When is the cutoff deadline to make IRA contributions for 2019?

This too, just like the tax filing date, has been extended until July 15th, 2020.

Do I have to pay the 10% penalty on the conversion if you are under 59 ½?

No, the 10% penalty doesn’t apply to the conversion only ordinary income taxes on the amount you convert.

The new CARES Act allows for penalty free distributions from IRAs and 401Ks in 2020 with the ability to pay the taxes over the next 3 years.

The CARES Act does allow for individuals to withdraw up to $100,000 in total from retirement accounts without the 10% penalty for those under 59 ½ — if you have suffered financial consequences such as reduced income from COVID-19. It also offers the ability for you to pay taxes on the distribution over a 3-year time frame and gives you the ability to pay the funds back within that 3-year time frame to avoid some or all of the taxes.

The CARES Act allows those who are taking RMDs the ability to not take them for 2020.

 

Plan on Tax Rates going Higher.  Why?

 

Below is a list of all the stimulus over the last month.

  • March 6th – $8.3 billion “emergency spending” package.
  • March 12th – Federal Reserve supplies $1.5 trillion in liquidity.
  • March 13th – President Trump pledges to reprieve student loan interest payments
  • March 13th – President Trump declares a “National Emergency” freeing up $50 billion in funds.
  • March 15th – Federal Reserve cuts rates to zero and launches $700 billion in “Q.E.”
  • March 17th – Fed launches the Primary Dealer Credit Facility to buy corporate bonds.
  • March 18th – Fed creates the Money Market Mutual Fund Liquidity Facility
  • March 18th – President Trump signs “coronavirus” relief plan to expand paid leave ($100 billion)
  • March 20th – President Trump invokes the Defense Production Act.
  • March 23rd – Fed pledges “Unlimited QE” of Treasury, Mortgage, and Corporate Bonds.
  • March 23rd – Fed launches two Corporate Credit Facilities:
    • A Primary Market Facility (Issuance of new 4-year bonds for businesses.)
    • A Secondary Market Facility (Purchase of corporate bonds and corporate bond ETF’s)
  • March 23rd – Fed launches the Term Asset-Backed Security Loan Facility (Small Business Loans)
  • April 9th – Fed launches several new programs:
    • The Paycheck Protection Program Loan Facility (Purchase of $350 billion in SBA Loans)
    • Main Street Business Lending Program ($600 billion in additional Small Business Loans)
    • The Municipal Liquidity Facility (Purchase of $500 billion in Municipal Bonds.)
    • Expands funding for PMCCF, SMCCF and TALF up to $850 billion.

The government has also said they will have an open checkbook should the need arise.

I’m not here criticizing the Fed’s actions, but rather trying to illustrate the potential need for Roth conversions, IUL tax free income, or finding alternative ways to accumulate savings to further reduce your tax exposure in retirement.

 

Upcoming Earnings Reports

 

  • Q1 earnings per share will be meaningless because January/February won’t likely be repeated.
  • Likewise, Q2 guidance is useless because no one knows when or how the coronavirus shutdowns will end.
  • The real questions are about companies’ survivability through this time.
  • Can businesses cover debt payments? Have they tapped credit lines? How much borrowing power is left?
  • Those answers reveal whether companies can get by, or will struggle.

These same balance sheet questions also apply to small businesses, many of whose prospects look grim. We are seeing how leveraged our economy is – and that leverage goes both ways.

The “fair value” of the S&P 500 is 20% below the latest price, according to Saxo Bank.

 

Gold

 

Gold seems to have everything moving in its favor. Low global interest rates, a softer dollar, and fears of global economic recession. And most of all, a bullish chart pattern both for the yellow metal and its miners. A lot of bullish articles on gold have been posted over the past year; so the fact that gold is hitting multi-year highs shouldn’t come as much of a surprise.

 

 

How Much Higher for the Markets?

 

Over the last couple of weeks, we have indeed had an extremely strong ‘oversold,’ reflexive rally, that has now reversed the conditions that ‘fueled’ the advance.

 

 

The Fed

 

Nobody has ever seeing anything like this.

Key Points:

  • Today’s data doesn’t fit any economic models because we don’t know how to model conditions that never existed before.
  • The bond market is no longer the other side of the equity markets.
  • Federal Reserve actions will keep interest rates near zero for a very long time.
  • This is not the time to panic or retreat. Opportunities still exist.

Two critical points: We are in unknown conditions that don’t make sense and investors still have good opportunities. They keys are to look carefully and act without fear. Right now, the Federal Reserve is spending trillions to make sure companies don’t default. Maybe in some cases that makes sense, but it also calls into question; who is bearing credit risk. Why should bondholders get paid for risk someone else is bearing?

 

 

Corporate High Yield Markets

 

The chart shows how many U.S. companies can’t pay their debt (the high-yield default rate) versus total corporate debt. Total debt is measured against U.S. GDP. The shaded areas show bear markets.

At the start of 2020, credit-ratings agency Standard & Poor’s (“S&P”) forecast a 3.3% high-yield default rate – the percentage of companies with “junk” credit expected to default within 12 months. Less than four months later, it’s now forecasting a 10% default rate.

S&P has never increased its forecast so drastically. And its current “pessimistic” forecast projects the default rate to reach about 13% by the end of the year. That would be a new 40-year high.

 

 

It’s important to understand that fear can take hold of the markets incredibly fast.

Fear causes investors to sell without asking questions.

Fear causes banks to tighten credit and it causes the credit market to dry up.

The impact to the economy far exceeds what was seen in the previous two recessions. To wit:

  • A complete shutdown of the economy.
  • 15-million jobless claims in 3-weeks
  • 20%+ unemployment
  • 20-25% negative GDP growth
  • 30% of mortgages heading towards forbearance
  • A dramatic drop in both personal and corporate consumption
  • A massive reduction in capital expenditures and private investment
  • A crushing of consumer and business confidence
  • A depletion of consumer and corporate savings

Will the economy recover? Yes. Absolutely.

It just isn’t going to happen overnight.

Using its “probability of default” (PD) indicator, S&P Global Market Intelligence recently released its list of industries most and least impacted by the coronavirus. The credit-rating agency looked at the change in the indicator during March. These five industries were the most negatively impacted.

 

 

Retail sales plunged in March:

 

 

Car sales:

 

 

Furniture, appliances, clothing, manufacturing have similar charts.

Online retail, pharmacies, grocery stores have positive charts.

An independent survey (Alexander Bick and Adam Blandin) conducted during the week of March 29 – April 4 suggests that the unemployment rate is around 20%.

In the first quarter, S&P downgraded 739 North American companies. That’s more than any quarter during the last financial crisis. Look at the quarterly breakdown below.

 

 

 

So far in April, S&P has downgraded another 387 companies for a total of 1,126 this year. It downgraded 906 companies last year. In other words, we’ve already seen more downgrades through three and a half months than in all of 2019.

This is important because downgrades always precede defaults. So, we can expect defaults to soar in the months to come. The default rate is a critical number… When it begins to soar, investors become fearful. They want nothing to do with high-yield bonds. The junk-credit market can dry up quickly.

The last time that happened was in December 2018, when investors were worried about rising interest rates.

Don’t expect the Fed to save the day today like it did in 2018. We weren’t dealing with a global recession then. And the Fed has already lowered rates down to zero this time.

Chairman Jerome Powell said earlier this month that the Fed can only lend to “solvent” companies. So don’t expect the central bank to bail out any junk-rated companies.

Things are going to get much worse for junk-rated companies with large amounts of debt maturing this year. The sins of their debt binge will finally catch up with them. And as the number of bankruptcies starts to escalate, investors will want nothing to do with junk debt.

 

There are Green Shoots That Show Early Reasons to Be Optimistic

 

Copper is rebounding.  Copper and industrial metals are a very good indicator of economic strength.

 

 

 

Small Business

 

The clock is ticking for many small businesses.

 

 

 

 

Energy

 

US crude oil plunged as much as 23% overnight to under $15/bbl., the lowest level since March 1999, after losing almost a fifth of its value last week. Production cuts agreed by top producers are barely making a dent in the demand destruction wrought by COVID-19 as the world rapidly runs out of places to store crude. US crude oil dipped below $15/bbl. on oversupply concerns. We are now near the lowest levels since 1999.

