The Coming Crash is a four-part series examining the 2008 Financial Crisis as well as current economic conditions. I am not a licensed financial expert. I am not an economist. I’m just a guy trying to learn each day and share my thoughts with others. Consult your own financial adviser when deciding how to allocate your personal wealth.
“If you’re first out the door, that’s not called panicking.” – John Tuld, Margin Call
If the previous three parts of this series are sinking in, you might have a fairly obvious question remaining: where do we go from here? It’s very easy to bring attention to problems. The hard part is finding the right solution to those problems. As I explained in Part 2, one could make a very strong case that the “fix” to the 2008 Financial Crisis has actually just delayed the real solution from happening. What is that real solution? It surely isn’t doing the same thing over again. To be sure, many of the economic issues mentioned in this series are really just symptoms of the real tragedy: the currency.
The US Dollar. Fiat currency. This is the real problem.
The people are largely oblivious to this, but society needs currency backed by something more than faith. But a currency backed by a commodity hinders the ability of central banks to create more of it with a keyboard. When the coming crash happens, how will the Federal Reserve respond? Let’s explore 2 options:
Fed Option 1
Fiat currency goes away and we return to some form of a Gold Standard. Let’s call this the long-shot. It would be a striking admission that our monetary policy has failed and that the Federal Reserve is incapable of controlling outcomes the way the people in charge believe it can. In my opinion, this is absolutely the proper solution. Which is exactly why it won’t happen.
Fed Option 2
More Quantitative Easing. More bailouts. More inflation. Lather, rinse, repeat. This is the most likely outcome. In this scenario, the equity markets crash over the span of 12-18 months – maybe they even experience a 50 to 60 percent decline. But the market will find a bottom, and then the new bull run will begin when the Federal Reserve acts. Expect a Federal Funds rate back down to zero; or even negative. Expect more liquidity pumped into the system through QE or something similar. Expect taxpayer funded bailouts of zombie banks. And expect $10 Big Macs. Basically, expect a bad deal for the little guy.
The Wild Card Option
What if the rest of the world has had enough with the Dollar? It’s not out of the realm of possibility. Russia has been actively setting itself up for an economic existence removed from the Dollar. Not only has China been cutting holdings of US Treasuries, but the bigger tell is that they’ve set up an oil futures exchange contract priced in Yuan – this is not a small deal. Muammar Gaddafi once tried to price oil in Gold instead of Dollars – we know how that ended. NATO ended up in Libya and Gaddafi is dead. The point is, the Dollar is power. It’s at least possible that our adversaries are tired of it.
Regardless of what happens after the crash, what can we do to protect ourselves during? First, minimize your exposure to the market. I’ve moved a bit of my assets out of indexes and into cash. Aside from limiting your market risk, cash also gives you buying power when stocks inevitably become cheaper. Physical cash isn’t a bad idea either. You don’t need to worry as much about a run on your bank if you already have some cash for essential living expenses in your home. Second, if you like owning individual stocks, take defensive positions. Think about the sectors that could succeed in a harsh economic climate. Think about undervalued companies that pay a dividend. If you find identifying those types of opportunities challenging, follow my blog. I share my ideas there. This is an unpopular opinion with some, but allocating some of your funds into commodities is probably smart. I’m someone who believes precious metal should be in everyone’s portfolio, but you don’t need to limit yourself to just metal. Energy is something that should do well in an inflationary scenario. Lastly, and this is only if you know what you’re doing, you could short the market. I wouldn’t advise doing this unless you have serious experience managing your assets. But it is certainly an option if your goal isn’t to just survive the crash, but profit from it as well.
Could I be wrong? Absolutely. Just because there are a multitude of recession indicators currently rearing their heads, it does not mean the stock market will react the way it has in the past. I’m not naive enough to think the Federal Reserve getting creative and propping up markets even further is an impossibility. The question you have to ask yourself is, do you think the longest bull run in the history of Wall Street is going to continue forever?
I’ve asked myself that question and answered it; I don’t.
Disclaimer: Views and opinions expressed by Mike are not necessarily the views and opinions of CLNS Media. You can follow Mike on twitter @MikeFay34 and read his stock market technical analysis at faybomb.blogspot.com