The evidence may point to a significant degree of parallelism between today and the conditions that caused the catastrophic crash of the Great Depression in 1929, and while trying to predict the exact timing of a recession is a challenging but also a relatively fool’s errand, taking steps to protect it’s a wise move.
Will the stock market crash like it did in 1929?
The Federal Reserve’s continuous interventions in the market until today are like extinguishing small fires, which aim to postpone a necessary correction. Allowing any “fixes” to occur occasionally acts as a relief valve, preventing a much larger, more catastrophic problem from occurring.
However, by continuing to suppress these swings in the markets, we are creating an environment where any future correction potentially becomes much more severe. “Tough times” are coming especially for retail investors. “Black swans” are unexpected economic disasters, such as wars or pandemics.
However, are there ways-strategies where small investors can protect their capital? An expected answer would be buzzwords such as: gold, government bonds and/or perhaps the Swiss franc.
But if risk mitigation isn’t cost-effective and doesn’t support higher returns in the long run, then it’s not worth it. Most of the classic safe haven strategies used by retail investors fall into this category. However, there are some strategies that differentiate this framework for the better.
- There may be a recession or a slide in the stock markets as we experience the biggest credit bubble in human history, but it may not be the end of the world for small shareholders.
- It may take time, but markets always recover, even when unexpected events, black swans, crash the economy.
- Retail investors should probably just listen to Berkshire Hathaway chairman Warren Buffett’s timeless advice: Focus on the… long term and don’t bet against the US.
Forecasts
The worrisome factors are the huge increase in US public and private debt. It is perhaps the biggest credit bubble in human history. The numbers prove this. Until today, the leverage – credit is of a terrifying size and is constantly being fed. More specifically:
- According to data from the New York Fed, total US household debt reached $17 trillion in the first quarter.
- According to a United Nations report, global public debt rose to an all-time high of $92 trillion last year, a 400 percent increase since 2000.
- According to data from the Federal Reserve, in the US, the ratio of total public debt to GDP reached 118% in the first quarter. In fact, public debt to GDP has been rising steadily for decades.
The rising interests on federal government debt:
- will ultimately limit fiscal spending,
- will slow economic growth and
- will force central banks to take interest rates lower than many now predict.
Net interest payments on the U.S. national debt are estimated to total $395.5 billion this fiscal year, or 6.8% of the entire 2023 federal budget.
Fitch downgraded the US economy from AAA to AA+.
Credit bubbles have to burst at some point. We don’t know when, but we know we have to. And as this credit bubble is about to burst, we should be worried.
Softening inflation and resilient corporate earnings, despite the Federal Reserve’s aggressive rate hikes, sent the S&P 500 up nearly 18% year-to-date. This rise and record valuations are a source of concern due to both public and private debt accumulation.
The Buffett Index compares the total value of US publicly traded stocks to the country’s economic output. (Buffett himself had called this index the best single measure of where valuations are at any given moment.)
The index suggests that if stocks were fairly valued, “we would have much lower write-downs right now,” but many investors are enamored by the near-term trend of weaker inflation and steady economic growth.
“Just listen to Buffett”
In general, predicting the future is a challenging but also relatively foolproof business. The stock market could crash, but that’s not guaranteed. John Maynard Keynes said that markets can remain irrational for longer than most expect, as investors often act like…maniacs because of some narrative: Today that narrative boils down to either artificial intelligence or blockchain.
“Risk-adjusted returns” (a measure of profit compared to the expected risk of a portfolio) which are paramount to net returns, cannot do much in their use by retail investors who are trying or will try to mitigate the risk in an economic way.
Modern finance is about maximizing what they call risk-adjusted returns.
Risk-adjusted returns are meant to distract from what really matters, which, of course, is wealth maximization over time. That’s the only thing that matters in the end. Modern portfolio theory tactics used to reduce risk succeed in reducing risk (mostly in the short term), but significantly reduce overall portfolio returns in the long term.
The only option is the gradual liquidation of their shareholders with a profit of course with the aim of increasing their savings. Only increased savings will see them through any recession. Most retail investors would be better off listening to Buffett and just buying an index fund that tracks the S&P 500. Using derivatives to reduce portfolio risk (hedging) will significantly reduce the retu
