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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.

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“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…

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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.

 

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Americans sense things are on the wrong track, and have been for quite some time. Among our many challenges, for example: It can no longer be denied that income inequality is skyrocketing. But it is not capitalism that is enriching the few while slowly impoverishing the many. It is America’s long, slow turn away from free markets -- and the vital medium of exchange that underpins them -- that’s doing us in. This pseudonym is a nod to a somewhat-fringey, indulgent personal suspicion I hold with a 1% probability of being accurate: Alan Greenspan never ceased being Ayn Rand’s “man in Washington.” What if the well-known central bank chairman put on the show politicians wanted from him for years, all while secretly trying to return this world to rationality? Instead of destroying copper like D’Anconia, however, Greenspan destroyed money. Without realizing it now, some of you know me but I write under this pen name for two reasons. First: Of all the potential tyrannies we face today, by far the greatest threat to America is the misunderstanding, and therefore the ongoing destruction, of the U.S. dollar. Second: I write with the hope my ideas will stand on their own, aside from any political party, even apart from my own considerable charm and personality. Love me for my ideas, not because I'm beautiful. Politics, markets, more ... the things on which I’m qualified to opine will be unveiled here over time.



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Business

Pandora Papers, a box of trouble for whom?

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Pandoras box seems to be a well-known metaphor in today’s culture. It is often used to represent unknowingly opening a box of wop-ass. The Greek origins are a little more complex.  Pandora was the first human woman, a gift from the gods. She was made from earth to be lovely as a goddess. With the gift of speech to tell lies, and the mind and nature of a treacherous dog. She was given a golden crown of animals and sea creatures. Pandora was blessed with grace, desire and caring to weaken her limbs.

Pandora was the first woman to live among mortal men, first bride and great misery. She was destined to live with men in times of plenty and to desert them in hard times.  Her name means both “she who gives all gifts” and “she who was given all gifts”. In the mythology she opened a jar that belonged to her husband that contained every misery that affects man to today, but managed to close it before hope was able to escape the jar.

Which brings us to the latest document leak from the International Consortium of investigative Journalists or ICIJ. This is the latest of leaks following the Panama papers and the Paradise papers. ICIJ claims this is the largest leak of tax haven information ever. The 11.9 million financial records include information on 330 politicians and high level leaders, including 35 country leaders. For two years over 600 journalists from 117 countries helped to follow up leads exposed by the leak.

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Top leaders with homes in Malibu, Monti Carlo, and high rise towers in Dubai. Investments in sugar plantations, polluting factories, and even a hospital. Secret companies and Trusts to hide assets from taxes and their people. ICIJ likes to point out that this money could have been used to help build roads, hospitals, and schools. They also imply the money comes from ill-gotten gains. Pointing out that hiding money is also used during drug smuggling, human trafficking, bribery, and international terrorism.

In an effort to seem like actual investigative journalists they do mention that nothing they were fed was illegal.  They failed to mention that the tax regulations in every one of the countries involved are written by the rich themselves. Mostly by those not uncovered by the Pandora Papers. Something the 600 seemed to have over looked during their two year investigation is any tax avoidance from the United States. Funny thing that.

To find out why you need to look at who the International Consortium of investigative Journalists is and who finances them. It turns out the group was founded in 1997, they claim to take no public funds only donations. Their largest donors happen to be Soros, thru the The Open Society Foundation. Now needless to say Soros is not going to admit what each one of these people did to stop his march towards one world government headed by Soros and company, but we can speculate.

Tony Blair, supported the American action in Afghanistan. King Abdullanh met with and supported Israel. Vladimir Putin would rather not have a one world government telling him how to run Russia. Shakira no stranger to wokeness had the gall to disagree with the Conovirus imprisonment and demanded children be let outside into the sun and air. You can bet that each one of the targets of this dump had somehow displeased those supporting the great reset.

Each one of these thought they had found a beautiful tax haven not knowing it was she who gives all gifts and conversely she who is given all gifts. By selectively revealing that it is worthwhile to spend money to hide income from those who did not earn it is telling. Besides highlighting that taxes are too high for the services provided. Telling that not one American is mentioned. Telling that the “journalists” didn’t discover how politicians in government get rich on civil service salaries. Not one mention of the heads of NGO’s (non-governmental agencies) have found that the poor are very very good for them. How about a peek into how many of the 1.5 million tax exempt organizations in America are just a tax dodge.

We will wait with the patience of Job for the International Consortium of investigative Journalists to do some real investigating.

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Business

The People Who Size You up Instantly

Beware of people who conveniently assess what you need, while missing the boat about their own needs

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I went to a social gathering and, arriving early, few others had arrived. So I took out my notepad and pen, and leisurely started making notes. A lady who saw me, asked what I was writing, which, of course, could be either a friendly way to start a conversation, or intrusive, depending on your point of view. I took it as the former, and shared with her my predisposition to take notes outside of my office where I generate ideas that don’t readily emerge at my desk.

Apparently my explanation was not satisfactory for her. In rapid succession she told me, ‘You need to get a drink. (Actually, I don’t drink.) You should to stop making notes. You ought to relax. (Making notes is relaxing to me.) You need to get a life.’

Paradoxically, I am the author of the books, Breathing Space and Simpler Living, and the audiobook, Get a Life. I also own the registered trademarks for the programs, Relaxing at High Speed and Managing the Pace With Grace. I have delivered 1,060 lectures on these topics for three decades.

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Quick and Wrong

It’s beyond strange when someone at a social gathering, in such short order, will assess what I need to do, with one pronouncement after another. When told that I needed to relax, I said, “If I was any more relaxed, I’d fall asleep.”

I came away from that experience recognizing that people who will readily tell you what you need are the ones who need what they’re telling you. You might have noticed a somewhat similar phenomenon in the workplace.

Suppose you work in a company that is crowded, noisy, and busy almost all the time. However, in your own office or cubicle, whichever the case might be, you’re able to maintain order.

Perhaps you have installed some sound barriers, if that is appropriate, and have crafted a workspace where you can get things done. People who walk by notice that your office equipment, resources, and possessions are organized. Guess what? Some office mates won’t tell you this, but they are uncomfortable with your organizing skills.

If they could find a simple way to articulate it, they would tell you, “Loosen up.” You don’t need to be so neat and orderly.” Why are they itching to tell you this? Because your level of organization makes them feel inadequate.

Be Like Me, I’ll Feel Better

Much like the lady at the social gathering, who told me ‘what I needed,’ some people in your immediate environment, in observing your capacity for taking charge of your space, and perhaps noting your higher-than-average level of productivity, would rather that you acted and proceeded in a different way. You might not hear that from them, but that is some might be thinking.

Beware of those people who so conveniently assess what you need, while completely missing the boat about their own needs. They fail to realize that what they’re telling you, is probably what they need to address for themselves.

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