To Be Rich Young Understand The Economic Cycle
Inflation well above expectations and the S&P500 -2.5%.
There is no doubt that this coming week will start with curves after what is happening this weekend in the crypto world.
This week the U.S. CPI figure hit a 40-year high again. It stands at 8.6% (Est 8.3%). In addition, Biden has said that this inflation may last for several years. In the meantime, many have already lost 30% and have left the markets resigned, saying the famous phrase: "When it recovers, I will buy again".
We told you a few newsletters ago which assets we believe will be the best performers in this period, and we continue to do so. Chasing results only makes you lose money:
In 2021 I bought ARKK: "How well this is going it just goes up".
In March 2022: "I've lost 20%. I'm getting out and buying the S&P500".
In May 2022: "This does not stop falling. I get out".
This is how most people invest.
The great depression made more millionaires than in any other period of American history and in this next one, our capitalist economy will be in prime condition to spit out hundreds more.
Some time ago, it was shown in an article that depending on the period of history in which you were born. You were more or less risk-averse in the financial markets.
People who were born in a post-war period, where people were starving, resources were scarce, and the most valuable thing was having a place to sleep, tended to be much more conservative with their money. They didn't flaunt anything and were dedicated to producing to earn more.
This generated a cycle of prosperity where a whole generation earned much more money, there were opportunities for everyone, and it seemed that we would never lack anything. The children of these people decided not to study. They preferred to go around the world supported by their parents, and, in addition, they had a new iPhone every year and a half.
Cycles are constant in life. There are short-term cycles and long-term cycles. A few weeks ago, we talked about the cycles that lead an economy to be the top dominator, and today, we want to talk in much more general lines. We want to talk about how we have an excellent opportunity to get ahead of the next cycle right now.
Returning to the conditions that make us have a different perception about money, we have that today and in a purely objective way:
Rates are close to 0%.
The possibility of getting a loan is high
Asset prices are high
Liquidity injections continue
This means that we live in a world where we lack absolutely nothing. Being able to have a new cell phone (over $1,500), travel twice a year, and dine out twice a week is our status quo.
I still remember when my grandfather used to say that his Christmas present was a chocolate bar...
Remember that since 1929 the Dow took more than 50 years to recover. This cycle began when Nixon cut the gold standard, which still continues. Since then an entire generation has thought that investing is simple, that you can leave your money in an index fund and grow at 6% per year on average.
Money is worth less and less, and a paradigm shift is about to occur. There are several things we can do to try to anticipate that shift:
Tail Risk Hedge: many people don't understand how slowly losing money can be good. Having liquidity when no one else has and being able to buy at -60 or -80% is the best thing that can happen to you. Having a very OTM options strategy is very beneficial to your pocketbook in the long run.
Imagine you have a $100k portfolio, and I give you two scenarios, on the one hand, a 6% annual return and in year 10 have a -50% or do 0% for ten years, triple your capital in year ten and buy at -50%. Which do you prefer? We have it clear.