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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…

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

And Then There Were Three: A Look at the Three VP Finalists

Here are the pros and cons of each…

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**The Red Report: A Conservative Perspective on Potential VP Picks for Donald Trump in 2024**

Check out Chris Widener’s new video looking at the three VP finalists. A deeper look in print below the video!

As the 2024 election approaches, the political landscape is abuzz with speculation regarding who Donald Trump will choose as his running mate. Three names frequently mentioned are JD Vance, Doug Burgum, and Marco Rubio. Each of these potential vice-presidential candidates brings unique strengths and a conservative vision that aligns with Trump’s agenda. Let’s delve into the qualifications and appeal of each candidate from a conservative viewpoint.

**JD Vance: The Outsider with a Powerful Narrative**

JD Vance, author of the best-selling memoir “Hillbilly Elegy,” has emerged as a potent force in conservative politics. His life story, rising from poverty in Appalachia to becoming a successful venture capitalist, resonates deeply with many Americans who feel left behind by the political elite. Vance’s candidacy embodies the American Dream, making him an inspirational figure for a broad swath of the electorate.

Vance’s conservative credentials are robust. He is a staunch advocate for economic policies that prioritize American workers, a critical issue in the Trump agenda. His focus on revitalizing manufacturing and curbing the influence of globalist policies appeals directly to the heartland voters who were instrumental in Trump’s 2016 victory. Additionally, Vance’s critique of Big Tech aligns with the increasing conservative sentiment against Silicon Valley’s unchecked power and perceived biases.

In the Senate, Vance has proven to be a strong voice for conservative values, consistently advocating for pro-life policies, Second Amendment rights, and a strong national defense. His ability to articulate these positions with clarity and passion makes him a formidable candidate. Vance’s outsider status, combined with his eloquent advocacy for the working class, would complement Trump’s message and broaden his appeal.

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**Doug Burgum: The Businessman and Problem-Solver**

Doug Burgum, the Governor of North Dakota, is another compelling choice for Trump’s running mate. Burgum’s background as a successful businessman before entering politics mirrors Trump’s own journey, suggesting a natural synergy between the two. His experience in leading a state with a strong economy and low unemployment rates demonstrates his capability as an effective administrator and problem-solver.

Burgum’s governance style emphasizes fiscal responsibility, limited government, and economic growth—core tenets of conservative ideology. Under his leadership, North Dakota has seen significant advancements in technology and energy, particularly in oil production. Burgum’s expertise in energy policy would be invaluable in an administration committed to achieving energy independence and reducing reliance on foreign oil.

Moreover, Burgum’s pragmatic approach to governance, coupled with his ability to implement conservative policies effectively, showcases his potential to appeal to a broader electorate. His calm demeanor and focus on results over rhetoric could provide a stabilizing influence, balancing Trump’s more combative style. This blend of business acumen and political effectiveness makes Burgum a strong contender for the vice-presidential slot.

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**Marco Rubio: The Experienced Statesman**

Marco Rubio, the Senator from Florida, offers a wealth of experience and a deep understanding of both domestic and international issues. As a former presidential candidate and a prominent figure in the Senate, Rubio’s extensive political background would bring a seasoned perspective to the ticket.

Rubio’s conservative stance on key issues aligns closely with Trump’s platform. He is a vocal advocate for tax cuts, deregulation, and strengthening the military. His expertise in foreign policy, particularly in relation to Latin America and China, would be an asset in addressing complex global challenges. Rubio’s Cuban heritage and his consistent support for freedom and democracy resonate with many Hispanic voters, potentially broadening the Republican base.

Rubio’s communication skills and ability to articulate a clear, conservative vision make him an effective campaigner. His youthful energy and commitment to conservative principles would appeal to both the Republican base and independent voters. Moreover, Rubio’s legislative accomplishments and his work on bipartisan issues demonstrate his ability to navigate the complexities of Washington, D.C.

In conclusion, JD Vance, Doug Burgum, and Marco Rubio each bring distinct strengths as potential vice-presidential picks for Donald Trump in the 2024 election. Vance’s compelling personal story and advocacy for the working class, Burgum’s business background and effective governance, and Rubio’s extensive experience and foreign policy expertise each offer unique advantages. From a conservative perspective, any of these candidates would complement Trump’s vision and enhance his chances of securing a victory in 2024. The choice will ultimately reflect Trump’s strategic priorities and the direction he wishes to take his campaign and administration.

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Business

Bite-Sized Motivation

The insights or wisdom we need to get us going often don’t have to be more than a few words

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I’ve spoken to 1075 audiences at conventions, conferences, and meetings, and have had the opportunity to hear probably 800 other speakers as well.

The insights, perspectives, or wisdom we need, to get us going often don’t have to be more than a few words. Here are 52 of my own six word “speeches,” drawn from my keynotes and breakout session on the topic of work-life balance. Some of these likely will resonate with you:

Choose from what you already have.
Everyone needs breathing space, especially you.
Information overload obscures meaning and relevance.
Deep breathes are essential for well-being.

Make every day an organized day.
Allow your natural rhythms to rule.
Stay confident and in control daily.
Manage your time, manage your life.

Slow down to plot your course.
Look for the best in others.
Make yourself indispensable on the job.
Compete with yourself, not with others.

Learn to take control of today.
Manage your time to make time.
Take control of your desk clutter.
You’re the best when you’re fresh.

Do something to take control now.
Major projects often require a jumpstart.
Methodically pare down your paper piles.
Don’t attempt too much at once.

Evaluate your situation and what’s important.
Narrow your priorities to stay focused.
Avoid making promises you can’t keep.
Learn to embrace your many talents.

Take the time to become organized.
Become aware of how you react.
Arrange your space; help isn’t coming.
Manage the flat surfaces in life.

Periodically challenge yourself to perform better.
Take long, deep breaths as needed.
Reclaim your places, spaces, and graces.
Start big projects well in advance.

Don’t rush the truly important things.
Make the best use of today.
Schedule accordingly: plan for your future.
Be kind, cut yourself some slack.

Opportunity knocks, but are you answering?
Conventional wisdom has diminishing value.
When practical, substitute time for money.
The market for top talent lives.

The self-reliant survive and thrive.
Leadership requires forethought and super-vision.
Learn from and capitalize on mistakes.
Firmly face the future with confidence.

“Now” holds a lot of opportunity.
Control but don’t curb your enthusiasm.
Treading water won’t propel you forward.
Have you ever really tested yourself?

Life goes on; do your best.
Continually seek out the higher ground.
Luck is distributed evenly, but disguised.
You must be doing something right.

 


 

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