No Bear Market Has Ever Bottomed With A VIX Under 45.
No Bear Market Has Ever Bottomed With A VIX Under 45.
History tells us that another major selloff is still needed.
Throughout the year 2021, we warned that the FED could not take care of the great debt crisis it had generated in the markets. Many investors believed that the indices could go to infinity, giving double-digit returns throughout the years. But this is not the case, the reality has arrived, and the index has already retreated more than 20% from its highs.
All citizens are now aware that we will never return to a world without debt again. Central banks do not know how to live without printing, but we must take our foot off the accelerator. This is precisely what the Central Banks are doing, at least the FED.
This mountain of debt will increase again once they are aware that companies can generate enough profits to make them "profitable". It is not normal to have companies with a P/E of 1,000 or companies with 40 employees with little revenue trading at several times what a well-established technology company like SAP makes.
We have seen this on countless occasions over the last few years, and we have already warned that everything reverts to the mean. Inflation will also revert, we do not know if in 1 or 5 years, but it will. At the moment, you can buy the S&P500 with a 22% discount or Bitcoin with a 65% discount.
That the indices can fall up to -80%? Surely yes.
But what is clear to me is that neither you, nor me, nor anyone else, is going to go "All In" right at that moment. Therefore, it is advisable on many occasions to average downwards. It is hard to see how you invest money, and after a month, it is worth 20% less. But I would rather regret that than regret 20 years from now that I didn't do it.
The money is worth nothing, and it will be worth much less in a few years. You need to put away enough to meet possible setbacks, but don't forget that a dollar of yours now will cost half as much in about eight years (at this inflation rate).
Therefore, while today's uncertain macroeconomic and geopolitical environment is creating risk in securities markets - particularly for fixed-rate assets - we believe it's also generating compelling opportunities for investors able to withstand a bumpy ride.
During the first quarter, central banks in the U.S., Europe, and the United Kingdom adopted hawkish policy stances. When Russia invaded Ukraine in February, investors initially reacted as though they believed the war would slow the pace of interest rate hikes. But the central bankers quickly made it clear that they were more concerned about the conflict’s potential impact on price increases than economic growth.
In March, the Fed not only boosted the federal funds rate target for the first time since 2018, but it also indicated that (a) six more hikes are likely in 2022; (b) interest rate increases of more than 25 basis points are possible at future meetings; and (c) it will soon begin quantitative tightening, i.e., reducing its $9 trillion balance sheet. Markets expect another 225 basis points in interest rate increases through year-end.
This would be the largest interest rate hike in a year since 1994. All will remain to be seen, but it is most likely that in the end, these increases will be much more significant.
This would mean that the markets would continue to see the gains of previous years unwind. There are several possibilities in this scenario:
1. that the Fed cannot control the rate hikes and that they are made disproportionately in a very short time and there begin to be margin calls on all those who asked for free money, assuming that rates were never going to rise. As in the case of Japan.
2. The FED realizes that at this rate of hikes, we will enter a much deeper recession and that it will cut or maintain the rates and print money again.
The first scenario would be very negative for 99% of investors, and the second would be positive for 99% of investors.
The market is totally uncertain, and always the thesis arises from the past and not the future. Therefore, it is good to protect yourself.
We believe that the best option today is: