Business
When the Market Crashes, There is Only One Place to Hide
Here’s the short, simple reality to understand: in powerful down markets, every asset class gets clobbered.
“This is Wall Street, Dr. Burry. If you offer us free money, we are going to take it.”
-Smug, Know-Nothing Goldman Sachs Chicky in The Big Short
My firm didn’t operate too differently from the above statement, frankly. but there was that one time we said no…
Trending on PolitiCrossing.com: The Subtleties of Religious Discrimination
In 2007 or 2008 – I don’t recall exactly – a mutual fund client asked us to create a defensive portfolio they could launch as a new product.
Sounds simple enough, right? Except, they weren’t looking for a portfolio loaded with utilities, healthcare and consumer staples.
What they wanted was a portfolio of stocks that would rise when the market was falling (it already was falling, but Wall Street is just as good at closing the barn door after the animals have left as are elected officials).
I suspected this would be tough to create. Once we ran our studies, indeed we realized this was an impossible request and for the first time ever, we declined the portfolio request.
Here’s the short, simple reality to understand: in powerful down markets, every asset class gets clobbered. *
Put in a more fancy-pants sounding, Wall Streety way: during crashes, correlation skyrockets. In this case, it was effectively impossible to create a portfolio of stocks that would rise in a crashing market; all stocks crater in that environment.
Correlation is measured on a scale of -1 to 1. A reading of 1 defines perfect correlation, -1 is perfect inverse correlation and 0 means no correlation at all.
A reading of 1 is easy to understand but think of the others this way. The correlation of wearing surgical masks and the spread of covid almost certainly resides near zero. Jen Psaki’s relationship with the truth? Probably a -.9 or so.
As an aside, both high and low correlations have value. For instance, we had a good friend in college who we came to realize had a sense of direction that had to be very close to a full negative 1. If he were in the car and thought we should turn left, the rest of us knew with total certainty to go right.
With correlation, readings at or near 1 and -.1 are rare in anything that actually requires study, so measurements above .4 already start to imply strong correlation.
When we looked at the historical track record we found that in severe downturns, all asset classes fell with the market at correlations above .5. It was eerie.
What about foreign stocks? Um, no… that’s actually a double whammy of bad news. Not only do their markets get hammered at least as hard as ours, currency declines magnify those losses. We can all appropriately hate what our leaders are doing to destroy the U.S. Dollar, but in a world of fiat currencies it is ours the world runs to as the safe haven. Most foreign currencies decline in value as a result.
Cryptos? Who the hell knows, but why would they be spared if gold isn’t?
Wait, what about gold? Yeah, it will probably act like a safe haven in a down market but in this case that probably means it will just decline less than stocks overall. For instance, while the Dow literally got cut in half from October, 2007 to February, 2009, gold’s peak-to-trough decline in 2008 was fully 25%.
By being down “only” 25%, did gold perform better than the market? Yes, but correlation of the direction of the movement skyrocketed even in this safe-haven asset class.
Quick disclaimer: I currently own gold and silver and will be holding these positions. But I hold them in the proper size and I am also expecting them to initially decline when the market really tanks.
Important note: if you’re holding gold and silver mining companies – which, after all, are just stocks – you can expect them to get hammered just as hard as all the stocks around them. The relative outperformance of bullion itself won’t save them; again, just go look at 2008.
Okay, so what the heck should someone do right now?
Well, I don’t like giving “right now” investment advice so I’ll say what I have been saying all year to close friends and family: if you’re fully invested, raise at least some cash in your portfolio. I’ve been advising a minimum of 20% but that figure will vary depending on your personality.
As I’ve been telling them, think of it this way: if I’m wrong and the market keeps ramping higher on the back of all this stimulus – and that indeed is the only reason the market has continued its 2021 surge, btw – and you’re still 80% invested, you’ll still be making a lot of money and you’ll feel okay about it. Sure, you’ll mutter that I was early with this advice – I have been all year and still could be depending on central bank responses to this decline – but you won’t resent me for the input.
