From Peter Reagan to Birch Gold Group
We’ve known since last week that Powell’s Fed pledged to keep raising interest rates to fight inflation.
This is a problem for the stock market. Stocks and corporate bonds have been supported for the past 14 years by near-zero interest rates and endless quantitative easing (QE). The entire financial market has adjusted to this “new normal” which supports otherwise unthinkable stock valuations combined with staggeringly high levels of corporate and sovereign debt.
If Powell’s plan works as it should, it will be the equivalent of pulling the rug out from under the financial markets. The markets will dive in without their easy lifelines of money (exactly the opposite of the “pivots” that Wall Street optimists were expecting last week).
Wall Street finally seems to be waking up to reality… As I write, US stock markets have hit their lowest point of the year (so far). The investment grade bond market has lost more than 12%. The traditionally conservative 60/40 stock/bond portfolio, recommended for decades as the gold standard for those of us saving for retirement, is having its worst year since 1936.
I don’t think the carnage is over, because if we look at where the smart money is going, we can see that hedge funds and institutional investors are preparing for a crash.
And by “crash” I don’t mean a bad day. Or a week off.
I’m referring to a repeat of September 2008, when the federal government took over the mortgage companies and Lehman Brothers failed and the wheels completely came off the global financial system.
Here’s a quick look at the smart money route.
Historical amount of crash protection purchased
Sometimes it’s a good idea to review what the big hedge funds and institutional investors are doing with their capital.
We call it “seeing the smart money.” (After all, yes billions of dollars are entering or exiting a specific industry or nation, there is a reason, and that reason is informed by countless certified market assistants with PhDs working for international banks and hedge funds.)
Like all investors, the smart money wants to do things:
- Earn more money
- Avoid losing money
Jim Rickards, who has enough connections in the investment world to qualify as an insider, recently received a tip from one of his sources:
A colleague informs me that institutional traders, not mom-and-pop retail investors, have it recently took out more than $8 billion in “crash protection.”
Oh by the way? “This is a record,” he says. The last time we saw an increase in crash protection was just before the collapse of Lehman Bros. in 2008.
The biggest investors, the smart money, are spend record amounts in a type of trade called “option put” that pay off when the market takes off downward with respect to bets in the opposite direction.
“Again, these guys are the ‘smart money,'” Rickards emphasizes. “They have to know something that the average investor doesn’t.”
While it’s entirely possible that they all know something that we don’t, I think it’s far more likely that they simply realize what many of us do. already known
Asset bubbles are bad enough, though super bubbles they are catastrophic
Most of the time (say, 85% or so), markets behave rationally. Assets are valued based on their fundamental value.
When assets are bid up to irrational levels, they usually go back down; this is what we think of as an asset bubble. About 10-12% of the time, financial markets are in an asset bubble or recovering from one.
Then there is the other times, perhaps only 3% of the total throughout history. Those other times when multiple sectors of the economy are all raised to astronomical valuations simultaneously.
We call this a superbubble. they are very strange i incredibly destructive.
This theory comes primarily from GMO co-founder Jeremy Grantham, and he’s certain that the U.S. is entering the “final act” of a historic superbubble right now:
Characteristics of the current superbubble an unprecedented mix of cross-asset overvaluation (with bonds, housing and stocks overpriced and now rapidly losing momentum), commodity shocks and Fed hawkishness. Each cycle is different and unique, but each historical parallel suggests that the worst is yet to come.
As I’ve written before, this kind of speculative frenzy has historically followed the same pattern. Grantham reaches a similar conclusion, again based on history:
in the US, the three near-perfect markets with crazy investor behavior and overvaluation of more than 2.5 sigma] have always been followed by huge market drops of 50%…
Here we are now, having experienced the first stage of the bubble burst and a substantial bear market rally, and we find that the fundamentals are much worse than expected.
So what is this “sigma” Grantham talking about?
It’s short for statistics. Given a standard distribution of data, we express how close a given value is to the “normal” range using the lowercase Greek letter sigma (σ).
Most of the time, things are normal. It’s when things are abnormal let prudent people notice. A sigma event of 2.5 or greater should occur about 2% of the time.
Now, it seems to me that “Grantham’s fundamentals are much worse than expected” is a perfectly plausible explanation for institutional investors to defend themselves with record levels of “accident protection”.
By comparison, Grantham says the United States is in the final act of an equally catastrophic event like the dot-com bubble of 2001, the Great Financial Crisis of 2008. i the collapse of 1929 that preceded the Great Depression.
Is it a good idea for everyday American families to do what the smart money does? Taking steps to protect your retirement savings from another massive financial collapse?
Personally, I believe in hoping for the best and planning for the worst.
Even Mom and Pop investors can take precautions
Grantham warns us:
Only a few market events in an investor’s career really matter, and among the most important of all are superbubbles.
When superbubbles burst, fortunes are lost. Companies go bankrupt, sometimes entire industries disappear. Unemployment increases. Financial security seems like a fairy tale…
Unless you’ve prepared ahead of time.
With both stocks and bonds continuing to collapse (and even home prices are starting to fall!), here at Birch Gold Group we’re helping hundreds of everyday Americans like you find safety and the stability they seek. Diversifying with historical stores of safe value like physical gold and silver is not a move that large institutional investors or hedge funds can take. They usually prefer exotic financial derivatives and paper-based investments that are easy to invest.
Tangible precious metals are not about making a quick buck! Rather, they are the opposite: not losing money quickly. Regardless of their timeless appeal throughout human history, physical precious metals are not for everyone.
You may be exhausted from watching stocks and bonds fall month after month. You might just want the peace of mind that comes with knowing that your hard-earned savings won’t be wiped out by a sovereign default, bank collapse, or unexpected announcement from the Federal Reserve. If this is the case, physical precious metals may be exactly what you need. If you would like to learn more, the Birch Gold team is here to help.
Why not put aside the next financial crisis? Seriously, who needs stress? Take the steps you need to ensure your financial security so you can focus on the things that really matter.