In my previous article, I explained the ongoing dollar crisis in the US. In that article, I discussed how the dollar printing has inflated the stock markets and why the US economy can reach high levels of inflation soon. Check it here:
What is happening in the US is also happening around the world. Stock markets around the world have giving excellent returns since April 2020. This is also the fastest recovery ever recorded in history after a market crash, which happened in March 2020. Here is a quick reference to how the stock market has performed around the world since April 2020.
Economies around the world have still not fully recovered from this pandemic, the GDP growth has marginally picked up and is yet to reach the pre-COVID level. But still, stock markets are at an all-time high.
Also, the Debt to GDP ratio has shot by more than 50% of various developed economies due to the Pandemic, as a result of various stimulus packages(i.e., money printing) issued around the world.
The chart below shows the % increase in debt to GDP ratio of various countries around the world.
In this article I will tell you, 3 asset classes, to be in to hedge yourself from any future market crash.
1. Gold
Gold is one asset class that provides a perfect hedge against a market crash. Gold will become more valuable as more and more dollars are being printed. Although all countries have printed lots of money during this pandemic, I take the example of the US because it is the holder of the largest gold reserve in the world and if their currency devalues the price of gold will rise in the international market as the US is such. Gold has outperformed many asset classes during any economic downturn in the past.
Gold prices saw a massive surge during the 2008 financial crash, it also shot up in March 2020 when the markets crashed due to fear of a pandemic. As we saw markets are trading at an all-time high, so if there is a correction gold will be a good asset to profit from such a crash.
Silver is also a good bet. In fact, silver is also used in the production of many important goods including solar panels, electric cars, lithium-ion batteries which are going to dominate in the future in their respective industries. Hence it may give a higher return than gold in the future.
Simply put gold prices always rise at times of uncertainty, panic, crisis, and war, and gold is rather sluggish during a stable and growing world environment. Hence keep always some portfolio parked in gold, because you will never know when uncertainty hits.
2. Crypto currencies
As I am writing now crypto currencies already seemed to be in a bubble as of now. But with the continued devaluing of the dollar and if this dollar crisis is imminent the crypto currencies might still have a very good chance of providing good returns in the future. Especially Bitcoin. Why? Because Bitcoins are limited in number(there can never be more than 21 million bitcoins). Their value will never erode due to inflation as the case is with the dollar which losses its value as more of them are printed out of thin air. On the contrary, Bitcoin coin value should theoretically increase with more and more printing of dollars.
And if in the future a dollar crisis hits people will look for an alternate currency as a medium of exchange.
And this has already happened in the economies of Venezuela in 2016 and Cyprus in 2013, where an economic crisis led the people to switch to an alternate currency as a medium of exchange.
After the currency crisis hit Venezuela the natives of the country switched to a crypto currency DASH as a medium of exchange and as of today many of the small and medium businesses have started accepting payment in DASH. Since then it has become highly acceptable around the country.
The same was the case with Cyprus. The banking crisis of 2012–13 eroded all the faith that people had in the banking system. As per a CNN article Bitcoin price popped up 87%, jumping from $47 to $88 in March 2013 since Cyprus began discussing tapping public deposit as a part of bailout from the EU. Soon Bitcoin ATM started emerging in Cyprus as Bitcoin became a popular medium of exchange.
Now, these are 2 small economies. But using crypto currencies as a medium of exchange is slowly picking pace in various large economies around the world. Japan in April 2017 passed a law recognizing bitcoin as a legal tender. Many people have started accepting crypto currencies as a mode of payment. Canada has passed an official law regarding crypto currencies and around 86 Bitcoin-accepting merchants are already working under the law. The US has topped the volume of the maximum number of trade in Bitcoin. People are already very open about crypto currencies in the country so it will not take much effort to switch to crypto currencies in event of a dollar crisis. Other countries include Netherlands, Denmark, South Korea, and Singapore to name a few have also a wide acceptance of crypto currencies.