If you stay fully invested, however, and the market tanks by 40%, you’ll feel ill. Having some cash on the sidelines provides for a rainy day, keeps something available with which to buy stocks near future lows and, most importantly, will do wonders for both your decision making and your psyche.
When people get stuck for cash – margin calls, mortgage payments, whatever the need may be – they make all sorts of bad decisions. They’ll sell whatever they have to and often, it’s psychologically easier to sell their “winners” along the way than it is the stocks that have been crushed the most. What many people end up with at bottoms is a portfolio full of the crappiest individual names.
‘Oh great,’ you may be thinking, ‘you’re telling us this on a day when the market is already down 500 points. Thanks a lot.’
True. Actually, I’ve had this post 80% drafted for the last 10 days or so, it just felt like that this might be the jarring market day in which readers would take it seriously. Let me explain by doing a little mind reset with you:
You may have a 401k that had risen, say, from $200k to $500k over the last three years (until 2 weeks ago). Awesome! But unsustainable.
After the market weakness of the last couple weeks, maybe its value has declined to $450k. If you’re the type that thinks my advice makes sense, but you don’t want to sell any stocks or mutual funds because they just fell from $500k, your mindset is all wrong. Sorry to be so blunt but it’s true.
Here’s what you actually have on your hands: a 401k that has risen from $200k to $450k over the last three years. Still awesome, also unsustainable.
If you think you’re the one genius who can nail market tops perfectly and you’re now certain that the market will soon regain its recent highs, re-read my last sentence and get your head on straight.
That said, at this moment I do have to admit that I don’t know if this is the start of the big correction. On the one hand, a few too many people for my taste are looking for that crash. On the other, how insanely optimistic did the market have to be that only now it is noticing the slow-moving Evergrande disaster in China that has been known for a year and plainly visible for nearly a month?
Regardless, the point is this: if this is the start of the big correction – or even a true bear market – then this is only the beginning.
We’re at such stratospheric valuation heights – the highest in history, generally – that the next big correction will take stocks down 30, 40 or even 50%.
So yes, it’s still okay to be raising at least some cash today. Even today.
Tighten up stop losses. Raise cash right now from zero to 5% if your end goal is 20%. Redirect future 401k deposits to the money market fund rather than the high-growth stock funds you’ve been riding.
In short: take action. Don’t be paralyzed and again keep in mind this simple reality: in powerful down markets, nothing gets spared. The only place to hide is in cash.
This post has me re-awakened. More soon…
FDG
*Historically, there has been one other place to hide in down markets: high grade, U.S. bonds. That will likely still turn out to be the case – indeed, bonds are rallying today – but what’s the point? The rates offered by today’s bonds are so meaningless as to be roughly equivalent with cash so my preference at this moment in time is for cash.
We'd love to hear your thoughts about this article. Please take a minute to share them in the comment section by clicking here. Or carry the conversation over on your favorite social network by clicking one of the share buttons below.
Join the conversation!
We have no tolerance for comments containing violence, racism, profanity, vulgarity, doxing, or discourteous behavior. Thank you for partnering with us to maintain fruitful conversation.
Business
This Three Pronged Plan to Overthrow America is Nearly Complete
And there are just two things that will stop it…
Want to leave a lasting impact on the world around you? Want your life to really count? Click here!
The left has long worked to overthrow America and all that it stands for. They have been working at it since early in the 1900’s and it took up more speed in the late 60’s and early 70’s with the rise of the radical left. PolitiCrossing founder Chris Widener explains the three-pronged attack and how it is almost complete, as well as the only things we can do to save ourselves and this country we love.
Trending on PolitiCrossing.com: The Subtleties of Religious Discrimination
Business
SAVE YOURSELF: Is This The Surefire Way to Protect Your Money in the Inevitable Financial Meltdown?
Decentralized finance (DeFi) has emerged as a revolutionary technology.
