The Unfolding — Anatomy of the COVID-19 financial crisis

In 2020, I learned about the macro economist Raoul Pal through a number of podcasts, and his pessimistic view of the global macro situation resonated with me prior to the COVID-19 crisis. He believed a nearly perfect-storm of characteristics existed that pointed to the coming of a deep recession. And then COVID-19 happened.

To continue having access to his views, I subscribed to his Real Vision service, which he dubs, “The Netflix of Finance”. One of his latest videos, titled “The Unfolding”, lays out the ideas behind his belief that we are headed into the worst economic crisis of our lifetimes.

Although I don’t pretend to understand all of this completely, I’m wanted to try to summarize his thesis here, as much for myself as for the reader. I would, however, encourage readers, if they can afford it, to subscribe to Real Vision, as the content for those interested in finance is outstanding. (I felt The Unfolding alone was worth the subscription price.)

How we got here

COVID-19 hit the world at the worst possible time; at the tail end of a sequence of bad events:

  • In 2016, interest rates began to rise globally, which, as one would expect, caused economies to slow as we saw GDPs around the world begin to drop.
  • This would generally lead to a “normal” recession, but a second bad event happened at the same time: a trade war, which pushed world-trade into the negative, as seen by the dropping of the PMI (purchasing managers’s index), an index of the prevailing direction of economic trends in manufacturing and services sectors.
  • Less trade resulted in a stronger United States dollar, as USD were being removed from the global system. A strong dollar isn’t good for the world as a whole.
  • Lastly, we had an oil conflict, as Russia and Saudi Arabia began competitive production, which led to the collapse of oil prices. This severely impacts economies like the United States, which are heavily dependent on their energy industries.

Then we had the massive black swan, COVID-19, in which world economic out has ground to a halt. COVID-19 has created both demand and supply shocks. Demand, as in people are not consuming. Supply, as in companies aren’t producing anything.

Raoul anticipated three resulting phases:

  1. Liquidation
  2. The Bounce
  3. The Insolvency

Phase 1: Liquidation

Because of sudden panic and uncertainty, we saw the sale and liquidation of everything—stocks, bonds, gold, bitcoin, etc.—as people rushed to get into the temporary safety of cash.

Credit spreads widened, as everybody realized credit was going to get liquidated as well. This caused the financial system as a whole to freeze-up, at which point the Federal Reserve stepped in with a huge stimulus package.

However, this wasn’t really providing “stimulus”, but rather an attempt to simply getting the financial plumbing working again.

The stock market dropped by over 30%, which would be characteristic of a mild recession. Raoul feels there’s a strong possibility it will later drop by 80%, characteristic of a true depression.

Phase 2: The Bounce

Just like in 1929, we can expect and have seen an initial bounce. Over the past week, the stock market has risen more than 10%. In a six month period of 1929, the bounce of the Great Depression saw a 45% rise in the stock market.

Why? Because there is optimism in the face of the initial shock. New COVID-19 case numbers are stabilizing. Maybe we’ll find a therapeutic. Maybe we’ll get a vaccine. Maybe, maybe, maybe!

But the 1929 bounce was based on a false narrative, and this one likely is as well. Raoul believes things are far worse than the market is reflecting.

And this leads us into the final phase, the insolvency.

Phase 3: The Insolvency

Raoul believes we’re going to see the largest insolvency event in recorded history.

  • Global GDP growth will be negative, quarter after quarter.
  • The world has far too much debt. United States corporate debt between 1950 and 2019 has grown as a percent of GDP from 20% to 45%.
  • The United States government debt has grown to 110% of GDP, and will take massive additional amounts to try to stimulate the economy with new money. Central banks all around the world will try to stimulate.
  • The problem, however, is that the velocity of money will be zero. People have clearly changed their habits, until a COVID-19 vaccine is available. We can see this in sales data (50%+ drops) and traffic data from TomTom (down 80% in China on the weekends). I personally see this in myself; Even after this lockdown is over, I’m not going to expose myself to infection by going to restaurants, coffee shops, gyms and other group settings before a vaccine is available.
  • Perhaps one third of the $3T of BBB-grade United States corporate debt will be downgraded to junk rating, requiring their sale by credit-rating-constrained entities. But there won’t be any buyers, and so the market will freeze.
  • A pension crisis is being born, as the largest wave of people ever (the Baby Boomers) enter retirement, and they currently own (and will sell) a huge amount of stocks and bonds.

