My 1 year old is sick again, and with that, up at 2:30 and we all know I go crazy on coffee on some overnight writings. Get your cup of joe, and settle in.
I’ve been getting this question a lot. And the truth is, you should not be listening to me and then pulling 90% out of your stocks. Furthermore, you should not be listening to anyone on YouTube. Or Twitter. You should be calling up your financial advisor and be discussing what works for you and your spouse. What I have done is well….first do four years of an MBA, but on top of that I probably spent 500 hours researching all of this before I bought my first stock, and probably spent another 1000 hours since then involving myself in everything I could with this.
There, end of article.
Well, no. What is the fun in that? This is going to be a THOUGHT EXPERIMENT considering different possibilities coming up. I did an article on this a few weeks back with how I thought a crash is imminent, and then from there I did a video on it which might blow your mind I called “the perfect storm”. Check out my channel – as I have new content coming out weekly on a variety of investment related items – mostly skewed towards gold and silver.
A lot of my timing is looking at the below for my level of worry at the moment.
It then begs the question, what do you do? Well, I don’t invest like other people, so again, don’t listen to me. I got involved with equity markets and precious metals really only 18 months ago. So no – I’m not an equity fund manager or anyone who’s ever worked as one. My work at Vanguard for over 4 years was in IT management. Someone like David Brady is an expert in this space and manages large funds. I’m some idiot writing a blog. There’s a MASSIVE difference. I’m doing this for fun with my observations on research. He runs $1b+ funds. He’s a professional. I’m a hobbyist. My writing is for entertainment and to get you to understand larger concepts to then talk to people like that. So – keep that disclaimer in mind throughout the rest of this piece. Maybe someday I switch careers and one of these guys wants to get me a 7 figure salary and fly me on a jet somewhere. Not likely. So with that, I’ll pet my dog, take a sip of my coffee, and continue with my hobby writing.
Put on your thinking caps and try to picture where this is going. Get out your own crystal ball. Write in the comments where you think this is going?
Prior to the past 18 months, I just focused on making money, dealing with my 3 rental units, paying my mortgage, and taking care of my family. So MY involvement came in from a DEFENSIVE standpoint when I felt all of that would be threatened and I needed to build a parallel investment structure up for when/if this whole thing came down. I felt 18 months ago things were going to break, and if you want to go back in my blog on the way back machine, you can see all of the posts I made From Nov 2019 to Feb 2020 dealing with all of the talk of market collapse. This was going to happen even before COVID, which many newer people don’t realize. Meaning, the end of COVID didn’t fix the root cause, and in fact, it made it much worse with the band aids they slapped on to fix a carotid artery spurting with blood.
My ORIGINAL thesis was after I heard about the repo market blowing up, I wanted a DEFENSIVE portfolio built. I felt LAST SUMMER again this crash would happen, as I could not understand how people defaulting on mortgages and not working could keep the economy going – what I underestimated was how much money they could print. It essentially kept my thesis intact, but punted it a year down the road. I think this would be an INTERESTING idea for an ETF down the road for people to hedge with to preserve wealth. Maybe switch those percentages the worse the stock market looks.
What I was seeing in Feb 2020 was that I was involved with mining stocks and my buddies had the regular risk on stocks. I got berated by them. “Nate, you have to diversify”. No, I really don’t. I invested in a defensive sector for a reason. As my mining stocks went up, theirs went down, and vice versa. Happened almost every day in February/March where they were inversed.
Until they both fell together, hard, in March 2020. Then, they ran together up until July when we all saw gold start the 8 month pull back.
I’ve learned a lot about personal investment over the last 18 months, and much of that has been through making errors. Granted, a lot of my errors are on very small scales as I usually tend to dip my toes in before I jump headfirst in. One of my first “bigger” errors was selling call options at “market”. Ouch. I was up massively on this one deal and did a market sell rather than limit. That one still stings, but it was the first time I ever went to sell call options 13 months ago. I also didn’t know much about technical formations a year ago and it would have been nice to understand the cup and handle and see why many experts sold a lot in July/August last year when I was hyper focused on $50 silver and the COMEX breaking.
That all being said, no one can call a top, precisely, or a bottom, precisely. What you can do is a survey and look around. If EVERYONE is bullish, consider being bearish. In my piece last week, I showed where signs of a market top had me spooked. Please review, as there are things in there I don’t want to write another 5000 words here to cover.
