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I was bearish Nasdaq in ‘99. I was bearish New York real estate in 2005. So I was early which in trading terms means that I was wrong. But I wasn’t trading stocks or real estate. I was looking at those assets an investor and while everyone else was getting margined out of their stock accounts or turned upside down on their mortgage, I (like some 19th-century immigrant) stayed in cold, hard cash. For a while, in 2008-09 I didn’t even keep my money in a bank and bought T-bills directly from the Treasury instead.
Now if you are the type of person who never sells your investments, never needs liquidity and always buys every dip in the market you can ignore every word of this column. I am sure you will be richer than Warren Buffett and I commend you on your ability to not need your money.
If on the other hand, you are looking to use your money for stuff like food, housing, travel, medical bills, you know, – life, then just as day follows night, there will come a time when you will wake up in the morning and half your savings will be gone before you could even login into your Ameritrade account.
I don’t want to rehash all the old arguments – that FAANG+M are the new Nifty Fifty. That my Upper West Side Apple store which routinely did more than 100M+ in business per year is now barren most of the time (yes it’s just the kind of bullshit anecdotal evidence that usually isn’t worth much – except when you are trying to gauge relative rather than absolute change.) There are many analysts much smarter than me that have made much better arguments as to the stretchiness of valuation.
No. What I want to tell you exactly how the crash will happen since I’ve lived through all of them starting with the “Big One” in 1987.
There will be some unexpected catalyst, or perhaps no catalyst at all – just a price cascade that will take the S&P down by 100 points in less than a minute. At first, the algos will step in and try their usual mean-reversion, vol-dampening routine but traders spooked by the move and investors looking to cash out long held profits will create customer flows that will quickly overwhelm the machines. The Spoos will start to dive again. Then, ignition algos seeing momentum will start to mercilessly pound the bids and drive the futures even lower. HFTs which only like to handle a couple of hundred shares at a clip will instantly turn off and suddenly all equity bids will disappear from the market. The exchanges will trigger circuit breakers and stop trading altogether. Now you will not be able to sell out at any price.
After a period of some time, the exchanges will once again reopen and once again investors will clamor to sell in order to salvage the profits build up over the years. Because really – who at this point is not long the market? Do you REALLY think that at 18,000 Dow someone will step in and say – “Wow – what bargain!” No – that’s going to happen later, much later, when the Dow is at 10,000 and you are left to wonder how 10 years of investment profits could be erased in a matter of 10 days.
I have absolutely no idea of when this will happen, but I do know that like all the other times before I will be safe rather than sorry and will stay in cold hard cash and let the rally pass me by.