None of this can get resolved quickly, as “flattening the curve” means power cycling the economy over and over, country after country, as localized outbreaks occur, preventing the full economic re-synchronization.

US 10-year bond yields are dropping to zero. But then, the Consumer Product Index (CPI) will go negative (because nobody’s consuming). This means that real yields (the difference between CPI and the bond yields) will go up, and when real yields go up, you destroy the economy.

And this time, the Federal Reserve can not fix this. They have no room to continue dropping rates.

The growing strength of the US dollar will break the global financial system, as there is far too much global debt denominated in dollars, and not enough dollars to go around to pay this debt. All non-US currencies will drop, and some will collapse.

Corporations in South Korea, India, Brazil and elsewhere are desperate for dollars, and the banks will issue the limited supply to the best creditors. The worst will be left scrambling, and go insolvent.

The end result in a world of negative GDP, nobody with cash, everyone in debt—is insolvency. And full debt-deflation then happens when everybody becomes insolvent.

Raoul believes this is a generational shift, the “Fourth Turning” that Neil Howe talks about in his book. A massive, massive change in which the market crashes to depression levels, everybody goes bust, and which may end with the world having to abandon the dollar standard, as the US dollar skyrockets.

Protection

How to protect yourself? Raoul believes:

  • United States bonds should be OK in the short- to medium-term.
  • United States dollars should be OK for the short- to medium-term.
  • Gold and bitcoin should do very well in the medium- to long-term.

Readers of my book Money for Something who followed my own allocation, the Golden Butterfly—a slight tweak on the Harry Browne Permanent Portfolio—will fortunately already have a sizable allocation to long-term bonds, gold and cash, that will have held up well in the current crisis, and hopefully going forward.

You can’t beat the market

So much of the financial services industry’s value proposition resides on the premise that markets can be beaten. With the most talented managers, the best research and cutting edge processes and algorithms, the modern financial firm promises to get you ahead, in exchange for fees that would otherwise kill long-term returns.

Continue reading You can’t beat the market

Bank of America SafePass Card Bubbles

Summary — As a Bank of America customer who spends a lot of time outside the United States, I have struggled to confirm my transactions due to (a) defects in the Bank of America SafePass card, and (b) being unable to receive a Bank of America SMS on a foreign phone number. This article describes a solution for getting a US mobile number that’s compatible with Bank of America systems, and that can forward SMS messages to a foreign number. Although originally written in 2014, the solution still works today, in 2020.


The problem(s)

To authenticate certain transactions, Bank of America issue its customers a physical device called the SafePass Card. Unfortunately, it suffers from a design flaw that frequently renders it useless. This is a showstopper for any customer unable to use the secondary, US-only, SMS-based authentication mechanism. Bank of America customer support believe the problem—which has existed since 2012—is isolated. The 75+ frustrated commenters at the bottom of this blog article tell a very different story. (And that’s just the people who have Googled the problem, read this article, and taken the time to comment. There are surely many more!)

While the broader financial industry has implemented standard two-factor authentication, via apps like Google Authenticator and 1Password, Bank of America relies on a proprietary system known as SafePass to authenticate certain transactions. There are two options for accessing SafePass:

  1. Mobile phone — The bank can send authentication codes to mobile phones via SMS. This option is a non-starter for anyone traveling or residing outside the United States, on a foreign cellular provider. You’d think an obvious solution would be to use an SMS-capable Google Voice telephone number. But unfortunately, for reasons nobody can figure out (try Googling it), the SafePass system can not send SMS messages to Google Voice.
  2. SafePass card — The second option is a physical SafePass card which the bank can issue for a fee of $20. Pressing a button on the SafePass card generates and displays a one-time SafePass code.

I received my first SafePass card in 2009, and used it until its internal battery died in 2012. Since 2012, I’ve tried four times to replace that card—and all four replacements have arrived defective and unusable. The defect is the presence of bubbles or splotches in the liquid display the obscure the visibility of the codes.

Having received the fourth such defective card (in 2014!), my suspicion was that the card was incapable of surviving air transport when mailed to me abroad from the United States. But when I called the bank, the support representative said that just yesterday she’d spoken with another customer in the United States who’d received two defective cards in a row.

She promised to escalate the issue as a potential problem in manufacturing, but stated that, unfortunately, the bank would not follow up with me (or the other customer) as this would be considered an internal matter. The only thing I could do, she said, is order a fifth card, and hope for the best—which I’ve done.