 

 

This year’s plunge in global oil demand will be unprecedented. Part of the reason for such weakness is the additional crude oil coming in from Saudi Arabia. The number of operational US oil rigs continues to tumble, with the largest declines coming from the Permian.

 

 

Debt

 

Mortgage debt is challenging its 2007 highs. Student loans are off the charts. Auto loans are 50% higher than in 2007. Credit card debt is higher, as are other forms of consumer debt. We are in far worse shape than we were, debt-wise, just prior to the great financial crisis in 2007:

  • Mortgage Debt – $10.6 Trillion
  • Auto Loan Debt – $1.19 Trillion
  • U.S. Corporate Debt – $10 Trillion
  • Emerging Markets: $72.5 Trillion

 

 

 

Coronavirus Update

 

The number of new coronavirus cases in the US has peaked.

 

 

 

Interview with Felix Zulauf

 

Felix Zulauf has experienced many boom and crash phases in his almost fifty-year career as an investor and market observer. Felix W. Zulauf is founder and owner of Zulauf Asset Management, based in Baar, Switzerland.

Mr. Zulauf, equity markets have suffered a sharp fall in March. Have you ever experienced a crash like this?

The intensity reminds me of 1987, but the speed is without precedent. It is unique that stock markets collapse by more than 30% within two weeks, straight from their historical high. But then again, the fundamental situation is also unique. I’ve been in business for almost fifty years, but I’ve never seen the global economy shut down so quickly. Many people still do not realize the enormous economic damage caused by the measures to contain the Covid-19 pandemic. The world will not be the same after this.

Is the economic damage larger than in the aftermath of the 2008 global financial crisis?

Yes. 2008 was primarily a real estate and banking crisis that spread to industry sectors through contagion effects. Most of the service sectors remained unharmed, though. This time, all sectors are affected, especially services. Tourism, restaurants, hairdressers, countless small businesses: if they have to close for two months, their cash flow dries up and they cannot survive. That is probably unique in history. According to estimates by the Ifo Institute in Munich, such closure leads to a loss of economic output of 7 to 11% after two months and up to 20% after three months. The decline will be determined by the duration of the restrictions. All in all, the economy will experience a brutal fall in the first half of the year. If authorities around the world act wisely, we’ll see a stabilization in the second half of the year.

Don’t you expect a V-shaped recovery of the economy when the worst part of the pandemic is over?

No, because the recession is starting a domino process. All the excesses from the expansion of the past ten years come to the surface now. Remember: The level of total debt in the world today, compared to economic output, is more than twice as high as in 2007. We have created the biggest excesses in generations. This debt is now increasing the downward pressure. In addition, the global economy was already in a slowdown mode even before the Covid-19 shutdown. You could see that the economy was slowing down in 2020, so it was right to start the year with an underweight in equities and an overweight in bonds. Then came the Covid-19 shock. And on top of all that, we saw the beginning of a new price war in the oil market in early March.

Isn’t a lower oil price good for the global economy?

No, not in this case. The shale oil industry in the United States is practically bankrupt. These companies have more than $900bn in debt outstanding. Risk premiums in the high yield segment, where investors for years have not paid attention to the balance sheet quality of debtors, are skyrocketing now. This eats its way through the financial system, jeopardizes the refinancing of many companies and thus also affects the real economy. Once again, this shows how dangerous an excessive build-up of corporate debt is.

Central banks are pumping liquidity into the system, governments are setting up support programs. Is this useful?

Fiscal policy measures can only take effect when the restrictions are lifted and people are allowed to move again. Afterwards they have a supportive and later a stimulating effect. The gigantic amounts that central banks are pumping into the system have to be imagined as follows: They plug the huge deflationary hole that the Covid-19 crisis has torn open, and they prevent the meltdown of our financial system. In that sense, that’s the right policy to follow. If the economy then normalizes, these liquidity injections can have an inflationary effect. Of course central banks believe that they could skim off this liquidity again, but they have shown in the last cycle that this remained a pious wish.

Are these support programs even necessary, in your view?

