(UPDATE: 13 March 2020 – The below article was written in August 2019 and anyone that took the information seriously would have been protected from the recent market crash. It is not too late though, the information below is even more relevant today.)
In this article, I am going to explain why I think that we are dangerously close to a recession, and a big drop in the stock market.
I am also going to show you 3 strategies that you can use to protect your life savings against such an event.
Even if the market does not fall off a cliff, you’ll still come out ahead with these strategies.
We are in the late stages of the longest bull market in history. Bull markets last on average 4.5 years. The current one has been going for just over 10 years, and it is showing serious signs of running out of gas.
Bill Bonner, one of the founders of Agora financial recently said something that resonated with me. Here’s what he said.. “The smart money leaves the party when it can still pass a breathalyzer test “
What is the smart money doing in this environment?
Let’s do some diggin..
Warren Buffet is sitting on a record cash pile, to the tune of $112 Billion, and it is currently growing by $100 million every day. Buffet, who is regarded by many as the smartest investor of all time, is not buying stocks.
He is sitting in cash!
In his annual letter to shareholders, he said that in the current environment, he cannot find any companies to buy at reasonable prices.
Jeff Bezos, the richest person in the world is selling. He recently sold over $3 Billion worth of Amazon shares.
An investment group called TIGER 21, with a combined fortune of $75 billion, had more cash than at any time since 2013.
Inside shareholders and the CEO of Beyond Meat recently sold 3 million shares in the company.
Nomura Asset Management recently said that a second market sell-off could be ‘Lehman-like’. Nomura is basing its view on data showing hedge funds fleeing the market and said more are set to exit when their algorithms are triggered by rising volatility.
What is going on here?
Billionaires are selling record amounts of stocks, Hedge funds are selling, The stock market just had it’s largest single day drop of 2019, Trade wars are raging, the yield curve inverted, Currencies are falling, Brexit is a mess, Emerging markets are struggling, Europe is in decline, China is slowing, Russia struggles to revive it’s economy and so forth.
I can go on and on but you get the point.
Look, it’s been a good run. The dow is up nearly 300% over the last decade.
Don’t you think that it would be smart to take some money off the table and protect your portfolio against the next recession?
Sure, maybe you can try to time the top of the market and add and extra 10% or so to your portfolio, but the odds are stacked against you.
Very few people ever get the timing exactly right.
Do you think the risk is worth it?
The smart money says no. They are jumping ship now, taking their profits and protecting their portfolios against the inevitable down turn.
Let me ask you this..
If the economy is so good, strongest ever, according to Mr Trump then why is the United States spending over $1 Trillion per year more than what it takes in?
The economy is supposedly booming, there is no major wars going on, things are great. Why the need for trillion dollar deficits? Why the need for rate cuts? Interest rates are supposed to go up during boom years.
What’s going to happen to the national debt during the next recession or major war?
The national debt on January 20, 2009 stood at $10.6 Trillion. As of today, the 13th of August 2019, the national debt is at $22.5 Trillion. That’s $68, 292 per citizen and $182,900 per tax payer in the US. According to USdebtclock.org
In only 10 years time, the national debt more than doubled.
It took the government 10 years to amass the same amount of debt as it took all of the previous administrations in the history of the US combined.
Sounds pretty bad right? It gets worse..
The unfunded liabilities of Social Security, Medicare, and Medicaid are often omitted from discussions about the large size of US public debt. Once these are taken into consideration, it becomes clear that the US government is already bankrupt.
Boston University economics professor, Laurence Kotlikoff, recently stated that the United States is currently sitting on 200 trillion dollars in unfunded liabilities, and when you add that number to the 22 trillion dollar debt, you get a grand total of 222 trillion dollars.
Do you think the US will ever be able to pay back that amount of debt when they are running trillion dollar deficits during boom times?
Of course they won’t.
US consumers are $13 Trillion in debt, corporate debt has doubled in the last 10 years, State and local governments are more than 3 trillion dollars in debt, Student loan debt stands at $1.6 Trillion.
Students are graduating with an average of over 30K in student loan debt. Because of the debt load, young people are holding off on buying homes, having kids and spending money into growing the economy.