I did something where I used gold and oil related to each other in price, and I used a statistical process control chart that I’ve used in my job previously just to explore the concept of upper control and lower control limits with respect to defining a channel of relativity to trade within. The concept here is simple. If you can trade NEAR the limits, you might miss the outliers up or down, but you can capture a VAST majority of a move in the middle. This is something extremely similar to what I heard Rick Rule say recently – so I don’t think I’m off with this strategy.
With the markets, it’s looking a bit frothy outside, and with this, lots of FEAR. Remember, GOLD IS A FEAR TRADE. Remember how I said I was a DEFENSIVE player in the market? That worked very well for me when gold and silver were moving up. It did NOT work so well the previous 8 months on the consolidation. The last month has been kind. That being said, I got into half cash last July (wrote about in on my blogs) and was luckily spared from buying a lot of the mining stocks at the top. I was buying over time on a lot of pull backs when I thought the breakouts were coming, so yeah – that hurts over time.
So with my DEFENSIVE playbook in mind, I feel your traditional equities are going down, and HARD. The fed may have other plans and try and make it an easy landing and buy corporate bonds and stocks (from what I heard, this is not allowed, but I don’t think much of that matters right now…because….COVID).
So what do your TYPICAL investment guys have? Something like 60% stocks, 40% bonds or something? I believe the idea here is to have the 5-10% growth per year? So you have the upside with the stocks, but hedge with the bonds? Wealth preservation going on there. Yeah – mine is like 95% defensive with miners and 5% towards regular equities and growth. Don’t do what I do. I bet HARD on this whole thing going belly up. Therefore, my strategies against what is coming will be different than yours. AND, my risk appetite is FAR different from yours. There is a distinct possibility this crashes so hard that the brokerage firms go under and my mining stocks are lost. So keep that in mind on any HARD crash. There might not be a bottom. There’s just an end.
My THESIS is just that. It is unproven. But I have a LOT of research that went into what works for me, including my age, the fact that I had no 401k, and I needed to play catch up so I might be having more risk than many. Let’s now dig into some ways to play this. Sorry for the long build up here, but it was ABSOLUTELY necessary to discuss how I am looking at this.
First – find where you stand. Deflationist or inflationist – or both?
I explained in the links above 3 different types of crashes we could see. In the “cliff” scenario, I am thinking there can be another March 2020. Perhaps this happens yearly until they fix the money problem. This is deflationary, and the thought that EVERYTHING will sell off to go to cash. This supports the dollar milkshake group and deflationists which suggest a hard crash could take us to 130 or 140 on the DXY.
With a situation like this, you wish you had a crystal ball. Perhaps your 100k portfolio shrinks down to 30k, and you wish you had sold it all so you could buy back everything you liked at 3x, only to then see your portfolio go to 300k on the “reflation” side of things. That threading of the needle just may not be humanly possible. It’s a logical thought, but one that may not be attainable to any real degree.
You WANT me or someone on Twitter or YouTube to give you the blessing to sell out of everything. You want them to give you a date and time to sell everything. You want to then blame someone else if you sell everything and no cliff dive happens. I learned also the hard way with prognostication to NOT provide dates, but I do believe in chain of events. When a chain of event is disrupted by something you could see, it pushes you timeline to the right. I even mention that if A, B, or C happens, it could push things to the right. However, anyone that heard a date in their head wants to nail your ass to the wall. No thank you. Lesson learned.
The risks with selling everything are missing an upside. IF you are wrong, and no deflation happens, then your 100k in stocks COULD have gone to 300k in a year, but since you went to cash, you are then sitting in 100k in cash that has 1.3 the spending power due to high inflation.
Anyone that tells you they KNOW which one will happen is either lying to you or doesn’t realize there’s a statistical probability they are wrong either way. Meaning, this is a game of probabilities you need to understand for yourself. Is it more likely something goes down in a crash or crashes up in a melt up hyper inflation?
Second: evaluate what scenario YOU think will play out
Scenario 1: Cliff dive
STRATEGY: Sell all or most
Risk: Being left behind if cliff drop doesn’t happen
How to mitigate: What I have done recently was sell out of ALL near term options of less than 3 months. I did have 50% of my portfolio in options for Jan 2021. GDX, GDXJ, SILJ, and tons of AG. I got out of all but maybe 30 SILJ options, and I’m about even on them. I’d like to buy some more on price dips and sell a little into price rising. For me, this reduces my risks of a crash while still getting some of the monthly income I had with short term options.
The others like AG I had LOTs of profits on. I then went to about 5-10% cash in my portfolio and bought into some silver juniors from GV’s sitfolio. I have 4 people I pay for info on mining stocks, but I have to tip my cap to GVs picks here. I just watched a video on Aya CEO yesterday and I’m about to up my position at open.