During the crisis: yes. In principle, however, fiscal policy should be balanced over the cycle; increase government debt in the crisis and then reduce it in the expansion. But apart maybe from Switzerland, nobody adheres to this principle. Take France, for example: They haven’t had a balanced budget for almost forty years. They don’t even know what a surplus is. The same principle applies to monetary policy: It is a disaster that our central banks have pursued a monetary policy that was far too loose during the expansion. This has fueled the excesses in debt. The problem with central banks really starts with the fact that a handful of people think they can control the economy. This is presumptuous. It is this attitude that weakens our market economy system. Recessions are a natural part of the business cycle. Companies who make negligent mistakes must be punished and eliminated. As a society, we have to endure that there are not only fair weather phases, but also recessions from time to time. If we can no longer accept this, then we cannot be saved. Then we will just pave the way to a planned economy with a long-term decline in prosperity.

What grade do you give the central banks for their performance?

For the time before this current crisis, I give practically all central banks a miserable grade. But in the crisis they do the right thing. Well, the Fed’s rate cuts would not have been necessary, they are of no use in the current situation. But it is important that the central banks provide credit lines for the entire financial system and inject liquidity. It was extremely important that the Fed opened Dollar swap lines to foreign central banks. These swap lines are probably even too small. China and other emerging economies in particular should receive this lifeline. The IMF will probably have to step in here, because the dimensions of the Dollar amounts required are monumental.

Why is that?

Over the past decade, a huge mountain of Dollar denominated debt has been built up outside the U.S., especially in emerging markets, and particularly in China. According to the BIS, these loans increased from $5.8 trillion to more than $12 trillion between 2009 and 2019. When the crisis hits, short-term loans are often not extended because lenders turn risk-averse. Then debtors have to scramble to buy Dollars in the market. As the Dollar rises, the debt in the debtor’s home currency increases, which in turn increases the pressure on them even more. Weak economies such as Turkey, Brazil and South Africa are caught in a vicious cycle. That’s why I’ve been warning for some time about investing in emerging markets, including China. They just have a huge Dollar debt problem.

Do you expect a “Lehman Moment” in this crisis, the collapse of a major market player?

In every crisis there are companies that perish. It won’t be any different this time. Given the excessive indebtedness in the corporate sector, one would have to expect some spectacular bankruptcies. But given the speed with which central banks have acted—much faster than in 2008—this will no longer threaten the financial system per se.

Is there a risk of a banking crisis?

With so much stress in the financial system, there is always this danger. In this regard, I am most concerned about Europe, because it has the structurally weakest economy and the weakest banking system. With the rigid regime of the single currency, the weaker members of the Eurozone won’t have the benefit of a devaluation in their currency. The one factor you have to look at today is corporate debt as a percentage of GDP. In the U.S., this metric is currently at 75%, in Germany at 95%, Italy at 100%, Switzerland at 120% and in France at 200%. I’m worried about Italy and Spain, but I’m even more worried about France and its banks. In the last cycle, the French turned the big wheel in lending and completely exaggerated. I doubt that European banks have enough capital to be able to absorb bad debts. I think a nationalization of some banks in the Eurozone will be inevitable.

Is the Euro at risk again?

The Eurozone is facing an important test. The Euro is a misconstruction. The Northern group has so far—understandably—resisted any communitization of debt. But if the Northern Euro members continue to do so in the current crisis, the weak states in the South will not be able to avoid introducing capital controls. Otherwise they will suffer a flight of capital to the North, and their banks will collapse. If, on the other hand, they agree to a communitization of debt, then the previously strong countries like Germany or the Netherlands will be dragged down by the weak and with them the entire continent. The move to a centralized state economy like in France would then be inevitable, and prosperity would decrease across Europe. The coming months will be crucial for the future of Europe.

What’s next for equity markets?

Stock markets are at the beginning of a bottoming process. The packages of measures taken by the authorities support the trust of market participants. This is a process of several weeks, and setbacks to the lows of late March or even slightly below cannot be ruled out.

What will trigger these setbacks?

In April, companies will report their numbers for the first quarter. Then you will see the first concrete signs of the economic damage. The outlook for the companies will be bleak because they have no visibility at all over the course of business. It is also unclear when the debt problems in China and other emerging countries will surface. Both could provoke setbacks in equity markets. Also, should the pandemic curves not flatten out as quickly as we assume today, markets will dive again. Over the course of the coming weeks, we should gradually gain more visibility, and after that a sustained recovery in equities can begin.

