Category Archives: bear market

The 2022 Depression

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Well, it’s been about a year since my last post. A lot of things have changed for me, a new job with unique challenges and opportunities, an expanding family, and lastly a move from one state to another. That being said, I do feel like I’ve abandoned my subscribers and for that I’m sorry!

Now that that’s out of the way I’d like to recap for you what I think has happened so far this year and what you can do to situate yourself financially to make the best return on your investments.

Inflation

It’s become clear that the media and the political elite have really been shocked at the rate of inflation over the past couple years – the official numbers are drastically underreported yet are still shockingly high.

The chart and table below display annual US inflation rates for calendar years from 2000 and 2012 to 2022 ending in August 2022. 

Now I have my own metrics of calculating inflation, that being the price of a Michelina’s frozen Entrée. You’ll find this in the freezer section of any major supermarket. Now I know the prices for these things had been $1 each for the longest time. Last year the price went to $1.30 and this year they cost $1.69 at the same place (Walmart). Other stores charge even more… So if you are gauging inflation based on food cost if you’re diet consisted only of these then the inflation rate is closer to 30%.

Michelina Frozen Entrees

Baby Boomers in Trouble

Now on a more serious note, of the around 72 million Baby Boomers in the US, the older spectrum are now in their early 70’s. The mandatory 401k Withdrawal age in 2022 is 72 (it used to be 70.5). That means we will start to see outflows from the largest population group in the US, and potentially more voluntary withdrawals as it doesn’t make sense to for Baby Boomers to hoard cash if they are in end of life stage. This means either the Federal Reserve is going to allow the stocks to be tanked by their higher interest rates and destroy the quality of life for millions of the older generation and make them reliant on government benefits OR go back to purchasing stocks and putting the brakes on interest rate hikes.

Quiet Quitting

The quiet quitting movement is here, and it’s loud. This is not just happening in the US but also throughout the world in developed or developing countries – in China this is called the “lie flat” movement.  As someone who has been to Europe, this is already the norm in countries like Italy and France – but as it becomes normalized in the US and China the entire world could become less productive. Less productivity could result in higher prices for goods and services. As long as you’re in a position where you’re income can scale with inflation you should be ok, but for those that can’t it will be important to have job mobility. For retirees this is just a bad situation altogether.

What I’m Doing

Now to the meat of the article – what am I doing to situate myself where I’m not blown away by the coming events. First thing, I’m holding the stocks in good long term companies. My portfolio is heavier in defense, food production, and Apple stock. I see Apple as an industry in itself since it has put itself in a good position against companies who leeched off of people’s private data (I won’t name names and get demonetized). Secondly, Apple is second against none ever since it surpassed Intel in making the best phone processors. Lastly, Apple has tons of cash reserves in USD so a strong dollar isn’t as bad as you may think for this company. Food stocks have done pretty well since the war in Ukraine, same with defense stocks. Both of these are also things that people and governments will not stop spending money on. In fact, a larger proportion of money is spent on these sectors during times of world tension like we see today.

Less Discretionary Spending

You will not see me going near buying discretionary spending companies like Build a Bear with a 10 foot pole. In fact I have purchased put options on this and other frivolous retail companies. In times of depression you’ll still see a lot of people in supermarkets but very few people in Coach stores. Middle class luxury items are getting and will continue to get quashed for the next year at least in my opinion.

I’m also holding stock in Chevron, as energy prices stay high. The biggest risk to oil stocks are political actions against them by the current administration. They can pick winners and losers, and its a risk you have to evaluate as you hold companies that can be construed as controversial. If you went back 40 years ago you would probably not have believed if the government and regulations could kill the tobacco industry, but it happened. This time the focus is on fossil fuels – the recent conflicts and the necessity for energy has probably drawn attention away from these companies temporarily.

Preparing to Strike

Cash is important to hold in your portfolios, and people often call this “powder” for a reason, it gives you ammunition to get in when prices are routed in stocks and real estate. If real estate gets down to a level where I can reach my 1% to 2% rule on real estate returns I will probably buy another rental property. I will attempt to lock in a 30 year fixed rate but this all depends on what the mortgage and escrow costs are in comparison to my expected rental income.

Will I Keep Writing?