If you’re a Bank of America customer affected by this problem, please add a comment at the bottom if you’ve also been affected. I suspect only as a group, we’ll have a chance of getting the bank’s attention.

My hope is that someone at Bank of America in a position of authority might stumble across this and consider any of the following solutions:

  1. Fix the design flaw in the existing SafePass cards.
  2. Follow the rest of the financial industry in switching to standard two-factor authentication, based on mobile apps like Google Authenticator and 1Password.
  3. Update your SMS authentication option to work with Google Voice numbers.
  4. Making SafePass an option, rather than requirement, for the bank’s online banking customers.
  5. Finally, implement a mechanism so that your customers who experience serious problems have recourse beyond front-line telephone support.

The solution

Three years after writing this article, a solution has been found:

  1. Create an account at telephony provider Anveo. (If you’d like to support this blog, you can enter my referral code 5253170 in the signup process.)
  2. Choose the “Free” subscription plan (screenshot)
  3. Add $15 from My Account → Add Funds. (Anveo is a pre-paid service.) You may have to wait a few hours for the payment to clear.
  4. Order a new Mobile phone number from Phone Numbers → Order a new number, choosing the United States. (Important: Anveo offers two number types, normal and mobile. Only the “mobile” works with Bank of America!)
  5. Setup forwarding of SMSs from your new number, to your local mobile device by going to Phone Numbers → Manage Phone Numbers → Edit → Forward to a phone.

Anveo is a telephony infrastructure provider, and as such providers an enormous number of features, including the ability to associate your new phone number to a “SIP Client” application running on your iPhone or Android device. I initially tried this, but couldn’t get it working given the large number of parameters that must be configured.

Mentioning this in the comments, Graeme pointed out that you can avoid all that complexity by just setting up SMSs on your new US phone number to be forwarded to your local phone number wherever you live. I set things up that way, and gave it a shot with Bank of America, and IT WORKS! Thanks Graeme!

How to forward SMS to email at Anveo

You can use Anveo’s “Forward SMS to URL” feature, to have your SMS messages sent to you by email. This is a little technical, and requires the ability to install a PHP script on a web server somewhere. Here’s how it’s done:

In the Anveo administration interface, go to:

Manage Numbers → Edit → SMS → Forward to URL

This is where you’ll enter the URL to your PHP script. That URL (of the GET, rather than POST structure) will contains tokens for the from and message arguments. Here’s mine (with the domain redacted):

http://mydomain.com/anveo.php?from=$[from]$&message=$[message]$

And here is the actual PHP script contents, with the to and from email addresses redacted in several places:

<?php

// This is Matt's secret script for sending email from a URL

// Initialize our KILL function

function died($error) {
        echo "We are very sorry, but something went wrong.";

        $error_message .= "The following were the errors:\n\n$error\n";
        $headers = 'From: [email protected]'."\r\n".
        'Reply-To: [email protected]'."\r\n" .
        'X-Mailer: PHP/' . phpversion();
        @mail('[email protected]', '[Anveo] Mailer Aborted', $error_message, $headers);  
        
        die();
}

// Initialize some variables

$email_to = "[email protected]mydomain.com"; // where you want sms forwarded
$email_from = "[email protected]"; // what the from address should be
$subject = "[Anveo] Incoming SMS from Anveo";

$email_exp = '/^[A-Za-z0-9._%-][email protected][A-Za-z0-9.-]+\.[A-Za-z]{2,4}$/';
$email_message = "";    

// Do some data validation...

if(!isset($_GET['from']) || !isset($_GET['message'])) {
        died('Either the from or the message was not present.');       
}

$body = $_GET['message'];   

// Check for good email syntax

if(!preg_match($email_exp,$email_to)) {
    died("The email address does not appear valid: $email_to");
}

// Make sure we have a body

if(strlen($body) < 2) {
    died("The email body does not appear valid:\n\n$body");
}

function clean_string($string) {
    $bad = array("content-type","bcc:","to:","cc:","href");
    return str_replace($bad,"",$string);
}

$email_message .= clean_string($body)."\n";

// create email headers

$headers = 'From: '.$email_from."\r\n".
'Reply-To: '.$email_from."\r\n" .
'X-Mailer: PHP/' . phpversion();

// Send that mail!

@mail($email_to, $subject, $email_message, $headers);  

echo "Form submission successful.";

?>