Moreover, digital currency like Bitcoin can only be used as a medium of exchange or store of value. But many crypto currencies are way beyond that.
The likes of Ethereum, Polkadot, and various other crypto currencies exist which not only provide a solution for digital currency but also are solving a very big problem through the use of its underlying blockchain technology.
Ethereum co-founder Vitalik Buterin mentioned many revolutionary uses of the Ethereum technology. Here are a few of my favorite ones:
· A globally accessible financial system, including payments, store of value, also more advanced stuff like insurance. Means a direct Peer to peer transfer of funds i.e, no intermediary involved hence no gateway charges, or server crash problems. Also, the transfer of funds from one part of the world to another will happen in just a snap.
· Identity: “sign in with Facebook” -> “sign in with an ethereum account, no intermediaries. This means no single company is in charge of your entire data thanks to it being decentralized.
· All sorts of registries should publish on the chain for security and easy verifiability and many more. This means increased transparency in recorded keeping (be it government records, company records, etc) and no more data leaks or data hacks.
When this claim becomes a reality in the future this technology will solve the biggest concern of the digital era i.e, Data Privacy.
Although this technology is far away from being matured and it presently has its fair share of problems too (which are anyways are being solved as it evolves) but as long as it is solving the first world problems it is here to stay despite its flaws. Look at the internet, for example, the internet has its fair share of problems and disadvantages but since it has solved the biggest problem of, globalized communication on the go, it will stay and so will the blockchain technology and everything that works on it.
Unlike gold, investing in crypto space is a lot risky due to the sheer volatility in its price but in the long run, it should stabilize and might turn out to be a good investment option. Although in event of a financial crash Bitcoin may see a surge in its value. Investing in the crypto space is risky and you should only invest if your risk appetite is high. Also, there are lots of fraud and scams that float around the crypto space. So get a proper understanding and do your homework before jumping into this (i.e., you should know what you are buying).
3. Productive stocks
Warren buffet in 2011 said “the one thing that I can guarantee is that the value of the dollar will be worth less incoming 10, 20, 50 years. One thing that I do to hedge against this bet is to buy good businesses.
Now, what do you mean by good businesses? The businesses that are contributing to the productivity growth in the economy, preferably having zero debt and holding assets of some real worth and also have been in a business for a while.
Still, these businesses will fall by a lot when there is a market crash but will still stand strong among many of the businesses that will be wiped off due to a crash. These businesses know to hold their own. And hence after the crash when the dust will still the only thing that will remain will be these businesses. And these are the business that you should increase your stake in. They will not make you rich during a market crash but will surely make you a lot of money in the years to come.
Companies like Apple, Microsoft, and Amazon wiped around 70–80% of the investor’s wealth in dot com burst. If you had bought this good business then you would probably have become a millionaire by now. Hence you should keep looking for these businesses and trust me they are not so hard to find if your technique is right.
Other assets
Other asset classes include commodities and real estate but they can be country-specific hence you should do a digging about what effect a financial crisis will have on these assets in my country.
For example, as per my opinion during a financial crisis, prices of real estate might surge to an all-time high in the US but these prices might stay sluggish in India and China. Hence do your own research.
And by the way, REIT (real estate investment trust) is a good option to invest in real estate with a small amount.
When the crash will happen?
Well, there is no certain answer to this question. All that is certain is that currently valuation wise the market is overvalued. But nobody can guess when it will correct. All I can tell is that every market bubble that had burst through history lasted for at least 3–4 years, during which the market peaked higher and higher after which it eventually crashed.
Below is the list of various bubbles that lasted through history:
Well, when it will happen? We can’t predict. But will it happen? As the numbers suggest it should happen. The best we can do is to be prepared for what might hit in the future.
Conclusion
A great investor is not the one who makes money in a market boom or in a market crash. The one who keeps minting money irrespective of the economic scenarios is one great investor. Hence I urge you all to become a great investors. Thank you for reading.