CAN DECENTRALIZED FINANCE BE THE WAY TO SAVE YOURSELF AND YOUR FAMILY FROM MELTDOWNS AND TYRANNY?
Decentralized finance (DeFi) is built on the blockchain, which offers a wide range of financial services without the need for intermediaries such as banks or other financial institutions. DeFi has emerged as a popular alternative to traditional finance, offering a more open, transparent, and decentralized financial system. In this article, we will explore why DeFi can protect you from a coming financial meltdown and from tyrannical governments.
Trending on PolitiCrossing.com: The Subtleties of Religious Discrimination
DeFi is built on the blockchain, which means that it is inherently decentralized. This means that there is no central authority controlling the system, and all transactions are verified and validated by a distributed network of nodes. This makes the system more resilient and less vulnerable to attack or manipulation. Unlike traditional financial systems, where central authorities have the power to manipulate the system, DeFi is designed to be transparent and immutable.
One of the main advantages of DeFi is that it offers greater financial freedom and control to users. DeFi allows users to access a wide range of financial services without the need for intermediaries. This means that users can transact directly with each other, without having to go through banks or other financial institutions. This gives users greater control over their finances and reduces the risks associated with centralized financial systems.
Another advantage of DeFi is that it is highly transparent. All transactions on the blockchain are public and can be verified by anyone. This means that there is no room for fraud or manipulation, as all transactions are visible to all participants in the network. This level of transparency is not possible in traditional financial systems, where transactions are often opaque and difficult to track.
DeFi also offers greater security to users. Transactions on the blockchain are secured using cryptography, making them virtually impossible to hack or manipulate. This means that users can trust the system, knowing that their funds are secure. Traditional financial systems, on the other hand, are often vulnerable to cyberattacks and fraud, which can result in significant financial losses.
Furthermore, DeFi is designed to be more inclusive and accessible to everyone. Unlike traditional financial systems, which often have high barriers to entry, DeFi is open to anyone with an internet connection. This means that people who are unbanked or underbanked can access financial services that were previously unavailable to them. This inclusivity is important because it helps to reduce financial inequality and promotes greater financial inclusion.
Finally, DeFi is more resilient than traditional financial systems. DeFi is built on a decentralized network of nodes, which means that there is no single point of failure. This makes the system more resilient to attacks and more resistant to financial meltdowns. In traditional financial systems, a single point of failure can have catastrophic consequences, as we saw in the 2008 financial crisis.
DeFi is a new and exciting financial system that offers a wide range of benefits over traditional finance. It is transparent, secure, accessible, and resilient, making it an attractive option for people who are looking to protect themselves from a coming financial meltdown. While DeFi is still in its early stages, it has the potential to transform the world of finance, offering a more open, transparent, and decentralized financial system for everyone.
SEVEN BENEFITS OF DECENTRALIZED FINANCE
Decentralized finance (DeFi) has emerged as a revolutionary technology that enables individuals to conduct financial transactions without the need for intermediaries such as banks or financial institutions. DeFi uses blockchain technology, which provides a transparent and secure way of conducting financial transactions. In this article, we will discuss the benefits of decentralized finance, along with a brief overview of crypto and blockchain.
Overview of Crypto and Blockchain
Crypto refers to digital currencies that use cryptography to secure financial transactions and control the creation of new units. Bitcoin, which was created in 2009, is the most well-known cryptocurrency. It is based on blockchain technology, which is a decentralized ledger that records transactions in a transparent and secure manner. Blockchain technology provides a secure and tamper-proof way of recording transactions, making it ideal for use in financial transactions.
Benefits of Decentralized Finance
Lower Transaction Costs
Decentralized finance provides a cost-effective way of conducting financial transactions. Traditional financial systems are often plagued by high transaction costs, which are passed on to customers. DeFi eliminates the need for intermediaries, which means that transaction costs are significantly lower. This makes it easier for individuals to access financial services and reduces the barriers to entry for new players in the market.
