When the path isn't clear, the advisor you turn to should be.

10-Year Archive

Humanizing Tech

Early Warning Signs of the Impending Market Crash

The Base Code: why you should sell your stock now and put it into cryptocurrencies

I. Setting the Stage

Over the last year, if you have been doing exactly what we said in The Base Code, then you would have made a +75% return on your money in the stock market, gaining almost $3,500 on a base of $4,500. To put that into perspective, if you would have invested only $1 million following The Base Code’s very simple strategy of BOSRUP (Buy On Sale, Reinvest Under Performers), you would have made $750,000 in a single year.

A quarter million dollar return in 52 weeks.

This morning, we sold all of our holdings and locked in the gain that we had been building as part of The Base Code’s fund for the last year. Below is a screenshot from our Robinhood account for proof. Read on to understand why.

II. Why We Sold

To make this as easy to read and impactful as possible, we’ll just put all of our observations into a simple bulleted list. Then you can judge for yourself.

  • The Dow reached its 13th all-time high. Granted it’s a basket of only about 30 stocks, but going from 20,000 to 21,000 in such short amount of time smells like irrational exhuberance.
  • On the front-page of today’s New York Times: “Why the Markets are Defying Forecasts of Doom & Gloom”.
  • The Fed is likely to raise interest rates in March as well as inflation forecasts going up.
  • Retailers are down across the board. See the “Reality Retail” section in Diary of a Madman, Page 24.
  • We’ve heard from various grocery clients and big box retail clients that sales are down even further and that they’re only buying once for the entire holiday season already. Frozen foods are down. Organic sections aren’t doing as hot.
  • Consumer staples are down across the board even while financial stocks are rising. That means the confidence is buoying derivative asset classes, but people have stopped spending money on clothes, more expensive food, and have switched their habits to something else.
  • Consumers are buying rice, meat, some vegetables.
  • Inflation has continued to increase prices while paychecks haven’t kept pace. Which means your dollar doesn’t go as far.
  • Ethereum’s price has increased from $12 to $19 in only a few weeks. Bitcoin’s rise is doing the same. You go into this asset class if you’re scared of the rest of the market going south.
  • NVIDIA, our largest holding, beat expectations with its last earnings release but the price didn’t budge which means future growth of AI is already baked into the price.
  • Apple, our second largest holding, is now seriously overvalued, especially after Buffett dumped $17 billion into it last quarter.
  • You sell stock when it’s at an all-time high, not at an all-time low. Sure, we might lose some on the upside but reading the tea leaves seems like the crash will come in the fall.
  • April 15th is tax day, which we feel will be the real catalyst when all this starts to become real. Especially when people have to pay out of their pockets to the federal government reducing discretionary spending even further.
  • Middle Americans are leaving their retirement in the market (because they don’t know where else to put it), have much of their value tied up in their homes, so they change habits where they can: spending less money on entertainment like the Hollywood Box Office, going out to eat (some food restaurant earnings are down), purchases at the grocery stores and clothing retail are down, and you will start to see Starbucks also hurting as people won’t spend $5 on a latte any longer.
  • Watch as alcohol and cigarettes start going up.

Why isn’t anyone noticing and why isn’t the same trigger that happened last time happening? That is, why is no one talking about a bubble or an expected crash? Very simple: the media is distracted with Trump. It’s been on the New York Time’s front page for months. It’s so much noise, and coupled with Bravo TV as an escape, that people are missing it this time.

We’re early. That’s true. We may have another 6 to 9 months or even a year. But when it happens, just like every other crash, it happens fast. And even with your finger on the trigger you can’t react fast enough.

But make no mistake. When people stop buying the core things that make our economy run: food, clothes, entertainment, then it has a massive ripple effect. They are leading indicators of something not so great happening on the horizon.

III. Where Should We Put Our Money?

It used to be that people would put their money into gold when their confidence faltered on a nation’s economy. The reason is that gold has value outside of just a currency like a piece of paper backed by a federal government. It has intrinsic value.

As of this morning (March 2, 2017), a very interesting thing happened. Bitcoin’s price is the same as gold.

For those unfamiliar, Bitcoin is a cryptocurrency. It’s partially decentralized, which means there’s no government that owns it and it’s uncorrelated with other asset classes. But it does have its problems. Even though it’s the biggest, it is controlled by a small group of individuals who are currently fighting over the right approach to take in the future.

So there’s another cryptocurrency that’s worth watching. That’s Ethereum. It has over $1 billion in market value which, as a new startup, is a pretty compelling thing by itself. Growing from $0 to over $1B in a few years time based solely on the value of people using it to build things on.

Even the New York Times announced that big businesses are going to be building new computing systems on top of the Ethereum platform. JP Morgan Chase, Microsoft, Bank NY Mellon.

We’ve also talked to developers who’ve built reference products on the platfrom. It’s stable, a new computing paradigm and everyone agrees that the development team building Ethereum is crazy smart but also morally ethical.

So, as you think of an asset class that wouldn’t also crash in response to the stock market crash, but rather continue to go up because it’s a safer place to store capital, cryptocurrencies sound like a better solution than Gold.

The value is tied to the number of “app developers” building on top of Ethereum, for instance. Use Apple and their apps as an analogy. The more iOS apps you have in the Apple ecosystem, the more it attracts new developers, the more it attracts users, the more valuable Apple becomes. Only imagine that these apps also act like currency and you can invest in the entire kit n kaboodle.

I know a few folks who are getting into Ethereum. And even though they specify that you shouldn’t treat it as a currency or investment class vehicle, the fact remains that you’re ultimately investing in a startup that’s growing quickly, becomes more valuable as more people build on top of it, already have major global companies doing it, and is uncorrelated with the rest of the market.

One last point. China is working on their own cryptocurrency that they will use to take over part of their money supply. As they use more of WeChat and digital payments, this makes a whole lot of sense. Eventually, you should expect The Base Code to keep part of its interest in Chinese cryptocurrency, as it creates a hedge against the American economy, there are over 1 billion people all connected and using a single platform, while enabling the economists in the government to make real-time monetary policy changes in response to consumer behavior happening digitally.

At that point, China will be ahead of America, at least from a currency perspective.

One last point. Imagine the entire global system crumbles. Banks fail. The cash you have sitting in their digital vaults disappears overnight. You’re overseas you can’t access your cash. The FDIC can’t insure the entirety of American savings, as paltry as it might be. The only safe harbor that allows for 24/7/365 liquidity without being subject to the rampant fraud we saw leading up to the housing market collapse, is a cryptocurrency.

Now, no individual’s personal incentive to deceive or make back-room deals can get in the way of your digital currency. And you can still shift it to a bank to get cash out. Some even have ATMs for these digital currencies.

Again, we’re early. It may be a sign of failure in the startup industry. But it’s a sign of Alpha in the investing industry.


Your Recommended Reading

  1. The Base Code
  2. Making a Return When the Dow Is Down
  3. The Market at an All-Time High
  4. Invest in Apple at $90
  5. The Gravity of a New Perspective

Early Warning Signs of the Impending Market Crash was originally published in Humanizing Tech on Medium, where people are continuing the conversation by highlighting and responding to this story.

from Stories by Sean Everett on Medium http://ift.tt/2lidoTC