Card Image

The Next “Black Swan” Event…and How to Prepare for It

Posted by The Savvy Retiree on April 22, 2020 in Save Money

Talk about bad timing…

You and I approach retirement, or are already in retirement, having suffered three major financial crises in the last two decades. Retirement wealth we should have had…poof.

Frankly, it’s getting more than a bit annoying. You live your life frugally—or relatively so. You save for tomorrow so that you’re not a burden to your family and society, and so that you can support yourself in a lifestyle that lets you feel secure and comfortable…and then some black swan comes along to drop little black swan bombs into your punchbowl.

Thing is, I regularly think about black swans and where the next one might come from. And I see another one circling. I can’t say it will land. I can only say it exists, and that preparation means connecting dots to gauge what’s possible, likely, or probable so that if this next black swan does hit the ground, you limit the collateral damage in your financial life. 

As I’m sure you already know, Congress has begun sending between $1,200 and $2,400 to American families, and $500 per child in a one-off payment. And that’s great: At a moment of unprecedented employment shock, consumers need the financial support.

But what happens if this microbe we’re battling keeps the U.S. economy in lockdown for a while?

A one-off payment here in April will help with immediate bills. But what of May and beyond? The government can’t just flip a switch to quickly return the economy to pre-corona normalcy circa February 2020. 

Basically, what I’m asking is this: What happens if, out of economic necessity, a one-off payment turns into something resembling universal basic income, in which Uncle Sam sends, say, $1,000 per month to every adult and $500 to every child so that families have some way to survive? 

This isn’t a crazy hypothetical. Spain, a coronavirus hot spot like the U.S., is now moving toward this as a way to preserve the economy. It’s not hard to imagine a similar trajectory in the U.S., where the economy is expected to contract by 20% to 30% and where historic job loss is accelerating. 

I’ve been playing with some numbers in the last few days—population data, existing debt, etc. The math indicates that basic income checks mean Congress would be spending something in the neighborhood of $238 billion each month, or $2.85 trillion per year.

As a one-off payment, that’s adding about 1% to the U.S.’s current debt load of just under $24 trillion. Manageable in the grand scheme.

As ongoing payments, however, universal basic income means adding 12% a year to the federal debt. Worse, this additional debt would arrive even as the country’s economy shrinks. At a 25% decline, our current $21.4 trillion economy returns to 2011/12 levels in the $16 trillion range.

Debt, meanwhile, rises to almost $26.5 trillion. And, frankly, it will likely be higher because Congress will have to borrow even more heavily than normal to keep the lights on in the U.S. as tax payments collapse…and as lawmakers try to buoy small businesses, which are job-creation factories.

Just like that, the U.S. debt-to-gross domestic product (GDP) ratio explodes to 165% or more. At its worst, during the early days of World War II when we ramped up defense spending, debt topped out at less than 120% of GDP.

The U.S. will absolutely survive that shock. No question.

At what cost?

When the U.S. last faced a crisis of this magnitude—the Great Depression—FDR revalued gold, which backed every U.S. dollar in existence. In doing so, he immediately increased the value of a dollar and immediately decreased the value of debt…precisely the prescription the U.S. could once again need.

Will this happen? Who can say? 

But, again, the point of preparation is connecting dots to gauge what’s possible, likely, or probable before the answer is obvious to everyone. When I connect all these dots, I see another possible black swan: The government forced to revalue the dollar, which would destroy purchasing power.

I’m not predicting this happens. But I’m not predicting that it won’t. I’m only saying that a) I’m tired of the U.S.’s series of unfortunate crises; b) coronavirus has the potential to force Congress into a universal basic income scheme to keep American families solvent; and c) the necessary accumulation of debt combined with a rapidly shriveling economy has consequences somewhere.

What I’m saying is that I want to be prepared for those consequences, just in case they do materialize.

I’ve owned physical gold for a long time, and I routinely add to my stash by occasionally snapping up old gold coins. In recent weeks, as the coronavirus whipsawed gold prices, I’ve used the weakness to buy specific gold trusts in my retirement accounts—Aberdeen Standard Physical Gold Trust (symbol: SGOL) and Sprott Physical Gold Trust (PHYS).

The weakness that hit gold early on in the crisis wasn’t a function of gold demand. It was a function of the stock market. Without getting too deep into the weeds: Many investors had been borrowing money to buy stocks in the bull market. When the collapse arrived with such speed, they didn’t have the cash necessary to cover those loans, so they sold gold in a panic to raise the necessary cash.

The irony: At that exact same moment, demand for physical gold soared. Contacts I have in that industry were telling me they literally couldn’t keep small gold bars and coins in stock. That says way more about gold’s role in our world today (lifestyle insurance) than do gold prices on Wall Street that are impacted temporarily by money-repayment demands.

I don’t make recommendations because everyone has a different tolerance for risk, and, well, my job isn’t really about urging you to buy and sell specific investments. But my job is about making money, saving money, and living a richer life. And in this particular moment, owning gold is about all three of those.

We’ve seen this movie before. The actors are different. And the scenery has changed. But the storyline is identical. Now is the time to buy some lifestyle insurance, before everyone figures out the ending.

Written by Jeff D. Opdyke