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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

Common ‘Wisdom’ that Just Ain’t So

Much of what we read, think, and repeat is not accurate, at all…

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Much of what we read, think, and repeat is not exactly so. For example have you encountered the phrase, “Those who give up liberty for security deserve neither”? Often incorrectly attributed to Benjamin Franklin, the phrase is nonsensical. With no national security, soon enough you’ll have no liberty.

With complete security, you’ll have no liberty as well. A trade-off is always needed. For the record, Benjamin Franklin actually said, “Those who would give up essential liberty, to pursue a little temporary safety, deserve neither liberty nor safety.” That makes more sense.

‘A penny saved is a penny earned’? Once again, Ben Franklin is in the mix. A penny saved is not a penny earned. A penny earned is a penny earned and even then it might not be a full penny depending on taxes, inflation, and other hidden costs and expenses. If you save your money in a long-term CD, you can’t have access to it months. If funds are tied up when you need them that is not a pretty penny.

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Not Actually

Consider the phrase, “Experience is the best teacher.” Perhaps, this is so, but not as a given. Generally, an excellent teacher is the best teacher. Experience might teach us the wrong lessons or send us down another blind alley. If we don’t fully comprehend the meaning of our experiences,we’re as likely to make bad decisions in the future and have unfortunate experiences as a result.

Closely related is, ‘practice makes perfect.’ Practice does not make perfect. If your practices are off the mark, then you will continue to be imperfect and you might be reinforcing a bad habit. As they say in Tae Kwon Do, “Practice makes permanent.”

On my daughter’s softball team, a young girl named Whitney was regarded as the star pitcher. Yet during the pregame warm-ups, time after time, she could barely throw a strike. With luck, she averaged 20% strikes out of all her pitches thrown. Sure enough, when the game started, she was no better. Why would anybody expect the outcome to be different?

The best chance for you to excel is to have perfect practices. An array of imperfect practices leads failure.

Lemons and Life

‘When life gives you lemons, make lemonade.’ This sounds like good advice, but to actually make and sell lemonade, you’d also need to have clean water, a good lemon press, some type of sweetener, a paring knife, a pitcher, an implement for stirring, and cups. Such bromides leave out 90% of what else you’d need.

Periodically, I encounter authors and speakers who write or say ‘to live life more fully’ by pretending that “you have six months to live.” If you had six months to live you’d engage in behaviors different than now.

You might sell your house. You might go on world travel, or at least travel more than you’ve been doing. You might dissipate your assets. You might spend your money down to nothing, or give it all away. Then, when you undoubtedly live beyond six months, you’re likely to be penniless!

Thank You For Sharing (!)

‘Think outside the box.’ What does the “box” even mean? The phrase has been so overused that it is now rendered meaningless. Would it be better simply to say “expand your thinking,” or “brainstorm,” or “reach beyond the norm”?

‘There is no ‘I’ in team.’ Michael Jordan once remarked that while there is no “I” in team, there certainly is a “me.” Acronyms and creative word use might have their place in a corporate pep rally, otherwise let them be.

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Business

Ten Ways to Overcome Information Overload

How do we narrow down thousands of journals, magazines, newsletters, emails and blog posts at our disposal?

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We are confronted by staggering amounts of new information every day; some of it valid, some of it contrived. Career professionals in particular can be easily overwhelmed by the wealth of information related to competitor data, new product and service launches, market changes, and industry trends and wind up with information anxiety.

Although we have access to a variety of information and communication tools, how do we narrow down tens of thousands of journals, magazines, newsletters, and blog posts at our disposal and manage information coming in? How do we flourish amidst thousands of printed pages, not to mention millions of pages on the web, and hundreds of emails, phone calls and text messages?

More Information, More Confusion

While we enjoy a growing capability to extract relevant information that supports our careers and our lives, most of what we encounter is of marginal value, at best, and often stands in the way of our goals and objectives.  We don’t have hours on end to contend with everything that competes for our attention; most days, it feels as if we don’t have sufficient time at all.

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Fortunately, we can employ 10 strategies in a manner that will be productive and even enjoyable and fight that information overload:

  • Contemplate in advance the kind of information you seek.
  • Identify the vital information carriers.
  • Streamline your intake capability.
  • Beware of information crutches.
  • Establish a distribution system.
  • Be thoughtful when sending information.
  • Design responses.
  • Do away with paper.
  • Constantly review and update.
  • Acknowledge the benefits of remaining organized.

Contemplate in Advance the Kind of Information You Seek 

Have a reasonable idea of the type of information you want and need to gather. Such information encompasses news about your industry or profession; notable product and service developments; significant regulations and new legislation; client, customer, or consumer-related information; special applications; intelligence on competitors; and emerging trends and prospects.

