Now That The Party’s Over…What To Do Next?
The flow of money in the stock market also turned on a dime over the past few weeks.
That’s never a good sign. A week after seeing the largest weekly inflow of capital into global equities, we saw the largest outflow ever. Half of the selling was in the SPY (S&P 500 ETF). This means that in a few trading days, investors around the world went from “all in” on stocks to a full on rush to the exits. This is probably the largest and fastest swing in investor sentiment ever seen. It’s like investors are finally admitting to themselves what they’ve known for years: that the stock market gains have largely been a result of the Federal Reserve policies…
It was the greatest money printing party the world has ever seen, and great while it lasted… But everyone knows the party’s over. With that in mind, every investor needs to ask themselves one all important question: “Where can I put my money when the stock market crashes again?”
Right now, there is only one logical answer to that question:
I’ll explain why in a moment, but first, we need to look at what traditional safe havens are and why they’re quickly losing their appeal with investors. The Safe Haven Traps
What exactly is a “safe haven” asset? Historically, safe haven assets were investments that you would expect to hold their value in the times of stock market volatility and uncertainty. There are a number of assets that have long been considered safe haven assets,
but the typical ones are U.S. treasuries and gold. These have generally seen massive inflows of cash in the event of a stock market crash. That’s because investors consider them to be a safe place to keep their money when other places seem too risky. But as I mentioned earlier, recent price behavior and fundamental developments could change this dynamic in the next stock market crash.
Perhaps it already has. For example, U.S. treasury bonds sold off during the recent stock selloff. Given the pressure on interest rates we described earlier, this move makes sense. Higher rates lead to lower bond prices. When rates go up, the value of bonds goes down. Further concerns over the deficit, inflation, the debt ceiling, and technical levels in the bond market could cause this weakness to continue. Today, bonds appear to be less of a safe haven and more of a trap. Gold has also been a traditional safe haven. Normally it is negatively correlated to the stock market, too. This means that, like bonds, it usually moves the opposite direction of the stock market, which is what a safe haven should do. But again, during the recent selloff in stocks, gold prices didn’t go up as expected.
They fell along with the stock market. In fact, the gold market has been positively correlated with the stock market for some time now. When the stock market has gone up, the gold market generally has risen as well. Although the selloff in the gold market is nothing compared to what we’re seeing in stocks, it shows us that this “safe haven” relationship between stocks, bonds and gold is not as strong as it once was. In fact, as the stock market sold off, the gold market saw its biggest weekly loss in the past two months. If both bonds and gold are going to be a safe haven in the
next major market crash, why would this have happened?
This shift can be attributed to cryptocurrencies. Digital Gold To The Rescue? Bitcoin actually rallied over the same period of time. Could this be because, like the JP Morgan analyst I quoted earlier said, investors are starting to consider Bitcoin as a form of digital gold? I believe this because, really, what’s the big advantage of holding gold in a stock market crash?
There aren’t very many practical benefits, and there are actually some major drawbacks:
Gold is difficult to store and transport.It’s difficult to buy things with gold – there are even fewer businesses that accept physical gold as payment than Bitcoin.It’s difficult to buy gold quickly.
Does Bitcoin suffer from gold’s limitations?
Not at all! Bitcoin has some incredible advantages over gold:
It’s easy to store and takes up no physical space.You can send Bitcoin around the world in an instant.Hundreds of thousands of businesses accept Bitcoin. Anyone can buy Bitcoin instantly. In the event of a stock market crash, which asset looks more attractive to you? It should be no surprise that Bitcoin has been viewed as a safe haven asset by its supporters for years and the above factors support their arguments very well. This trend away from gold as a safe haven made itself apparent in 2017. Thomson Reuters 2017 Gold Survey released last month had this to say:
“The rapidly accelerating popularity and price in cryptocurrencies, such as Bitcoin…diverted substantial amounts of capital away from precious metals last year.” Clearly, many investors are already shying away from gold as a safe haven in favor of Bitcoin.
But what about treasuries? Bonds also suffer from some of the problems that gold does. But the biggest issue with treasuries as a safe haven has nothing to do with their lack of practicality. If higher interest rates are going to be one of the main factors in a stock market crash, investors will chase safety (and bigger returns), in the crypto market. If you want to be prepared for a stock market crash, it is clear that treasuries and gold are not going to be your best safe haven assets when the time comes…and it’s coming soon.
That’s why I believe that now is the time to trade Bitcoin
and other cryptocurrencies.
The Ultimate Crypto Catalyst