What a wild week it has been in the stock market, bond market, crypto market and housing market! There is so much going on it’s hard to keep track of it all. On a positive note, we’ve always had the same mantra… “Crisis is another word for opportunity”. So. Here’s a quick list of easy ways to profit from the current market disturbance. Some of it may not apply to you but feel free to remember it for a future downdraft.
Refinance Mortgage: Under the assumption that you already have a mortgage and decided to live in a particular home/apartment for the next 10-years… Refinancing makes a lot of sense. Notice a key item here, we assume that you’ve already purchased. You don’t want to purchase a home if you believe there is a downturn in the future. If you’ve already purchased a home (say 3-5 years ago), simply get a lower rate on your current loan balance and collect the difference.
While it is true that rates could go even lower, by getting it set up in the next few months or so, you should be able to lock-in a number that is significantly better than your current rate. In the case that rates really drop to zero in the USA, you can worry about that in about a quarter or so. For now, if you bought a few years ago the chances of a profitable refinance in a place you already own is an easy decision to make.
Emergency Cash: Many Americans live paycheck to paycheck. Since we’ve gone through a massive bull market and most people were chasing stock prices through the end of last year, it’s a great time to double check your cash/liquid positions. You’re probably spending a bit more time at home and you’re probably reducing your travel at this point in time. So take a few minutes and make sure you have enough emergency money to last you several quarters/months. At peak markets, it’s not unreasonable to have at least 6 months if not 12 months of run-way in cash.
To avoid redundant questions, yes… the normal number is 3 months and there is no real change. The point here is that a downturn like this is a good wake up call. If you feel uncomfortable in your current position (worried about job loss/income loss) you should re-balance your portfolio a bit by simply stacking up extra cash in the bank. This is common sense for anyone who is worried about losing their primary stream of income. The 3 month rule is used for a “mid-market” cycle.
Ready to Buy: Your average person will not be able to think on their feet. So if you take a look at the prior recommendation, this would put you in a great position to purchase assets on the cheap if things continue to go south. If we really enter into another recession it is smart to have cash piled up. You don’t want to sell your stocks/real estate purchases from 5 years ago since that defeats the purpose entirely. For all of our readers (or at least 90% of them), having a year of living expenses paid sitting in cash would certainly be enough to buy a high quality property if the debt bubble pops.
As you can see from the above, if you believe we’re at the peak or near it, this would create downside protection for you. In the worst case scenario you’re cash flow negative (business crumbles/career loss/job loss) and you’re living off a year of savings. In a positive scenario, you are a top performer or your business is stable and you end up buying something nice at rock bottom prices in a year or so. Keeping the math simple, if you already had 3 months of living expenses saved and you can garner a 50% savings rate, this would result in ~9 months of cash building. Not a bad sacrifice.
Investment “Theories”: We’ve already disclosed our view 15 months ago, only adding to cash and crypto while ignoring everything else. If you’re looking for the classic view of what to do it would be as follows: 1) cash, 2) gold, 3) TLT/bonds and 4) decreasing exposure to all high debt load stocks. Cash is self-explanatory since we already did this above! On the gold side, the gold “bugs” will be bullish at all times and the gold “haters” will be bearish at all times. The right time to buy it is when we’re going into a down turn as most of the returns are in this time frame. From a volatility and risk/return profile over decades, it returns a lower percent compared to stocks but has a lower volatility to it as well… Fits on the efficient market frontier (expected return vs. standard deviation). The third item, TLT, is a classic one that simply says you’re betting on bond yields going down. While yields are already low, it has been a solid investment from 2017 onward. And. To wrap it up, even if you believe in the high flying stocks (typically technology, biotech and emerging/new markets), they typically do much worse than the market as multiples come down across the board.
Notice, this is based on historical recommendations and no one really knows what will happen to the crypto currency market. It’s a strange one as we realize the paragraph contradicts what we’re saying (since crypto is a new/emerging market). Our bet, which may prove to be wrong, is that a fixed asset crypto like Bitcoin should act more like gold and less like a high flying tech stock trading at 40x+ earnings.
Lots of Disruption: One of the comments we made on our twitter account was that “people complain about the price of success being too high. Instead of just paying it as fast as they can.” This will become extremely clear if we do enter an official downturn over the next 12-18 months. Why? You’ll find that many people who agree with the comment above were really just over earning in a bull economy. They didn’t actually pay the price (they spent it all thinking they already made it).
If you live in a major city you’ll find that many people who appeared to be rich were really spending everything they had. This is way more common than you think. You’d believe that a somewhat senior person earning $300-500K would be saving tons… only to find out that their net worth is right around the same level ($300-500K)! It sounds preposterous but it is entirely true. The reason for this is that most people are incredibly unbalanced. So most people who earn a lot are either out of shape or have poor social skills (spending tons to appear to be higher status, an important “feeling” to them).
In short, if things get ugly, more and more people will lose a lot of money. This will then lead to a belief that the “price of success is too high” and you’ll see an increase in socialist type beliefs. The guys who were over-earning? They will find that they cannot replace their income and end up pushing into the same category (wealth re-distribution beliefs). Unsurprisingly, if you lived through the 2008-2009 crash you should be excited since you’re ready to buy when things get ugly. 2008-2009 allowed middle-upper middle class people to jump socioeconomically. It was probably one of the greatest opportunities in the last 50 years. We’ll go ahead and wager that you’ll get one more shot at it over the coming years.
How do you know when the disruption is near the bottom? Well the phrase blood on the streets is simply replaced with “no one physically on the streets”. When actual traffic drops off a cliff, the bars/clubs are incredibly empty and restaurants have no problem “filling you in at any time”… You’re at the bottom. While many people may be laughing at this simple metric you’ll make out like a bandit if you look for these signs.
More Important Matters: You’d think that there is more strategy involved. There isn’t. As with most massive things in life, the simple answers are usually the best. Dollar cost average into index funds instead of trying to bet it all on single stocks. Remain diversified across a broad number of holdings. Always have enough cash to avoid selling. Work extremely hard and you’ll see your life improve. Go and practice something (anything) for 60 hours a week and you’ll get better. So on and so forth.
The more important items are the intangibles. The key item here is social situations. Under no circumstances do you talk about investing or income during a downturn (the days of everyone asking you the annoying “what do you do” dies down since many won’t be working). You will have everyone asking you for jobs/yelling at you that nothing is going to recover (ever). So both conversations are not worth having.
In downtimes, you’ll get your new contact list without trying. The people who are surviving and doing well will not complain at all. This is a general framework for life. In the first 3-4 months of a downturn most people are “optimistic” as they are happy to get a break from the grind. The pain sets in about 6 months later when many realize they may be structurally unemployed. This is a terrible feeling and you don’t want those feelings negatively directed at you. So be sure to comb through your list of contacts as fast as possible.
Quick Summary: If you already have a mortgage and don’t plan on leaving it should be quite easy to reduce your costs. If you think we’re going to enter into a correction soon then you need closer to 12 months of cash versus 3 months so you can hold through the downturn. Standard investment theory has you buying gold/bonds/avoiding high multiple stocks… we’d add crypto to this (opinion and no history since it was created after the recession). Expect a ton of disruption if a debt bubble pops and be careful socially for a bit, the high quality people will naturally float to the top (seriously you won’t even need to look).
Ending on some good news (better news), you should be able to jump a socioeconomic class if you play a downturn correctly. A 20-35% drop in net worth for many people is more than enough to create a “gap” and you can move up within 3-5 years. Also. Since this corona virus stuff has gotten out of hand, we’ll be writing more here soon! No more travel is a great thing! Lots of video conferences instead.
