I was expecting the Fed to lower its target rate at the next meeting in mid-March.  Instead, we got a surprise with a 50 basis point cut on Tuesday morning.

The Fed is now only 100 basis points (1%) away from its all-time low for the federal funds rate. It can’t go beyond that unless it goes negative.

With the surprise news, yields fell once more.  It is no surprise that short-term yields plummeted.  But the 10-year yield briefly fell below the 1% barrier for the first time ever.

Gold went up on the news, which makes some sense.  The lower interest rates are correlated with a looser monetary policy.

I don’t know if the Fed was expecting to save the stock market, but stocks ended up tanking again, giving up much of the massive gains from Monday.  This just shows that the Fed can only do so much.  If anything, this move may have just spooked investors more.  Now we know the Fed is really worried about the situation.

I continue to contend that this is not just about the coronavirus.  That may have been the trigger, but the gun was already loaded.  Stocks were in a massive bubble, and they continue to be in a massive bubble.

I am a part of some online groups that discuss financial independence.  There are many people asking if they should buy now while stocks are on sale.  My answer continues to be a firm “no”.  They are on sale compared to two weeks ago, but they are still in a major bubble.

I can’t be certain, but I think we are in a recession now.  The bond market is certainly telling us that.  And if the Fed is cutting 50 basis points in an emergency meeting, I think Fed officials see it that way too.

Hopefully most people reading this are not heavy in stocks right now.  If you are, I would recommend diversifying now.

It took many years to blow the bubble up this much.  It won’t take years to deflate it.

I will make some more political commentary after Super Tuesday is over. But I just wanted to comment briefly on the political situation because both Pete Buttigieg and Amy Klobuchar have ended their bids for the presidency.

It looks like both candidates are going to endorse Joe Biden. It makes you wonder if the powers-that-be had a say in this.

Both of these candidates had decent showings in Iowa. But after Biden’s big win in South Carolina, it looks like he may be back in the seat as the establishment favorite.

If I were Buttigieg or Klobuchar – and thankfully I’m not – I don’t think I would have given up right before Super Tuesday. You spend all of that time, effort, and money, so one would think that you would let it play out on the biggest primary day.

This is why I suspect that they were coerced into it, or at least highly encouraged. Politics is a dirty game. The powers-that-be may have said that good things will come their way if they drop out now. Maybe there are promises of vice presidential slots or cabinet positions. In the case of Buttigieg, who is young, they may have said to come back in 4 or 8 years and he will receive the establishment support.

It’s possible they were threatened too, but maybe it didn’t need to come to that. I think Buttigieg and Klobuchar got the message without anything explicit having to be said.

The goal for the establishment is to get rid of Bernie Sanders. They probably don’t mind keeping Elizabeth Warren around for now because some of her supporters could possibly go to Bernie.

It is basically down to Biden and Bloomberg for the establishment slot to face off against Bernie. Things will likely be more clear in a couple of days.

I am surprised the establishment is siding with Biden as their best hope. The guy is a train wreck. He can’t put together two coherent sentences. If he has to go against Trump in a two-hour long debate, it is going to be entertainment like you wouldn’t believe.

Maybe the plan is to get Biden to match, or close to match, the delegate count with Sanders going into the convention. Then they will throw him under the bus and bring in Hillary to save the day. I can’t completely discount that possibility now.

I’ll have more on Wednesday.

My paranoia is about the paranoia.  I am not too worried about the coronavirus itself.  I am worried about panic from the coronavirus, including government reactions to it in order to appear to be doing something.  This is the type of thing where governments can get away with tyranny to a greater degree than normal.

Stocks fell really hard this week.  Gold went up at first, but then fell really hard.  Bonds did well, as interest rates went down.  The 10-year yield hit an all-time low.  There are also strong bets that the Fed will lower its target rate at the next meeting in March.  It is almost certain we will see a 25 basis point (.25%) reduction, but it could be 50 basis points.