How long will this recovery last?

That will depend on developments in the real economy and the behavior of authorities. I would question whether investor confidence and animal spirits will come back so quickly. We also don’t know what will happen to the pandemic next winter. I am currently assuming that the greatest damage to the markets is behind us at the moment, that we will continue to see large fluctuations for some time and then stock prices will rise towards the end of the year. My expectations for afterwards depend on new information.

When would you buy stocks again?

If you can live with fluctuations, you can buy during the setbacks in the next few weeks. A lot of negatives are priced in, and central banks support the system. But consider: If you look at the Stoxx 600, the index with the 600 largest European companies, it has largely been in a sideways movement with large fluctuations for the past 20 years. This is a challenging environment, and I expect that to continue.

How do you deal with it as an investor?

Anyone who has successfully tried to identify good stocks has made good money in this sideways movement. And anyone who has managed to time the cycle – something that has been frowned upon in the wealth management industry for years – has also made money. So anyone who has done exactly what the wealth management industry has proven to be unable to do, and which is why it says it is the wrong approach, has been successful. But all those in Europe who have followed the buy and hold strategy as preached by most asset managers and major banks are sitting on poor results. Only in the U.S. did the market manage to reach a new high—but only thanks to the questionable, loan-financed share buybacks of many companies. I doubt that this will continue in the future.

Are you fundamentally negative on equities?

No, absolutely not. When you buy shares of a good company, you purchase a share of productive capital. Good companies can always adapt to the environment and generate more income for the investor over time than a normal fixed-income asset. There are always spurts of one to two decades on the stock exchanges, where stocks can grow strongly thanks to low valuation and a generally benign market constellation. You have to be there. But there are also long periods in which this is not the case, such as during the time between the mid-Sixties and the early Eighties. Today, we are headed towards more and more government intervention and less and less freedom and free markets. This is not a climate for structurally increasing prosperity. And over time, this expresses itself in financial markets. That’s why I advise investors to behave opportunistically.

What do you buy when you buy?

The order of my preferences is the United States, followed by emerging markets, and finally Europe. Europe simply has the most problems because the economic area is suffering from the misconstruction of the Euro and the EU. Emerging markets can recover, but it is too early because there are still many problems to be addressed. I have the most confidence in the United States because the economic system there is more free and flexible.

What about bonds?

Yields for high quality borrowers have receded under fluctuations for almost forty years. We have now reached the end of a generation cycle in terms of returns. Bonds either have to be sold today or only have short maturities, which no longer brings any benefits in terms of returns. European bonds are most at risk because of the risks in the Euro that I have outlined. I would avoid them.

Is the forty-year bond bull market over?

Fiscal authorities and central banks are running programs that will have an inflationary effect over time. Accordingly, interest rates will rise again, first at the long end and after a few years also at the short. We will have an inflationary economic policy that will drive up inflation but not prosperity. This is bad for normal fixed income investments.

Will this be a favorable environment for gold?

Gold is an unproductive asset. Its price depends on the trust that investors have in the policies of the authorities. I expect the new decade to be beneficial for gold prices because central banks will continue to devalue our paper currencies, and confidence in policymakers will decrease. Gold should therefore be represented in every portfolio.

Do you think the current crisis will change the way investors behave?

I hope so. We should actually know that life is a risk. As a society, as a company and as an investor, you have to be prepared for crises and setbacks. It is clear that our healthcare system was not prepared for such a crisis. And only now do we realize that 70% of the basic elements for the pharmaceutical industry come from China. This is insane. I am a supporter of free trade, but today’s crisis shows the fragility of our wide-ranging supply chains. What also concerns me is the short-term thinking of managers who have inflated their companies with debt to finance share buybacks. It is simply negligent. These managers should be fired. There is a lack of personal responsibility everywhere, not just among managers. Our entire society has forgotten how to take responsibility. We have forgotten that life consists of setbacks and that you have to have safety margins for difficult times. We live in a spoiled society where people think they are entitled to a wonderful life. Well, this right does not exist in reality. And the constant cry for help to central banks and governments whenever it rains will gradually cost us freedom and prosperity.

 

 

All content is the opinion of Brian Decker