Greater Accessibility
DeFi provides greater accessibility to financial services, particularly for individuals who are unbanked or underbanked. In many parts of the world, people do not have access to traditional banking services due to various factors such as lack of documentation, poor credit history, or living in remote areas. DeFi provides a way for these individuals to access financial services using only a smartphone and an internet connection. This has the potential to increase financial inclusion and reduce poverty.
Increased Transparency
One of the main benefits of blockchain technology is its transparency. Transactions recorded on the blockchain are publicly visible, making it easier to trace the flow of funds. This provides a level of transparency that is not possible with traditional financial systems. Decentralized finance leverages this transparency to provide greater accountability and reduce the risk of fraud. This makes DeFi a more secure and trustworthy way of conducting financial transactions.
Robert Kiyosaki on the Coming Financial Tsunami
Register for Robert’s FREE webinar by clicking HERE.
More Control Over Personal Data
Traditional financial systems often require individuals to provide personal data such as name, address, and social security number. This data is stored by banks and financial institutions, making it vulnerable to hacks and breaches. DeFi provides individuals with more control over their personal data by using self-sovereign identity solutions. These solutions enable individuals to control their own data and share it only with the parties they trust.
Greater Flexibility
Decentralized finance provides greater flexibility in terms of financial products and services. Traditional financial systems are often rigid, with limited options for customers. DeFi provides a range of financial products and services, including loans, savings accounts, insurance, and investment products. This gives individuals greater flexibility to choose the financial products and services that meet their specific needs.
Faster Settlement Times
Blockchain technology enables faster settlement times for financial transactions. Traditional financial systems often require several intermediaries to process transactions, which can take several days. With DeFi, transactions are processed directly on the blockchain, which means that settlement times can be as fast as a few seconds. This provides greater convenience for customers and reduces the risk of errors and delays.
Reduced Counterparty Risk
Traditional financial systems often involve counterparty risk, which is the risk that one party will fail to fulfill its obligations in a financial transaction. DeFi eliminates counterparty risk by using smart contracts, which are self-executing contracts that automatically execute when certain conditions are met. This provides greater security and reduces the risk of fraud and default.
Conclusion
Decentralized finance is a revolutionary technology that has the potential to transform the financial industry. By eliminating intermediaries, increasing accessibility, increasing transparency, providing more control over personal data, offering greater flexibility, enabling faster settlement times, and reducing counterparty risk, DeFi provides numerous benefits that traditional financial systems cannot match. As DeFi continues to evolve, it has the potential to create a more equitable and inclusive financial system that benefits individuals and communities around the world.
The information provided in this article is for educational purposes only and should not be construed as financial or investment advice. Investing in decentralized finance (DeFi) and cryptocurrencies involves risk and may result in significant financial losses. Readers are advised to conduct their own research and seek the advice of a financial professional before investing in DeFi or cryptocurrencies. The author and publisher of this article are not responsible for any losses incurred as a result of investing in DeFi or cryptocurrencies.
BLM’s Financial Footing is on the Ropes
Allen v. Farrow and the American Quest For Truth
Lest We Forget
Treachery Plagues Our Nation: Democrat Election Tampering is Rampant
How Hating White People Became the New National Sport
The Pickle DeSantis Finds Himself In
Mainstream Media: Intentionally and Diabolically Unfair and Unbalanced
-
News2 weeks agoPick One: Why the Right Must Bankrupt at Least One Liberal Corporation
-
News2 weeks agoSix Keys to Praying for America
-
Elections2 weeks agoDemocrats Once Made Sense Occasionally
-
News1 week agoThe Pickle DeSantis Finds Himself In
-
News2 weeks agoMainstream Media: Intentionally and Diabolically Unfair and Unbalanced
-
Politics1 week agoHow Hating White People Became the New National Sport
-
Elections7 days agoTreachery Plagues Our Nation: Democrat Election Tampering is Rampant
-
Military7 days agoLest We Forget
