Sign of the times: Lunada Bay Corona Closed.

Made it back from Asia to sheltered Lunada Bay. Thought I would be safe here. No. Corona riptides are so bad that even Lunada Bay is closed. Economy drowning. What should investors do now?

First, everyone should realize these are unprecedented times. Coronavirus has turned into a dangerous pandemic. Large parts of the US and global economy are in lock-down. Never happened before. From full-tilt boogie to stop in a bit over a month. The economic damage that has already been inflicted is immense. The worst is yet to come.

Priorities are personal health, family, friends, community and assisting others if possible. This is a time for both personal and economic survival.

Wear a mask when out. Wear gloves in a store. Social distance. Wash your hands frequently. Keep your job if possible. Postpone any large purchases. If in lock-down, enjoy the free time and use it wisely.

On the investment side, continue to keep risk low. Conserve cash. Focus on capital preservation.

I have been very clear about the nature of risk markets over the past 8 months. Just one of many admonitions:

“The risk/reward for risk assets from here is not favorable. Better to keep some dry powder in say risk-less 3 month US Treasury Bills at a 2% yield, or even gold. For those seeking more return, uncorrelated alternative fixed income is one of the few places to safely pick up any yield and avoid a blow-up.”[1]

How did this advice work out during this panic? Not so bad:

Seagate Alternative Fixed Income vs: REITS, DJ REIT Index; DAX Index; Dow Jones Index; JPM EMB; Corporate Bonds, iShare LQD.

What do I think about the risk/reward in markets now after the market rout?

Some advisors are saying this is the investment opportunity of a lifetime.


Stocks were off hard and have bounced some. They look a lot cheaper now based on PE’s, but that is based on the earnings before this disaster. Hard to know where earnings end up a year from now. Yield spreads have moved out. Real estate is worth less now, the drop will show in the next few months.

Any positive news will result in sporadic rallies. And I would not underestimate the US’s ability to come up with answers to whip this virus. Amazing creativity, dedication and resources. However, even with breakthroughs, each week of lock-down inflicts more economic pain on a scale never seen.

Then you also have to think about how the world will look when we come out of this, which we will. That is hard to know until we see how much economic damage the virus inflicts. Buy the dips has worked for the last 40 years because the US could counteract a market sell-off and boost the economy with fiscal and monetary tools. Corona-baby doesn’t care about the monetary stimulus from the lower fed funds rate or the massive fiscal stimulus from the CARES Act.

Authorities have little choice but to react, however interest rates are effectively now zero, and the debt is being increased further. This moves us much closer to the toxic Japanese situation of low interest rates with massive debt which resulted in low economic growth and negative equity returns over the past 32 years.

Sun Tzu in The Art of War provides some guidance here: “Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.”

In an investment sense I believe with our strategy recommendation of T-bills and alternative fixed income we win before we invest. Stick with it.

Buying risk on the dip here looks more like defeated warriors going to war seeking to win. If you must, dollar cost average on new market lows.

How does the Seagate Global Smart Loan Program win before investment? Even in these horrific markets it is delivering 9% annual return, around the long-term return on US equities over the past 40 years.

The program was designed from the ground up in anticipation of the kind of bad market conditions we now have:

1. Investment grade (A3/A- sovereign rating, AAA local currency rating) government of Malaysia official employee housing programs.

2. Co-investing with the Government of Malaysia, so risks are aligned with the government.

3. Short-term underlying maturities of each housing receivable, so limited volatility.

4. No market exposure as the underlying housing units are pre-sold to government approved employees.

5. No repayment risk as payments guaranteed by the Malaysia government housing bank.

6. Currency exposure hedged to $’s or euros.

7. Other risks are spread to other parties and actively managed leaving investors with 5-6% alpha.

Almost bullet-proof. Sun Tzu would most likely approve.

Once Lunada Bay sounds the all-clear and re-opens the bluff paths and beaches, we will again be able to watch the sun kiss California good night, and welcome Asia to a bright Corona-free sunrise. Brighter days are coming.

Lunada Bay cliffs.
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