This Tuesday, Secretary of the Treasury Janet Yellen said in an interview that interest rates might have to rise a bit—not much—at some point in the future. This utterly mild and obvious statement instantly rattled stocks, bonds, gold, and other markets.
To be clear; there was no crash.
Nothing melted down or leapt in a big way.
The Secretary’s remarks were quickly walked back, but even before then, markets started reversing their initial, knee-jerk reactions.
I suspect that Yellen was doing Powell a favor, floating the notion as a trial balloon so they could see what the market reaction to even the tiniest hint of tightening might be. We’ll never know, of course, but officials like this always plan what they want to save very carefully in advance.
Whether this was deliberate or not, the market’s instant reaction provided very telling data; any talk about tapering will make the last tantrum look like a quiet sigh.
But there must be some tapering—and actual tightening—at some point. The Fed can’t just keep expanding its balance sheet forever. No government, not even the US government can print and spend without limit. “Everyone” knows this, at least at some level.
There are analysts on financial media calling for a healthy correction of 10% or so when the inevitable talk of tightening does come from the Fed.
I think it could be much worse than that.
I think we could finally see the other “COVID-19 shutdown shoe” drop, creating a bigger, badder, and meaner market crash on Wall Street than we saw in March of 2020.
Reasons why any substantial correction on Wall Street could easily turn into a major meltdown include:
- Officials may deny or downplay it, but investors of all stripes are well aware that the Fed and Congress are spiking the punch bowl. They know what it will mean when the bowl is taken away—and they are clearly watching for signs of that like hawks.
- Optimistic talking heads make persuasive-sounding arguments for why nosebleed valuations are not really so high, but I think almost everyone knows that record high valuations are more useful to those looking to “sell high” rather than those looking to “buy low.”
- The divergence between Main Street and Wall Street—the so-called “K-shaped recovery”—is not sustainable. Famous investors with very different views on many things all agree on this—and it’s a clear warning for Wall Street.
- A lot of people have made a lot of money—on paper. If Wall Street goes into reverse, it would be all too human for many of them to sell fast, looking to lock in gains before they melt away.
- The proposals for higher taxes are coming out of Washington even faster than the stimmy checks. As more and more of investors’ big wins cross the line from short term gains to long-term gains, I can see them seeking to exit their trades before capital gains taxes go up.
- If we count March 2020 as a temporary aberration, rather than the end of the previous bull, then the great run equities have had since the crash of 2008 is very, very long in the tooth.
My sense from monitoring financial media is that “everyone” is skittish. Investors are aware how fragile and artificial the high on Wall Street is. The most nervous ones—or those with the most to lose—will bolt at the first real sign of trouble. And then the avalanche should begin…
I’m not predicting this.
I’ve resisted doing so since this “second shoe-drop crash” failed to appear last year. It seems well-deserves, but the off-the-charts easy fiscal and monetary policies could keep the party going this year.
Maybe even next year.
I doubt that, but I’m sure that the longer the party lasts, the more wicked the hangover when it’s done.
Switching metaphors, what I’m saying now is that the market response to Yellen’s mild—intentional or accidental—words tells me that the market balloon is floating in a room full of pins.
As investors become aware that the party is ending, the rush for the doors is unlikely to be an orderly, healthy, 10% correction. It’s more likely to be a panicked stampede that leaves many crushed.
That would ultimately be very bullish for gold bugs like me—but we’d have to go through the crash with everyone else first.
What to Do if there’s Market Crash?
This remains one of the most frequent questions I get. I’ve answered before, but here’s my take:
- EVERYTHING will get whacked, even safe-haven assets. That’s because market crashes create liquidity crunches. Funds facing redemptions, investors facing margin calls, ordinary Joes losing their jobs, and more will force large numbers of people to liquidate anything they can sell to cover their obligations. We saw this sort of selling hit gold hard in 2008—and 2020—just when you’d think a safe-haven asset like gold should be soaring.
- Cash is king. During the crash, we’ll want to go to cash. Market crashes cause huge single-day drops, but they are never one-day events. Usually there are clear signs that something wicked this way comes. Better safe than sorry. If things start looking really shaky, I expect to liquidate any speculations I’m not absolutely sure will pull through—even the ones I’d have to take painful losses on.
- The rebound for gold and silver will be spectacular. As soon as the immediate liquidity crunch passed in 2008 and 2020, monetary metals soared. Gold reached new nominal all-time high highs after both crashes—and I still expect silver to this time around. This is good news for those of us with large cash allocations—or who raise cash by trimming portfolios. We can rotate into new speculations with terrific upside. Often, the best of the best go on sale with the rest. Such opportunities are the foundations on which fortunes are built.
- Don’t try to time the bottom. An absolute bottom is only visible in the rearview mirror. No one will be able to say with certainty when the bottom is in. I certainly don’t expect to nail it on the head. But I do expect it to be obvious when valuable assets are on sale for stupid-cheap prices. I’ve seen that before, and that’s when I expect to start buying again.
- Gold is not a speculation. I don’t buy gold because I think the price is going higher. I buy it because it’s gold. Depending on the nature of the crash, people might stop taking Bitcoin, checks, or even—if the crash results in hyperinflation—paper money. But no matter what happens, history says I will always be able to liquidate my gold to cover my needs. Gold is what I use for long-term savings and wealth protection.
These sobering reminders lead to an inescapable follow-on question:
If nothing escapes a market crash, why invest or speculate in anything now?
The answer is simply that we don’t know when the next major crash will be. It’s true that it could happen at the drop of a hat—it could start tomorrow. But it’s also true that it might not happen this year, or next, or even for many years.
The opportunity cost of sitting on a huge pile of cash, waiting for the next market crash is high.
Given that there were clear warning signs before the crash of 2008 (well, maybe not clear to the likes of Ben Bernanke, but clear enough to contrarians), I plan to make money speculating until it’s time to head for the exits. I understand that I’ll take some losses when the bloodbath starts. But I use my Upside Maximizer strategy to take profits as I go, so unless the next crash does start tomorrow, I should be able to make more money before then.
That’s my plan, anyway.
Readers of the Independent Speculator will be able to see exactly how I implement it, down to the day I act and the price I pay for every speculation I make.
But I’ll continue covering the markets free of charge here in the Speculator’s Digest, so all my readers will know when I think it’s time to get out of harm’s way.
Caveat emptor,
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