That’s a daunting prospect indeed, since at current levels such a decline would mean the DOW DJIA -0.75% would plunge by more than 3,000 points in a single trading session.
Hedge Fund Consultant Michael Belkin is predicting a 40% stock market drop in the coming 12-15 months. And we’re kidding ourselves if we think that market regulatory reforms such as circuit breakers will be able to prevent it.
These sobering truths are what emerge from a fascinating line of recent academic research into the frequency of market crashes. Recognizing them is perhaps the best way for us to respect this week’s 25th anniversary of the Oct. 19, 1987 Crash, when the Dow plunged 22.6%. In numerous follow-up studies, Professor Gabaix said in a telephone interview earlier this week, the original findings have only been strengthened.
No way to stop losses
The researchers derived a complex mathematical formula for predicting the frequency of large daily stock market movements. And they found that not only does the U.S. stock market over the last century closely adhere to the formula, so do international markets.
A single-session drop of at least 20%, for example, is predicted — over long periods — to occur once every 104 years, on average, but it could happen at any time. That’s why you always have to prepare for it, because you don’t know when it will occur.
If the frequency of crashes of various magnitudes is predictable, shouldn’t precipitous slides also be preventable?
Professor Gabaix says “no.” Crashes are an inevitable feature of the investment arena because every market, to a more or less similar degree, is dominated by its largest investors. When those large investors collectively want to get out of stocks, which will happen on occasion, they will find ways to circumvent myriad downside protections such as circuit breakers that may be in place.
Profession Gabaix therefore recommends that all of us — whether individuals or large institutional investors, such as banks & mutual funds — cushion our portfolios so that a crash as large as 1987’s won’t be fatal.
The bottom line? Repeat after me: Another stock market crash as big as 1987’s is going to happen. Period. ]
Do you heed this warning or do you play good little sheep & stay buried in your retirement investments in derivatives like stocks & bonds? Do you prepare for it by simply diversifying your portfolio into precious metals? Do you purchase more govt. bonds that offer no return whatsoever? Do the banks loan to you at 0% interest on a 20 year note? Of course not, so why would you lend your money with those terms? Especially since the dollars you will be repaid in will be devalued dollars thanks to the FEDs $40 billion dollar per month freebie handouts to the banks that I suspect will be upped to $85 Billion per month when Operation Twist expires in December.
Coincidentally, if you ignored your brokers advice to purchase govt. bonds & instead listened to your gut & acquired gold & silver you would have reversed this trend in your favor. If you purchased silver in December of 2008 (2 months after the housing crash initiated) it was priced at roughly $9-10.00 per ounce & with the same $10K you would have been able to secure 1,000 oz. Overlooking the meteoric rise to $50 last year & the gains you would have made with a sale at that price & the subsequent secondary purchase at the $26 mark which would have you sitting pretty with silver at roughly $32.00 now, lets look at simply holding the metals until present day. So the 1,000 oz. of silver bullion purchased at $10.00 p/oz is now sitting at $32.00 & you sell it all into the market to secure the profits. You would have gained a cool $22.00 per ounce which on 1,000 ounces would equate to a net gain of $22,000.00! (that’s assuming you simply purchased on a 1/1 basis & did not utilize a trading account to expand your holdings) That said, if you lost 30% in the purchasing power of the dollars you lent to the govt. they just returned to you with 0% interest gained while conversely you hedged your potential losses in silver bullion you would have recouped that loss of purchasing power & then some! So if you lose 1/3 of your purchasing power (=$3K OUT OF EVERY $10k so far) while you made over a 200% gain on your other $10k invested in precious metals you really aren’t griping about the cost of gas climbing every month as much as you would had you lost money betting on the govt.! If 80% of stocks are owned by 10% of the population they can certainly steer the markets wouldn’t you agree? The SEC admits that 86% of daily stock market trading volume is executed by High Frequency Trading computer algorithms that have no human oversight whatsoever. Combine these two facts & the wealthy 10% can get nervous & sell 10/15% of their holdings which could then trigger another “May 6th Flash Crash” (DOW lost 1,000 points in 6 minutes) where the computers go into ‘nuclear option’ selling frenzies which will certainly chew up the little guys in nano seconds.
There will be massive dollar devaluation which will translate to inconceivably higher retail prices which in turn will deplete your cash position at an ever quicker rate. Now the foreign central banks are announcing they will step up their currency war retaliations as a counter measure to this unlimited QE3 play of the FED which will only put further pressure on the FED to pump more money into the system to negate the counter measures of the opposing central banks. The talking point is now “maybe QE3 wasn’t quite enough & maybe they need to do MORE!!!!” Playtime is over folks! The FED is locked into this dollar destruction game plan to cheapen the dollar so they can pump the banks up at the expense of the citizens of the land & their life savings. They don’t say “Don’t fight the FED” for no reason! That means you better get into something to absorb the dollar devaluation & protect your life savings now. They have warned you, albeit indirectly, that you cant fight the central bank & you shouldn’t even try because you will lose. Purchase your sound money assets in physical gold & silver bullion today & let the FEDs suicide mission make you money for once. Inflation can turn into hyperinflation, while recessions can morph into depressions when currency wars shift into trade wars that can eventually degrade into real wars. It is a far better strategy to PREPARE your portfolio than to attempt to REPAIR it once the damage has begun. Tick, tock.