The almost-universal opinion is that stocks fell hard because of the coronavirus.  It makes sense to a certain degree. The Chinese are a major supplier of goods, so there will be some disruptions in business.

Nationalists will make the argument that this is a good example of why we (Americans) need more independence and less reliance (trade) with foreign nations.

I do not agree with this argument for several reasons.  First, supply disruptions could just as easily happen within a country.  If iPhones were all produced in Los Angeles, then an earthquake could shut down production.  If they were produced in Miami, a hurricane could disrupt production for a while.  There could be a pandemic in any American city.  One could think of many examples.

Second, the free market will take care of this issue if it is allowed to function.  If supply chains shut down for long enough in China, then businesses aren’t just going to sit there and throw up their collective hands and do nothing.  They will find other suppliers.  They will likely have to pay a little more than what they had been paying, but things will adjust as long as prices are allowed to function.

Even as an advocate of the free market, it surprises me how fast businesses and industries can make major adjustments.  The profit motive (or the motive of limiting losses) is powerful.

I do want to explore just how much of this dive in stocks is due to the coronavirus.  The Dow sank over 3,500 points in one week. All of the major indexes experienced a correction in the matter of a week, meaning they lost at least 10%. This is quite extraordinary.

So here is my question.

What if the Coronavirus Goes Away in the Next Few Weeks?

Spring is coming soon in the northern hemisphere.  I am not sure why such a big deal is being made of this particular virus. It is contended that the flu kills far more people annually.

I think the flu statistics are not quite accurate.  A lot of the deaths attributed to the flu are for people who were already unhealthy.  They are people who had compromised immune systems.  We don’t know how many of them would have died in a short time frame without the flu.

The coronavirus does not seem to be much different.  They are citing an approximate 2% death rate, but we don’t know how many cases have gone unreported.  It seems that most of the deaths are with people who already had health issues.  Admittedly, it is hard to say if the Chinese government is overstating or understating the problem.

Anyway, there is a decent chance that the virus will slow down and mostly go away over the next couple of months.  Maybe it will be even sooner.  I really don’t know for sure, and I don’t think anyone else does either. That uncertainty has rattled fear into people, which includes investors.

But let’s just say, hypothetically, that the virus mostly goes away over the next several weeks. Who thinks that stocks are going to gain back everything that was just lost this past week?  Is the Dow going to be going to near 30,000 again in a short amount of time?

I know my answer to this question.  I don’t think stocks are going to recover any time soon.  I see this as the beginning of a recession.  Everyone can blame a virus all they want, but it won’t change the reality.  The bond market is sending a strong signal of a recession.  The stock market just finally caught up with the bond market a little this past week.

I have said that my theme for 2020 will be about the massive stock market bubble.  It is now a little less of a bubble than it was a week ago.

I have been reading some forums where, as typical, you get some people saying that stocks just went on sale.  In other words, this is an opportunity to buy lower than it was the previous week.

To be sure, I would rather buy now than have bought a week ago.  But it is crazy to think that now is a good time to buy stocks. We will see bouncing around and high volatility, so there is potential money to be made in day trading. But these people are not talking about day trading.

Stocks could easily go down 50% from here.  They could go down 70%.  We probably aren’t going to continue to see drops of over 10% on a weekly basis, but we could easily see massive drops over the course of several months. It is going to take a lot less time to take the air out of the bubble than it did to inflate the bubble.

I am sticking with the permanent portfolio as a core.  Even that did poorly this past week, but it certainly wasn’t as painful as being heavy in stocks.

Aside from the permanent portfolio, I think it is good to do what is almost always wise in a recession where there is little concern for imminent price inflation.  It is best to save in cash and bonds.  It is best to pay down debt if that is possible.

This is not the end of the fall in stocks.  I think the coronavirus is only one piece of the puzzle.  That was a trigger event, but I don’t think it is the main event.  The bond market is telling us this is a recession.