I have always felt that in my lifetime there would be one very large market downturn remaining. And to me, the most obvious and likely cause would be what is called " the great credit unwind."
I never suspected it could start with the subprime mortgage situation, but the kicker here was the amount kept "off the books." That the Banks and Financial institutions left themselves "holding the paper", and thus eating the losses is incredible.
That said, we could still see a lot of other just as substantial credit unwinds, such as: Margin retractment, as stocks drop in price. Derivatives retreating, as highly leveraged positions are unwound; Hedge funds unwinding, who have leveraged, to buy leveraged securities; Hedge fund withdrawals by investors. Most hedge funds have limited opportunity windows to withdraw from, such as semiannual, for one week each. Some hedge funds have even closed withdrawals by investors. Investors may panic here.
In short, take the fact that since 1982, the USA has had a huge bull market run, and
The earnings of many companies may take a large, and for some like banks, a structural decline, and
the USA as a country may be in decline, or at best, stay the same (yes, very debatable), and
We're due for a bear market, and
R48 was able to retire at 48 (he didn't really earn it)...
combine this with the great credit unwind, and, presto, down 50% not difficult to forecast.
OTOH, I know. there are reasons to be positive, too..
My portfolio is now at 45% fixed income (highest ever), all short term, and I seek hedging positions to limit the effect if the great credit unwind bear market occurs. The good news, my equities could go to zero, and I can still stay retired. Whew! Perhaps I beat the system. Comforting.
BUT HERE'S MY TAKE ON THIS:
All this stuff is fundamental analysis of the economy and society. History shows the stock market does not often follow such economic patterns, and often bottoms way before the economic downturn subsides. And who knows, when people realize that bonds may be the ones really crashing, all that money "running to safety" may realize that owning the means of production aka businesses aka stocks is much better, in the long run, as paper bonds become more and more worthless. In short, the bottom may not be as far down as is predicted.
Secondly, if the things in the article become true, bonds are much more predictable as to outcome. That is, much higher lending rates, due to inflation, and the competition from preferred stock yields as this financiag mode is used to shore up marginal companies. In the 1970's inflation, inflation drove bond yields to their highs. In competion, stocks could not compete and their yields had to go up, thus declining stock prices, which lingered until rates came down. Now we have the reverse. Higher stock dividend yields due a declining market will drive money from bonds into stocks. Bottom line, extreme caution bonds, be prepared stocks don't fall as far as predicted.
So what is one to do. Shorten bond maturities to no longer than three years. Don't catch falling knives. Prepare to try to identify a stock market real change in trend, then invest in it.
So how does one identify this change in trend. Not pushing this, but one way is to demand that your funds 200 day moving average flattens out, and starts upward, before any new purchases are made. Yes, I realize this is a fundamental rule of the Pyramiding Up technique, which BY RULE, has kept any investor out of this market for the last seven months.
Don't like Pyr Up...OK. But find another way to identify a true uptrend, before buying in.
Just some thoughts...R48
