The U.S. Government And American Families Have Been Swimming In Debt — And Will Soon Be Drowning

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.

Charts

Please click here for an annotated chart of the SPDR Dow Jones Industrial Average ETF DIA, -4.38%, which tracks the Dow Jones Industrial Average DJIA, -4.54%. For the sake of full transparency, this chart was previously published and no changes have been made.

Please click here for an annotated chart of long Treasury bond ETF TLT, +7.52%.

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.

• The second chart shows that bonds fell after Trump disclosed his trillion-dollar stimulus program.

• The answer to the intelligent investor’s question on limits is in plain sight in the second chart.

Better ideas

It would have been nice, before the coronavirus crisis hit, if the country were not so heavily indebted and engaged in trillion-dollar deficit spending, and if interest rates were much higher and the Fed’s balance sheet was much smaller. We are here and cannot go back. It is easy to criticize our leaders, but do you have better ideas?

What does it all mean?

The first chart shows my call on Jan. 25 that an external event such as the virus from China could hurt stocks. At that time, not many were paying attention to what was happening in China, and bulls had decided that the virus was of no consequence.

At the stock market peak, Arora portfolios were up to 57% protected. Now they are up to 86% protected.

In addition to the Dow Jones Industrial Average and S&P 500 Index (SPX) SPX, -4.33%, consider watching charts of mega-caps stocks Apple AAPL, -6.34% and Amazon AMZN, -1.85% ; two semiconductor stocks, Advanced Micro Devices AMD, -0.52% and Intel INTC, -0.23% ; two airline stocks, American Airlines AAL, +0.87% and Southwest LUV, +3.50% ; and two bank stocks, J.P. Morgan Chase JPM, -2.11% and Bank of America BAC, -7.21%.

Answers to your questions

Answers to your questions may be in my previous writings this year. You can access them here.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.

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