Another thing to note is that interest rates are near historic lows.
Have a look at the chart below that shows the historic rate for the US 10 Year Treasury Bond. The 10 year US treasury bond is the most traded and most liquid bond in the world.
That is the rate at which Investors, governments, companies and so forth lend money to the US government.
As of today the rate is standing at 1.65%.
Historical Interest Rates For The US 10 Year Treasury Bond
What do you think is going to happen when the rate goes back to the normal range of around 6% and the US has to pay 3 times the amount of interest on the debt as now?
Well, the fed already tried to raise rates this year and the stock market had a fanny wobble. Even the president recently made history by publicly calling on the fed to keep cutting rates.
Let’s look at other parts of the world.
Japan, Sweden, Switzerland and Denmark all offer negative yields on their bonds. Negative interest rates mean that you’d have to pay the government to hold your money instead of the other way around.
You literally lose money by borrowing to those countries. You’d think that nobody would be so stupid as to borrow money to someone at a negative interest rate.
Well, you’d be wrong to think that way. The value of all negative yielding bonds are currently standing at $51 trillion. Roughly a quarter of all debt issued by governments around the world.
Experts agree that the financial market is now even more fragile than pre-2008. Do you think that the banks learned from their mistakes and took steps to better capitalize themselves?
Nope, they didn’t. Banks are even more leveraged today as they were back in 2007. The federal reserve printed trillions of dollars in QE money during the financial crisis. That money found it’s way into the stock market, sending it to all time highs.
Valuations are currently so high that legendary investor Warren Buffet cannot find any companies to buy at a reasonable price. That’s why he is sitting on a record cash pile.
Inverted Yield Curve
Yesterday, the spread between two and 10 year treasury yields fell below zero for the first time since 2007, causing the Dow to drop 800 points.
When the 10 Year Treasury bond yields less than the 2 Year bond it’s called an inverted yield curve and it has not happened since 2007.
For the past 50 years, each time the yield curve inverted, recession followed within 6 to 24 months. This time will be no different so it is probably a great idea to look at what the smart money is doing and follow them.
Let’s take a look at what the smart money is currently doing with their money and how you can protect your portfolio from the next inevitable recession.
1. Gold and Silver
Precious metals, and in particular gold has historically been the ultimate safe haven asset. Central banks cannot print more gold, people all over the world recognize gold as true money.
Gold has outperformed in all previous recessions as can be seen in this chart.
John Paulson, famous hedge fund owner who made a fortune shorting the sub prime crisis has over $4.6 billion invested in gold.
“I view gold as a currency, not a commodity. It’s importance as a currency will continue to increase as the major central banks around the world continue to print money.”
Thomas Kaplan, American billionaire business man has over $2 billion invested in gold.
“People view gold as emotional, but when they demythologize it, when they look at it for what it is and the opportunity it represents, they’re going to say, ‘We really should own some of that.’ The question will then change to ‘Where do we get the gold?’”
Paul Tudor Jones has a net worth of $3.3 billion.
“I have never been a gold bug, it is just an asset that, like everything else in life, has its time and place. And that time is now.”
Mikhail Prokhorov has over $6 billion invested in gold.
“We’re looking now at what the world financial system is going to do with all this money that was printed during the financial crisis, if there’s continued inflation, we’ll see a global trend for raw materials and gold is not an exception. I’m optimistic that the gold price will stay at the same price or higher.”
Central Banks are buying gold at the fastest rate since 1970.
Central banks around the world backed up the truck for gold in 2018, buying 651.5 tonnes versus 375 tonnes in 2017. That’s the largest net purchase of gold since 1967.
So far in 2019, first quarter gold sales came in at 145 tonnes.
Russia, Turkey and China are leading the charge as they plan to dedollarize their reserves. Central bank gold buying is undermining the dollar. It’s sending a signal to the US government, and the Federal Reserve, that the USD is no longer as important as it once was.
It’s no longer risk-free, and the US is no longer considered to be the most powerful nation in the world.
Gold prices broke to the upside this year and is now in a confirmed Bull market.
5 Year Gold Chart
Now is a great time to switch a portion of your portfolio over to gold. That’s what the smart money is doing.
