Conditions Are Ripe for a Deep Bear Market Right Now
People who think “this time it’s different” are screwed.
Has there ever been more fear in the economy?
There’s fear in the market, the streets, the headlines — absolutely everywhere. And everyone’s pessimistic about investing from young to old, poor to rich, retail to institutions. It’s demoralization on all fronts.
Yesterday I even saw a kid run out of a store while waving a bag of candy at his friends yelling “INFLATION, INFLATION, INFLATION” because the bag costs more than usual.
This is it, isn’t it? We’re all doomed.
Nah. More fake news. Investors, like all human beings, are prisoners of the moment. And the market always looks darkest at the bottom.
That said, according to the Wall Street Journal we’re due for a deep bear market, so let’s talk about what that means for you and your portfolio.
How Bad is it Gonna Get?
First, some definitions —
A bear market is defined as a decrease of 20% or more from the recent high in stock prices. And a recession is defined as two consecutive quarters of negative economic growth, as measured by gross domestic product.
Bear markets rarely take place outside of an economic recession, and in the post-World War II era, only two bear markets have occurred outside a recession.
This is where we’re at today, sadly. But the buck doesn’t stop here. The WSJ says that “conditions are ripe for a deep bear market.”
What does that mean?
Well, everything performs poorly in a recession. Stocks, crypto, commodities— you name it. But as we push further into recession there will be three key indicators to follow:
- Inflation-Hedge Assets Will Fail: In periods of high inflation, as we’re experiencing now, nothing can save you. Not gold nor Bitcoin. These assets are hedges against the debasement of fiat currency, not inflation. During periods of high inflation, nothing can protect you because people are prioritizing bills, food, and survival. Assets, even “inflation hedges,” fall in price causing more panic. (I wrote about this ad nauseam on Substack)
- The Yield Curve Will Invert: The yield curve is a graphical representation of the difference between short-term and long-term interest rates. An inverted yield curve signals that global bond investors see more risk in the present than in the future. Currently, the yield curve is flirting with inverting indicating more horror ahead.
- The Fed Will Step in: This is the most important point. The market will officially hit bottom when the Federal Reserve steps in to cut rates and stimulate the economy. History proves it, here’s why.
Pay Attention to the Fed and You’ll Win
I wrote about this last week, but it’s worth repeating. The Federal Reserve is the most important market driver, and you need to pay attention to what they’re doing and saying:
- During the 2008 recession we were by quantitative easing. This is when the Fed prints more money, gives out stimmy checks, and buys assets.
- In 2018 — when investors believed the Fed had abandoned the markets as many are similarly thinking now — the Fed announced they’d stop increasing rates and equities went green again.
- The most recent memory of Fed intervention was in 2020 when they switched the money printer on overdrive and went to work.
Federal quantitative easing (i.e. stimulating an economy) is a tight needle to thread. Too much debt forgiveness and stimmy packages result in inflation; too little and the economy crashes. Everything ebbs and flows.
But the key takeaway is this: The Fed will save us, but only when things have gotten really bad.
We haven’t seen economists begging on Bloomberg or CNBC for the Fed to save them, so we’re not even close yet. Especially because food shortages are real, supply chains are broken, and superpowers like Russia, China and India do want to break up US dollar dominance.
But hang in there, the Fed’s got this.
(And to be clear, yes, a world without an authoritarian dictator-esque Federal Reserve would be great, but it won’t happen. So come back to reality)
What’s Next? (More Pain)
There is nothing to remotely suggest that the Fed will lower interest rates in the near future. It may happen at the end of 2022 or 2023, but we know it’ll happen someday.
For now, the Fed has to sit on its hands.
It turns out doubling the supply of money, low-interest loans for nearly a decade, zombie companies, skyrocketing fertilizer costs, the upcoming food shortage, the approaching record inflation, the skyrocketing fuel costs, the supply chain crisis and the next generation being filled with weak, lazy and entitled man-children has consequences on society and an economy.
Who knew?
Until the rates go back down, equities, crypto, gold, and eventually the energy market will keep crashing. In fact, surveys of sentiment show fund managers (surveyed by Bank of America), private investors, and financial newsletters are already at March 2020 levels of caution about stocks.
But if you want me to be perfectly honest with you, this recession is largely an EU problem and to a lesser extent a US issue. Food shortages and the oil crisis are hitting Europe most. Doomsday economists who believe this is the end of the world are being hyperbolic. It’s like the Mayan calendar all over again.
The markets aren’t broken beyond repair. Anyone who says this is overdramatic or too new to investing to understand history. The Fed absolutely cares about the stock market. Politicians absolutely care about the stock market. It will come back.
Until then, be safe, don’t lose all your money and keep an eye on the Fed.
Ever since I was a child it was my dream to become a financial advisor. Unfortunately, it never came true. Therefore I am not a financial advisor and you should do your own research and not just listen to random people on the internet. Nothing contained in this publication should be construed as investment advice.
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