The stock market is shaking. Big players like Tesla and Apple have seen a big dip this past week. The stock exchange is a rollercoaster. Like always, a lot of people are making predictions. ‘A big crash is coming!’, ‘The whole monetary system is collapsing!’, ‘Interest rates can’t get lower, what will happen next?’. All these panic headlines. I tried to find out what the buzz is about. Here is what I found.

The stock exchange is a rollercoaster. You’ll get hurt if you step out early.

Corona.

The world economy took a big hit because of the pandemic. A lot of stimuli have entered the economy. The money presses have been pressing new money like crazy to keep ahead of the economic disasters created by lockdowns. With the extra money pumped into the economy, a higher inflation arises. That is undesirable. The aim is to keep inflation under 2% annually.

Super debt cycle.

Some economists say we are ending a super debt cycle. Once every 50-75 years there is the end of a super debt cycle. This occurs when central banks keep the interest rates low. It is done to make it easy to take out loans and make it less desirable to save. It is artificial growth of the economy based on loans. Interest rates are historically low both on your savings account as on a mortgage and on government bonds. Stocks in general are going up without any sort of big crashes for a while.

Tight monetary policy is coming. Defying inflation with low interest rates is not working. What is happening then is the central banks will increase interest rates. The artificial growth will slow down. It will get harder to take on a loan and that will decrease spending. The interest rates on bonds and savings accounts will go up so saving and investing in bonds will become more interesting. Saving and investing in bonds is less risky than investing in the stock market. Therefore money will be taken out of the stock market and put into savings and bond. By decreasing the demand on stocks, the prices will go down.

When will saving become more interesting than investing?

What if you have 100 dollars. You can exchange them to a 50/50% change that it will become 0 or 1000 dollars. What do you do? Changes are you are going to say I will take my change and hope to make it 1000 dollars. Now do the same thing but with 500 dollars. There is a 50/50% change of it becoming 0 or 1000 dollars. What do you do? My best guess is that you will keep the 500. The guaranteed 500 is better than the 50/50 change of 1000. This is how investing in the stock market is. The return on investments was so low on savings and bonds that a lot of people took a shot on the stock market. The risk of losing your stakes is bigger, but the changes of a high return are also greater. The near zero interest rates and growing inflation you lose money if you keep it at your savings account. The upcoming higher interest rates will also create a higher interest rate on your savings. Expectations are that a large group of people will redeem their stocks and put them back on the savings account. The stock market will go down. I think this will only happen as the interest rates will be as high as 3-4%. The average return of investments on stocks is around 7-8%. Where do you think the tipping point will be?

Gold standard and cryptocurrency.

Then there is this point. Our complete monetary system is based on the dollar. The value of the dollar was directly linked to gold. Other currencies were linked to the dollar. In 1971 the dollar was detached from gold but it is still linked to the other currencies. Since a couple of years there is a new player on the market that’s winning terrain. Cryptocurrency. Nowadays it is possible to use your cryptocurrency as collateral for loans. You no longer have to go to the bank if you need money. You can also grant your cryptocurrency to someone who needs money on websites such as blockfi. Someone who needs money pays interest, you receive interest. If your crypto increases in value and you exchange it for dollars again, that also adds up. That way you can create a whole new monetary system in which government and banks are completely sidelined. No one can see into the future, so I am not going to say in advance whether this is the new monetary system. It is interesting though.

Buy the dip.

Conclusion

There are infinitely more factors that determine the economy. No one is able to predict this time and time again. Despite the uncertain times we find ourselves in and the crisis that will sooner or later come anyway, I will stick to my investment strategy. By always keeping savings and bonds in my portfolio, my portfolio remains slightly more stable than the volatile stock market. Because of my share in investments, my portfolio grows faster than inflation. The risk is that I will get (much) less return for a while during the inevitable coming crisis. Research has shown time and again that if you have a widespread portfolio, it is better to stay invested than try to time the market. The chance that you will achieve more returns is almost 100%. Time in the market beats the timing of the market, Warren Buffet said.

Would you adapt your strategy to a crisis?

Till next time,

Elske

I am not a Financial advisor nor am I YOUR financial advisor. I am not a trained financial professional. This blog is for entertainment purposes only.