Identify the Vital Information Carriers 

Identify the small number of key information sources, including publications, websites, blogs, and hard news sources, that cover what’s occurring in the field. You’ll really only need three to four sources; you’d be surprised at the amount of coverage overlap you’ll see.

Streamline Your Intake Capacity 

Once you recognize the kind of information you require and a handful of the best sources, you need to establish a methodical way of receiving, synthesizing, and applying such information that will benefit you, your team, and your organization.

Staying attuned to your goals and objectives and focusing on the kind of information that supports your efforts gives you the best chance to accomplish what you want. You might consider reducing social networking, depending on your job. Your quest is to maintain a constant inflow of relevant information in as simple a manner as possible. Yes, on occasion you can give attention to peripheral issues. In general, however, focus on the information that will make a difference in your effectiveness.

Beware of Information Crutches 

Many people have a predisposition to collect and retain information that confirms what they already believe or know to be true. They don’t need to save such information; the practice is more like a reflex action. With the vast amounts of information on the Internet today and the power of search engines, it’s not necessary to hang on to much.

More vital is the ability to find what you need in a hurry, which often requires only a few keystrokes. Retaining piles and files of hard copy information is of diminishing value and can impede your effectiveness. Moreover, files and information that you retain for more than 18 months often can be deleted with no detrimental effects.

Establish a Distribution System 

As you rise in your career, don’t spend inordinate amounts of time gathering information. Much of what you seek can be identified, collected, and disseminated to you by junior staff. You can use them as information scouts and as a clipping service of sorts to pre-read for you.

Once freed from the constant task of identifying and assembling information, you’re better able to think conceptually in ways that will help to propel your team, division, or department forward. This is especially true when introducing a new product, service, or delivery system.

Be Thoughtful When Sending Information

Sometimes the staggering amounts of information is due to our lack of organizing guidelines. Such guidelines could otherwise spare us from unnecessary, excessive exposure to information that does not support our current challenges.

Learn to be more discriminating when exchanging information. Eliminate acronyms, abbreviations, and jargon that can lead to misunderstandings, and limit the length of your correspondence with others by including only what is necessary to know. Overwhelming our recipients with information is no more welcome to them than when they overwhelm us. We also must encourage one another to stop CCing and BCCing when it is not necessary, and avoid submitting “FYI” kinds of messages.

Design Responses

Throughout the workweek, you’ll receive many different types of requests. Many are routine, so you can automate your responses by using your email’s signature function. Most email software programs today support at least 20 different signatures. You can create and save signatures by category that enable you to respond promptly and effectively to customers and clients. The signatures that you’ve developed can also be personalized to address the particulars of a specific inquiry.

What kinds of signatures might you create in advance? Rosters, standard letters, product and service descriptions, price lists, team or organizational descriptions, credentials, etc. The more signatures you establish, the quicker and more productively you can answer questions from inquirers.

Do Away With Paper (When Practical) 

A variety of hard copy files and documents will need to be retained. Nevertheless, you can undertake a campaign to reduce the volume of paper you’re retaining, whether it’s in filing cabinets, desk drawers, or storage bins.

Evaluating each document you receive and consider whether it merits saving. Will a scanned version of said document suffice? If so, scan it and recycle the hard copy. Yes, scanning requires extra time and effort, but in the long run the payoff is more than worth it. When you effectively label each of the documents you’ve scanned, you enhance your ability to quickly locate them on your hard drive or online. Finding such e-documents is generally easier than finding the hard copy.

Constantly Review and Update 

Periodically review your documents. Is the information still relevant? Does it need to be combined with something else? Should it be reclassified? Your goal is to keep your holdings to a minimum.

Tackle only a handful of file folders at a time, so you don’t feel overwhelmed. Ask yourself, “What can be deleted? What should be merged? What can be extracted so that the few gems of wisdom crucial to my success can be applied as needed?” Think of this task with a project management hat on and take it step-by-step.

Acknowledge the Benefits of Remaining Organized 

Staying organized might make you anxious. Organizing is certainly not a glamorous task. Yet, in a world that overwhelms us with the volume of information and communication, becoming the master of your files, and maintaining them so they serve you, is more important than ever before. Information overload occurs when we let things pile up. The people who become adept at recognizing, gathering, retrieving, and applying the right information at the right time are valuable to their organizations and their teams.

The future belongs to ultra-productive people who understand the importance of information and communication management. Regardless of the obstacles they face, these adept information managers are capable of pointing their team or organization in the appropriate direction. Why? They have a well-developed ability to identify, assemble, and impart knowledge that they extract from information.

Ultimately they can draw upon their knowledge to lead with wisdom.

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