One way to buy gold, in a easy tax friendly way is to open a Precious Metals IRA.
A precious metals IRA, also known as a Metals IRA, is essentially a self-directed IRA holding physical coins and bars. A Metals IRA can be opened with an accredited custodian that allows physical gold bullion investments.
When opening a precious metals IRA, once can either fund it by rolling over a previous retirement account (e.g. a SEP, 401k, 403b or others) or transferring funds from another retirement vehicle.
One can also write a check or transfer money from a bank account to fund their Metals IRA.
Converting part of your retirement savings to gold (and other precious metals) can reduce the volatility of your overall retirement portfolio.
Warren Buffet and other smart money investors are sitting on record amounts of cash.
Being in cash might not make you any money but you are also not risking losing half of your portfolio when the market crashes again.
By sitting in cash, you are protected on the downside and when the markets tank, you will have the cash available to jump on the many opportunities that presents itself during recessions.
Look at the 2008 mortgage crisis. If you had cash to invest in 2009 after the recession ended, you would have made money on pretty much everything you bought. Think real estate, stocks, fine art etc.
You can park some of your money in US government 10 year bonds and at least earn 1.6% safely.
The government is heavily in debt and in the long run they will probably have some sort of default, but I believe that won’t be any time soon. There is still a lot of can kicking down the road before that happens. Think more rounds of QE.
You can also park some cash into a money market fund that yields around 2.2%. Money market funds recently saw a huge influx from smart money investors who’s looking to park some of their money in cash, ready to buy bargains when they arise.
A money market fund is a kind of mutual fund that invests only in highly liquid instruments such as cash, cash equivalent securities, and high credit rating debt-based securities with a short-term, maturity—less than 13 months.
As a result, these funds offer high liquidity with a very low level of risk
Say what you will about Crypto currencies, but they are here to stay. Lots of people worldwide is starting to view crypto and in particular Bitcoin, the same way as they view gold.
In many ways, one can argue that Bitcoin is actually better than gold.
Let me explain.
Just like gold, Bitcoin is a store of value, it’s easily divisable, there’s no counterparty risk, Finite amount of 21 Million Bitcoins ( Central banks can’t print gold or Bitcoin)
Bitcoin is unhackable and the network has never been compromised. It has to do with the way that transactions gets recorded on the block chain.
People in Venezuela and Zimbabwe are buying Bitcoin in record numbers to protect their money from the spirraling inflation rate in those countries.
Bitcoin is a near perfect safe haven asset. You can literally buy a few Million dollars worth of Bitcoin today and take it with you anywhere in the world. If you need to send Bitcoin accross the world you can do so in around 5 minutes with super low fees.
Somebody recently sent $194 Million worth of Bitcoin for a fee of just 10 cents.
If you have to move that amount of money through the traditional banking system it will cost you tens of thousands of dollars. One million through a bank costs around $10k in fees, and it takes 3 or 4 business days to clear.
On top of that, if the amount is large, you might have to answer some questions about where the money comes from and why are you sending so much money overseas etc.
With Bitcoin nobody asks you any questions and you can move your money where you want for a low fee and nearly instant transaction speed.
What is not to like?
My prediction is that when the next Bear market hit, or when the debt crisis finally pops and the central banks start printing money again and devauluing the dollar, we will see a surge in demand for Bitcoin.
Putting a portion of your portfolio in Bitcoin now, will protect you when the markets crash and you will also be positioned for big gains when institutional investors and other big money players move to Bitcoin for safe haven protection.
You can buy Bitcoin through Coinbase.com and have it stored with them or in your own wallet.
If you would rather not deal with the technicalities of buying crypto yourself, consider adding it to your IRA.
There you have it.
Moving a portion of your portfolio into the above 3 vehicles should protect you from any major stock market crash or correction.
If the market does not crash or correct, you still stand a good chance of preserving your buying power and even gain some as Gold and Bitcoin remains in a firm bull market that should last a few years at least.
If you’d like to stick to stocks as well, download my free report below where I reveal 10 stocks with their charts, that did well during the last recession.
These stocks will probably do well during the next recession as well and they could save your portfolio.