For anyone expecting a technical analysis, this is not going to be one of them.
What recently happened with GME and AMC made me scared about valuations in general. Does the new crowd of retail investors know how to read balance sheets and income statements or do they just follow the hype?
I'm not going to try and answer that question, but I will try and explain why I think this is a good time to hedge. This crazy bull market that started just after the crash in March, has undoubtedly been fueled by active fiscal policies around the world, but especially in the US. The FED has practically done everything they can to keep rates low and liquidity flowing and I believe they will continue to do so. Not only that, Biden is pushing a 1,9 trillion $ stimulus package that is expected to be rolled out in March. Since the markets are forward looking and the stock market is getting increasingly expensive with one of the highest average p/e ratios ever, I only think there are a few rational things left to do. As a result of this next stimulus deal, the stock market could easily continue further up but on an increasingly weak basis. Most small businesses, that are a major part of the economy, are all struggling, but this doesn't show in the stock market because most of them aren't listed. Many of the companies that are listed have done quite well, firstly because they have an easier time borrowing money and secondly because they've had an easier time adapting to the stay at home economy. This is particularly true for the tech sector. The whole point that I'm trying to make is that the insanely good stock market has given many the illusion that the economy is doing well. As soon as stimulus runs out, consumer spending might grind to a halt, and the companies that have survived might be in a lot of debt.
What options are there to hedge?
1. Options: With the VIX hovering around 30 at the moment it is difficult to make it work.
2. Bonds: Bonds is of course a safe option but because interest rates will be kept low and more stimulus is to come, there is definitely not a lot of money to be made there.
3. Crypto currency: Crypto currencies are gaining mainstream acceptance and could potentially be a good option but because some of them are already up 1000 % YoY, this is in my point of view not an optimal solution either.
4. Strong currencies under bear markets: The Swiss franc, the Japanese yen and the Australian dollar have been known to perform well under tough market conditions and could also be good hedges but with limited upside.
I might've left some options out but here at last is my favorite:
5. Gold: Gold was pushed higher since March driven by low rates and because it is considered a "safe haven" in tough market conditions. It made its top at around 2060 an ounce in August, and has since then gone lower even though interest rates have been kept low and all other assets prices have kept going up. If the stimulus deal is passed, all assets will continue to rise and that means gold most likely will do the same. If interest rates are kept low, gold will at least be stable and potentially go up quite a bit more. If there is a stock market crash, gold will most likely go up. If we are still in lockdown next winter and the stock market is even more inflated at that point, gold will most likely go up. I believe that gold will continue up in pretty much any case.
This is not financial advice but just my thoughts in the market situation and how I will hedge and hopefully make some money along the way. With all that being said I'm still 85 % in equities.
Let me know if you have any questions. ;)
- Emil Ramsby Rasmussen
What recently happened with GME and AMC made me scared about valuations in general. Does the new crowd of retail investors know how to read balance sheets and income statements or do they just follow the hype?
I'm not going to try and answer that question, but I will try and explain why I think this is a good time to hedge. This crazy bull market that started just after the crash in March, has undoubtedly been fueled by active fiscal policies around the world, but especially in the US. The FED has practically done everything they can to keep rates low and liquidity flowing and I believe they will continue to do so. Not only that, Biden is pushing a 1,9 trillion $ stimulus package that is expected to be rolled out in March. Since the markets are forward looking and the stock market is getting increasingly expensive with one of the highest average p/e ratios ever, I only think there are a few rational things left to do. As a result of this next stimulus deal, the stock market could easily continue further up but on an increasingly weak basis. Most small businesses, that are a major part of the economy, are all struggling, but this doesn't show in the stock market because most of them aren't listed. Many of the companies that are listed have done quite well, firstly because they have an easier time borrowing money and secondly because they've had an easier time adapting to the stay at home economy. This is particularly true for the tech sector. The whole point that I'm trying to make is that the insanely good stock market has given many the illusion that the economy is doing well. As soon as stimulus runs out, consumer spending might grind to a halt, and the companies that have survived might be in a lot of debt.
What options are there to hedge?
1. Options: With the VIX hovering around 30 at the moment it is difficult to make it work.
2. Bonds: Bonds is of course a safe option but because interest rates will be kept low and more stimulus is to come, there is definitely not a lot of money to be made there.
3. Crypto currency: Crypto currencies are gaining mainstream acceptance and could potentially be a good option but because some of them are already up 1000 % YoY, this is in my point of view not an optimal solution either.
4. Strong currencies under bear markets: The Swiss franc, the Japanese yen and the Australian dollar have been known to perform well under tough market conditions and could also be good hedges but with limited upside.
I might've left some options out but here at last is my favorite:
5. Gold: Gold was pushed higher since March driven by low rates and because it is considered a "safe haven" in tough market conditions. It made its top at around 2060 an ounce in August, and has since then gone lower even though interest rates have been kept low and all other assets prices have kept going up. If the stimulus deal is passed, all assets will continue to rise and that means gold most likely will do the same. If interest rates are kept low, gold will at least be stable and potentially go up quite a bit more. If there is a stock market crash, gold will most likely go up. If we are still in lockdown next winter and the stock market is even more inflated at that point, gold will most likely go up. I believe that gold will continue up in pretty much any case.
This is not financial advice but just my thoughts in the market situation and how I will hedge and hopefully make some money along the way. With all that being said I'm still 85 % in equities.
Let me know if you have any questions. ;)
- Emil Ramsby Rasmussen
Comment:
An addition to that: I firmly believe the rising interest rates in late 2020 was caused by a lack of a stimulus bill. They couldn't come to an agreement, but that will now change