Side note, I had at one point 84 AG options for $10 strike price I paid $3.20 each for. The week or two before the silver squeeze, I sold 40 or so of these to “de-risk” as a large portion of my portfolio was in AG and I didn’t like that. When silver squeeze happened, each of these options I paid on avg $3.20 for were $15 each. 5x. Didn’t sell. Greed got me. Thought it was going to the moon the next day. Ended up selling all of them between $6.50 and $8.00. Note to self. On a 5x, take the damn money, especially on options.
Why this strategy works, for me: I’m 45 and have no 401k, so I need to be somewhat aggressive with some higher risk plays. If you are sitting on half a mil in your 401k, you risk losing a lot with a crash. But I am someone that needs to be aggressive in the face of a cliff dive. With options, and a cliff dive, I can lose everything in an options play. If you look and now see $1 quadrillion in derivatives, I think a cliff dive’s first goal here is to unwind a lot of leverage. What this means to you is a LOT of selling will have a LOT of stocks tanking, and this will have a LOT of options expiring worthless and going to the bank. By now having only 10% of my portfolio in options that are 7 months from expiration, I have the upside of SILJ options which can rise quickly, but minimize my options loss to 10% of my portfolio. Additionally, I feel there is a needle being threaded here as we may be seeing $1900 gold and $35 silver soon – and I need to capitalize on a lot of this move up. So I bought into some juniors silver miners that I like and are cashed up.
Fallout: it all has to do with timing. IF metals continue to rise over the next 3-4 months and no cliff dive happens, I will be taking profits along the way and selling here and there. Those SILJ options I mention, perhaps I exercise them or sell them to remove ALL options down the road if it is imminent a cliff dive is happening in days/weeks. We saw with the stock market last year that talking heads were indeed warning about stock market crashes weeks ahead of time.
Scenario 2: The “soft landing”
STRATEGY: Patience, be mostly in PMs and miners. Be 3-5% in cash and mostly invested. Take profits as you go. I should be more “in cash” here, but the repairs on my rentals are costing me a fortune and I’m expecting lots of FCF from them soon. So I mitigate not being a lot in cash with my portfolio with having excess cash from my paychecks and rental units. YOU might want more cash on the sidelines. With this strategy, I’ll be more invested.
Risk: you feel metals will continue to move up as the market slowly grinds lower over years, but instead, a cliff drop happens and you are caught all in.
How to mitigate: With this strategy, I do NOT think a cliff dive is happening in a week. This is my DEFAULT mode, right now. Get into about 3-5% cash and plan on metals to stair step higher while stock market gently rolls over and grinds down over years. This is similar to the cliff dive scenario for me, but in this situation I have less cash on the sidelines. I feel we could have a soft landing, until we don’t. Right now, you can see how the market psychology is unfolding in a few things like bitcoin, ARKK, Tesla, microstrategies. When this market psychology spreads through the rest, then it’s game over. But for now, it appears the top has been in for highly aggressive tech items.
Fallout: With this strategy and outlook, it has me believe that you could grind gold higher up to $3000 and silver up to $75. In the back of my head, I know that the fed cannot backstop the stock market forever, and feel that any kind of “soft landing” will be short lived and either have a cliff dive or melt up. Given I’m 95% in defensive stocks, this is my preferred scenario to plan for, as a cliff dive sells off everything and may have the DXY shoot up. With this scenario, the DXY will grind down over time as my metals go up.
Scenario 3: The melt up
Strategy: All in. Levered up. Selling blood and all worldly possessions to inflate stocks and asset values.
Risk: not being “all in” and any cash you have on the sidelines depreciates in value rapidly. Being all in and the stock market drops 90% in a week. Being in illiquid stocks you cannot get out of.
How to mitigate: Given I feel the stock market is going DOWN and not UP, I have mostly mining stocks and PMs. I may be 100% wrong. But I do have a SMALL hedge in my portfolio on a HR play with a REIT. This REIT was/is near bankruptcy and may have a 25x upside if all goes well. Meanwhile, if everything is melting up, it signals high inflation and this may ALSO take gold and silver up with it. In this scenario, being in cash could be devastating. In this scenario, you win if you are highly levered up.
