What goes up must come down!
The next financial crisis is coming!
The S&P 500 just made a fresh new high, is it heading higher? or is it going for the next big collapse?!
When the economy is doing well, the stock prices are so high. We can't help but want to ask a question like this.
"When is the next big crisis?"
So we can avoid it.
Or better yet, profit from it.
I hate to tell you, but I can't predict the future.
If I can predict the market just for 1 year, I'll be the richest man on earth.
Since we can't predict the future of the market, how do we know when to prepare for it, and how to prepare for it?
Well, that's the essence of this article.
In order to be prepare for a market collapse, we must understand what it is.
Here we go!
What is a capitalistic market economy?
In a capitalistic economy, there is something called "Credit", or borrowed money.
Credit allows you to borrow money from the future you, so you can spend it on things you want to buy now.
With credit, everyone's buying power increases.
When everyone buys more thing, the economy grows faster.
When money circulates, everyone feels rich, and buy more things at the same time!
Time is good! the economy is expanding!
But we all know, what is borrowed must be returned...
When the creditor who lend money to you ask for the money back, you have to pay the debt!
When you have to pay for the debt you owe, normally what people do is...
They spend less...
When everybody started to spend less, the economy is slowing down...
Money goes back to the creditor, and spending power decreases, and...
Everyone feels poor...
The economy is in a recession...
The economy expands and contracts in a 5-8 years cycle, we call it the short term debt cycle.
Well, it sounds nice and all... but why do we need to know that?
How can you prepare for a crisis, when you don't understand exactly what it is?
A financial crisis such as the 2008 financial tsunami is the product of the "short term debt cycle."
We can look at the picture below for a better understanding of the debt cycle.
*Credit for this photo goes to www.wallstcheatsheet.com, I have no ownership of it*
So, here is the question...
When will the market reach its peak?
"When the house wife next door is giving you a stock tip, it is time to get out of the market!"
I once read that in a book somewhere, and find it quite interesting as an indicator...
For one simple reason...
Everyone you know is talking about stocks, the stock market is probably too overheated!
I once told a friend, there is no reliable indicator of the market peaking. However, if people around you are euphoric, watch out!
The short-term debt cycle is the cycle of borrowing, and repaying debt.
At the beginning of the debt cycle, money is easy to borrow, and interest rate is low.
Houses and stock market value is rising.
When the amount of debt we owe is very high, interest rate is high, stocks is really really high, and more credit is difficult to get, we have reached the peak of the debt cycle.
Okay, now we know what the economy is like, but how do we avoid a financial crisis?
If you are expecting the financial crisis, your best reaction is....
Turn your stock into cash... or turn it into Bond ETF!
First of all, let me explain the cash choice!
If you are expecting a crisis, holding on to cash is so important! Here is why!
With cash, you can purchase high quality stocks when it falls a lot during a financial crisis.
You can purchase real estate during the crisis!
In the 2020's Covid-19 crisis, if you have turned all your stocks into cash, and buy again at the March 2020 bottom.
By 2021 November, you would have doubled your money at least!
"Cash is king" would feel like an understatement in a time of crisis!
"What's better than cash is Bonds! or better yet, Bond ETF!"
Let me tell you why!
Bonds have the tendency to go up whenever the stock market goes down, due to risk aversion.
If you feel like the economy is overheating, or the stock market is overbought, you can switch to bonds.
If you don't know much about bonds, buy the bond ETF! EASY!
If you are wrong, big deal~ you are still collecting a 1.9% annual interest rate...
But, if you are right...
You would probably fatten your wallet significantly, and profit from a financial crisis where everyone is crying over their margin calls, and selling their houses to pay for a debt.
Here is the final kicker...
At the bottom of the financial crisis... we turn our bonds back into stocks, and when stocks recovers next year... we would fatten our pool size wallet even some more...
So, I'm just going to say this once!
In a crisis, run to the Bond ETF for shelter!
While you're in the shelter, why don't you make a few buck while the others are crying?
I'm not saying we should make fun of the people who loss money in the stock market, but we should feel safe when the market is in a decline.
Knowing that we have the tools to deal with a financial crisis.
That is, if we can actually predict it...