Is The Biggest Crash In History Coming?
2022.05.13 13:22
Robert Kiyosaki recently tweeted,
Is Kiyosaki just being hyperbolic, or should investors prepare for the worst?
I can save you time, and future spam emails, by telling you that Kiyosaki will be correct.
Eventually.
However, the problem, as always, is
As discussed previously, going to cash too early can be as detrimental to your financial outcome as the crash itself.
SP500 Index 2009-Present
The email I received noted:
Let’s start with that last sentence.
The Biggest Crash In History Is Coming
As I stated, Kiyosaki is right. The biggest crash in world history is coming, and it will be due to the most powerful financial force in the financial markets – mean reversions. The chart below shows the deviation of the inflation-adjusted S&P 500 index from its exponential growth trend.
Note that the market reverted to or beyond its exponential growth trend in every case, without exception.
SP500 Real Events 1900-Present Trend
Importantly, this time is not different. There has always been some that elicited speculative interest. Over the last 500 years, there have been speculative bubbles involving everything from Tulip Bulbs to Railways, Real Estate to Technology, Emerging Markets to Automobiles, Commodities, and Bitcoin.
Historical Bubbles Lisiting
Jeremy Grantham posted the following chart of 40-years of price bubbles in the markets. During the inflation phase, each period got rationalized as
History Of Asset Bubbles 40-Years
Again, every financial bubble, regardless of the underlying drivers, had several things in common:
This time is likely no different.
Timing Is Everything
So, yes, a crash is coming.
However, the problem is the
A crash could come at any time, next month, next year, or another decade.
In the meantime, as noted, sitting in cash or some other asset that vastly underperforms either inflation or the market impedes the progress in achieving your financial goals.
Notably, crashes require an event that changes investor psychology from the to the As noted previouslythis is where the current lack of liquidity becomes extremely problematic.
Such is an important point. Every transaction in the market requires both a buyer and a seller, with the only differentiating factor being at what PRICE the transaction occurs. When the selling begins in earnest, buyers will vanish, and prices will fall lower. Such is why the correction in March 2020 was so swift. There were indeed people willing to buy from panicking sellers. They were just 35% lower than the previous peak.
What could cause such a shift in psychology?
No one knows. However, historically speaking, crashes have always resulted from just a few issues.
Almost every financial crisis in history boils down ultimately to one of those five factors and mainly a credit-related event. Importantly, the event is always unexpected. Such is what causes the rapid change in sentiment from to
Preparing For The Crash
As investors, we should never discount under the assumption some force, such as the Fed, has eliminated it.
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So, we know two things with certainty:
Fortunately, we can take certain actions to protect portfolios from a crash without sacrificing financial goals. However, such actions are not of cost.
As noted, there is a Adding any strategy to a portfolio to mitigate or diversify risk will create underperformance relative to an all-equity benchmark index.
However, as investors, our job is not to beat some random benchmark index but to make sure our investments meet just two goals:
Any objective that exceeds those two goals requires an undertaking of increased risk and ultimately increases losses.
Okay, I don’t actually have one.
However, you can certainly take some actions today to mitigate the risk of catastrophic losses tomorrow.
