One of the most frequent questions I’ve had over the years is what would happen if there were a major market crash.
What should we do if there’s a 2008 or 1929 level of disaster?
I’m sure all investors have this question lurking at some level or another of their thinking, especially after 2008. But for speculators who know they’re taking higher levels of risk in search of greater gains, the question is pressing. Plus, contrarian thinkers are always looking ahead to the next market correction or crash when the herd of investment bulls is charging ahead.
In the current context of a record-breaking bull market that has famous investors and hedge fund managers sounding alarms, the question becomes urgent.
But first, let me say that I am not calling an imminent stock market crash. There’s enough visible strength in the global economy that it seems premature to me to say the next big waterfall event is around the corner.
That said, I do say that it’s possible, and that such a crash could take markets much lower and last far longer than the crash of 2008 did.
Why? Because I don’t think any government anywhere on earth actually solved any of the root problems that caused the crash of 2008. Profligate spending, insane levels of debt, unsustainable lending, and other unwise practices are all still with us. In many cases, they’re worse than ever. Plus, from negative interest rates to historic levels of money-printing, governments have taken all sorts of unprecedented actions whose secondary, unintended consequences have yet to play out.
It’s my sense that there are many fragile parts of the global economy that won’t take much pressure before they start coming apart.
What could be seen as the market taking a breather this month could turn into the major correction we all know must come sooner or later. And if that pushes important but fragile systems over the edge, the correction could turn into a rout of epic proportions.
Remember that when Lehman Brothers went down in 2008, it was said that the entire banking system came close to collapse. Checks would not have cleared, and the resulting financial chaos would have been devastating.
If I’m right about the underlying causes remaining unaddressed and perhaps stronger than ever, the crash of 2008 could turn out to be a warmup. Doug Casey’s famous prediction of a Greater Depression could yet come to pass.
Again, I’m not predicting this—just saying that it’s in the deck of cards the world is playing with.
This is why I like to say that we’re all speculators now—it’s just that some of us know it, while others still imagine they are cautious investors.
So, what will happen when markets around the world do crash? Well, aside from the obvious bad news across the board, there are some specific things experience has shown savvy speculators should keep in mind:
- 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—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. When things start looking really shaky, I expect to liquidate most of my speculations—even the ones I’d have to take painful losses on.
- The rebound will be spectacular. As soon as the immediate liquidity crunch passed in 2008, gold did soar. It ended the year up and went on to reach new highs for three years, leading up to an all-time nominal high just under $2,000 in 2011. The upside of liquidating investments when markets crash is that we’ll have cash to deploy near the bottom.
- Don’t try to time the bottom. Notice that I said “near 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 this year—but it’s also true that it might not happen for several, or even many, years.
The opportunity cost of sitting on a 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 like me), 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’ll be taking profits as I go, so unless it starts in the immediate future, I should be able to increase my wealth substantially before then.
Full disclosure: I was early last time.
I started trimming my portfolio in 2007, when I sold off the industrial mineral plays I had going. As I’d rather be early than late when trying to avoid major pain, I’m going to say that I’m likely to be early again next time.
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.
I’ll do my best to be your early warning radar.