I’m hoping to write at least once a month from here on out. The major changes in my life didn’t need to put a stop to my posts, I just need to be more consistent. I’m still pretty active on my Facebook groups and pages.

References and Relevant Links

How Does Greece Affect the US Economy?

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Greece in and of itself does not directly do much business with the United States. Greece does not have manufacturers that compete with the US, such as S. Korea, China, and Germany have. Greece does, however, greatly impact the European Union not only because of the size of its economy but more importantly due to the thought of a collapsing EU. The EU (European Union) was created in 1993 and has 28 member states. If Greece exits, it will raise the spectre of other economically weak countries like Italy and Spain leaving – this will shatter the Euro and send investors running for the hills. It will make the US dollar much stronger which will hurt US exports, which in turn will affect US international companies negatively. It will also hurt US tourism as it will be much more expensive for Europeans to visit the United States.

The thought of a collapsing economy and certainly the fact that Greece has stopped people from withdrawing their money from their own bank accounts may have a ripple effect across other countries in Europe and possibly the world. The 2% drop in the Dow Jones on Monday and the 2.5% drop in the Nasdaq does not bode well for an actual Grexit (The new term used to describe Greece’s exit from the Eurozone). Stock markets that are already priced too high in terms of price earnings ratio will feel more pressure to correct themselves. A falling stock market means less market capitalization in companies which is used to fund their operations, which may in turn lead to job losses. The stock crash of 1929 led the way for the Great Depression in the United States, which is an extreme example of what happens when a stock market crashes.

If a stock market crashes then confidence is lost, and the likelihood of new jobs is dampened.

 

Reading the above you might think it’s time to head for the hills, but I think that a more important and less pronounced threat is the United States debt and trade deficit which will not be helped by a European crisis. Ways to protect yourself include but are not limited to:

  • Shifting out of stocks and into cash, whose value will most likely increase relative to the rest of the world unless the Federal Reserve doesn’t increase interest rates and comes out with another stimulus package
  • Making sure that your portfolio does not include European investments

Of course, these protective measures may limit your upside potential, but will most definitely defend you against a downside. If you’re courageous enough, you can always short individual stocks. Please read my disclaimer below and have a nice day.

Is The Bear Here?

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Is the bear here? Have six years of solid yields in the stock market going to be wiped away by a massive correction? Should you be worried?

I have no idea, but I’m prepared to a certain extent whether or not a bear yields its ugly face. You can do the same, as long as you are approved for options trading.

 

Strategy #1: Make sure you have put options covering or exceeding the amount of shares you have in companies – for example if you are holding 100 shares of Apple which is worth around $106.25 after falling almost 7% in the past five days, you should hold at least one put option of Apple. The strike price for the put option is where a lot of the magic comes into play, as if you buy a put option with a strike price above Apple’s current market value you are making a very conservative play that will be handsomely rewarded if Apple stock price falls but costs a moderate amount more than an option with a strike price around $100 for example.

In my real-price example I will use the March 20th, 2015 expiration date. The Put option with strike price of $110 (above the market price of AAPL which is $106.25) costs $850. The put option for $100 costs $370. The difference is $480, which is less than the difference in share price for a given options “basket” which is $625. That means that It makes more sense to buy the more expensive put option if the stock falls, because even if it falls past the lower strike price you will be making more money.

Let’s say Apple falls to $90 per share by March 20th – with the more expensive put option you make $20 per share in your basket minus the commission which comes out to a profit of $1150. If you had purchased the cheaper lower strike price option you would make $630. Of course you stand to lose more if Apple goes up by March with the first option, which is why options being supported by a long ownership of Apple makes sense.

Strategy #2: Short the stock market. Sell  shares of a company you don’t own with the intent of buying them back later at a lower price. This is a highly risky strategy as shorting a stock makes you liable to pay any dividends they issue from your account and without a call option to secure the short position the loss potential is astronomical. One company that is heavily shorted is Herbalife Ltd., which some hedge fund managers consider to be a pyramid scheme soon to be busted by the government. If you short the stock market you will make money in a bear market.

Strategy #3: Sell all of your stocks and invest in corporate bonds or bank CDs. This is sort of like giving up on high yield investing, find a bond that suits your risk level or go with a municipal bond that may offer tax savings at the state level. Even more risk averse you can put money into T-Bills, which is what countries like China have done to protect the value of their huge cash surplus.