What If 2023 Is Much Worse Than 2022?
A -20% decline in the S&P 500 is small compared to what can happen.
After experiencing one of the worst stock market years in history and the bond + stock mix performing in the worst way ever.
Many of us take for granted that this implies that 2023 will do well, but this is not entirely true. In fact, in the major financial models, statements like this tell about winning or losing everything we own. Remember, just because it has never happened doesn't mean it can't happen.
In fact, key macro fundamentals are beginning to deteriorate, and this could be exacerbated if any of the following plausible scenarios come to pass:
With rate hikes and liquidity cuts, many companies will be unable to renew their credit lines and will be forced into bankruptcy. This will mean that many families will also be unable to pay their debts, and many other companies will continue to default.
The dollar has suffered a drop against the rest of the currencies, but it is not ruled out that it will return to record highs (DXY), and thus the price of the main commodities will rise considerably.
The stock market has not yet discounted everything it has to discount -20% in 2020 is little compared to what could have happened.
If there is any reason we believe we may be right on the edge of the cliff, it is because, despite being an incredibly bad year, the markets have not yet felt that volatility.
For all of 2022, the VIX index did not break above the 40 barrier, so there is every reason to think it could do so in 2023. If not, remember what happened in 2008.
Corporate bonds of the companies declined little by little until the final collapse.
The whales know it
There is something that has gone largely unnoticed, and that is that when big investors sense that a catastrophe is near, what they do is start hedging all their assets against the fall. To avoid that, if everything falls, their companies will also fall.
To do this, what they do is something as simple as starting to buy PUT options. Several indexes collect information on PUTs bought, but the main one is the one that compares PUTs bought against CALLs (CPCE).
This week has seen the highest intraday level in history. Never before have investors been so scared about this event. As you know, the excesses that were made during 2020 were excessive, this has caused many investors/businessmen to be heavily indebted, and if they want to protect their wealth, they have two possibilities:
Sell debt at a loss
Buy insurance to avoid bankruptcy.
Most have opted for the second option.
This week, we bought very OTM options that would cover us and make us a lot of money if something like the above were to happen.
These contracts were trading at a huge discount, so we took advantage of the opportunity to get a good deal.
Who knows if 2023 will be the year of a black swan... what we do know is that we will be prepared in case it is.
Now our portfolio is in detail