Fallout: At some point, the music may stop, and those levered to the tits might lose everything in a panic sell off. I heard the other day that a hyper inflation may only last a year or so before something gives. So even if we DO think a hyper inflation scenario is coming, being at high levels of margin is good – until it’s not, and you have to pinpoint precisely the time to get out. The problem I saw with this logic was my experience from March 2020, where you woke up to the markets being down 2000 overnight and before the bell you were down 10% in your portfolio. Lots of these moves in the overnight markets can catch you while you are asleep. Perhaps you then sell at the bell at 40% loss, and the market makes a rapid recovery that day.
Third: understand when the music is over, or just beginning
Market psychology. This is my favorite chart in investing. Because this chart doesn’t care about anything P/E or balance sheet or anything. It just says, “your time is up sir”.
If you look at the below charts, you can make the argument that the time has come for cliff dives for all of these. These could ALSO be leading indicators of how the tech stock sector could perform and these could lead any form of crash that is coming. Part of me feels the big money in here will rotate into a “risk off” play, which is either treasuries or gold/silver. Given real rates are at -2.5%, to me this is where I think gold is king.
While I may have cherry picked a few charts – put them in context with my links above about “signs of a market top”.
If we look at the dow, or just about any other index, you see a shape similar to this as well.
What is different? Look at the peak at the end here. It’s all post COVID and after $7T being printed. One can make a STRONG argument that a 40 year bull market in the stocks is coming to an end and needs a severe correction. One can also may the strong argument that the $7T added in liquidity is being captured into the stock market (and asset prices) here which has led to virtually every equity to be massively over valued.
At the same time, you see the cup and handle formation with gold occurring.
This gold chart looks a lot like this…
The pullback you have seen over the last 8 months is very similar to what you saw in 2008/2009 and there’s a MASSIVE leg up coming as the markets then correct.
Part of my thesis was suggesting that we are perhaps seeing the end of the traditional equities market run for some time just as the metals are going to be taking off.
Fourth: Tailor YOUR solution for YOU
What does all of this mean?
Peter Schiff sort of says it best. If you think things eventually are going up in a higher inflation scenario, WHY get cute now? Just put your money in stuff, let the deflation happen, and it will come back with reflation. I’m dumbing down what he said, but what he tries to point out is that if you think gold and silver are going up very high long term, don’t care so much what happens short term. In THAT case, THAT is why I tossed the short term options. IF there is a downside event, my biggest risk really is options going to zero. While I try and get cute on timing things – the REAL risk is total loss by losing on a leveraged play.
So, in MY scenario, I significantly reduced my options from maybe 60% of my total portfolio (50% long term, 10% shorter term) to 10% longer term (7 months out). Now – as time goes on and a crash doesn’t happen, I will be potentially selling these into metals rises to be 100% out of all options in the next 3-4 months as having any options for me with less than 3-4 months on them are VERY high risk right now.
In my video on this I created linked above with the perfect storm, I mention there could be a combination of three crashes going to happen….
Near term could be the “soft landing” for 2-6 months where stocks go sideways or slightly down as the fed tries to backstop everything. This will have metals launching into outer space. Likewise, ANY DAY during that time, a catalyst could have multiple limit down days for days or weeks on end that could cause the “cliff” dive. Likewise, on the other end of all of that, you could have the hyper inflation of sorts with a lot of things melting up as everyone who had cash on the sidelines rushes back in to buy everything dirt cheap, again. This could create more rapid boom and bust cycles of every so many years.
I could be VERY wrong. For ME, I am very comfortable in my thesis that some form of crash will be occurring and gold/silver is a good place to be. Either the cliff dive, soft landing, or melt up – in any case, I feel my miners will outperform everything else. How much cash to be in? How fully invested? What risk is your portfolio? All of these are personal decisions YOU must make for YOU. What I wanted to do here was walk you through how someone could evaluate what is going on and how they could make a decision for themselves.
MY BIGGEST risk here is a replay of 2016 or so when gold had a start up and then collapse – but if you look at that cup and handle pattern, it is clear to me that from about late 2018 on, this is a gold bull market about to explode higher.
I feel, like many, that in a cliff diver scenario, EVERYTHING is initially hit hard. This means gold and silver and miners as well. However, the thought is that these items may recover far more quickly than others. This is where it would be nice to know and be in 50% cash so you can buy back everything you like cheaper – but at that point it’s relatively moot. Why? with how much of a move gold and silver can make over the next 5-9 years or so, it’s not going to matter much what you do in the short term to make moves.
Lastly, I’m now heavily invested in a cyclical investment. Meaning, at some point, gold and silver will become over valued and your taxi driver will be talking about gold stocks rather than cryptos. At that point, it’s time to perhaps pack up shop and get back into energy, growth stocks, and perhaps dividend stocks depending on what year this all happens.