When is the next market crash?

Someone threw the million-dollar question to me at a recent Q&A session: When will the market crash?

As they said, the answer ranges from imminent to most likely to happen in these two to three years. All markets have cycles, ups and downs, booms and busts, peaks and bottoms. Nothing can escape this, be it the economy, equities, properties, bonds, currencies or commodities.


Investing is taking a roller coaster ride blindfolded

The investment world is no different from an amusement park. You pay the entrance fee, step inside and have fun. There are shows to watch, games to play and prizes to be won.

The most popular attraction that no one want to miss is the giant roller coaster. The ride has ups and downs, upslope climbs and steep falls, sharp turns and unexpected twists – all the drama and thrills that we lack in our monotonous daily life.

Every time we invest in an asset, we are on board a roller coaster. The difference is that we are going for the investment ride with our eyes blindfolded.

It doubles the fun, the excitement and the fear. It helps to relieve our phobia of height. But it also increases the uncertainties in the near future.

We know the roller coaster cannot stay at the top or at the bottom forever. But we have no idea how high or how low it will continue to go, and how long it will remain in the same position.

But one thing is sure: When we feel it has already gone up for a long time, we know it is almost time to come down soon.

No bull market can go on forever. Wall Street has reached its record of nine consecutive years’ of bull run. We are now going through the most expensive bull market in history.

Look at the PE ratio of the best-performing stocks. Look at the net return of real estate. Look at the risk level of bonds. Where is the intrinsic value?

We often hear people say that it is not possible to time the market. But down at heart, if we are not too overwhelmed by greed or fear, we can still see whether the market roller coaster has been at the top or the bottom for a long time.

We often hear people say that the market will always recover to go up higher. So it doesn’t matter when we buy.

A roller coaster ride may take three minutes to go up and down three times. How many market cycles can we ride through in our whole lifetime? How can we guarantee that the market we invest in is up when we need money the most?

Because life is unpredictable. There are black swans. There are accidents.

All of a sudden, some gunmen can storm into the theme park and open fire. We never know whether we are still stuck at the scene or are lucky to leave in time.

Amused? That’s why it’s called an amusement park.


What may trigger the next market crash

According to Harvard’s Joint Center for Housing Studies, household debt in the US is now at all-time high. With a total population of 326 million, 39 million Americans cannot afford their homes and 19 million spend more than half of their income on housing. Nationwide mortgage already stands at $8.8 trillion as of Q4 2017.

The spike of interest rates is going to make highly-leveraged individuals and companies increasingly difficult to service their loans. After Fed raises interest rates four times this year and the trend continues again next year, defaults on personal and corporate debts are going to spread really fast.

A near full employment economy and euphoric stock prices are covering two big bubbles: asset bubble and debt bubble. The former’s prices are inflated by money printing while and the latter has escalated to an astronomical figure. Since the last financial crisis, worldwide debts have ballooned to $164 trillion. Still, no one has any intention to address the global issue.

What makes stocks, bonds and properties so expensive today? It has nothing to do with better economies or higher spending power. It is the result of “fabricated demand” from central banks around the world. Since the last financial crisis, global central banks have injected huge capital into these assets to spike up their prices. Institutional investors followed suit.

The stimulus efforts of global central banks created a fabricated demand for stocks, bonds, and real estate, ever since the credit crisis, but as of April 2018 those combined efforts are now a drain on liquidity. As recently as last September the combined effort of the ECB (European Central Bank) and the FOMC (Federal Open Market Committee) was infusing $60 billion per month into these asset classes, like they had almost every month since the credit crisis — but now they are effectively selling $30 billion of assets per month. That is a $90 billion decline in the monthly demand for assets in seven short months.

– Thomas H. Kee Jr., President and CEO, Stock Traders Daily

The budget deficit of Fed will be close to $1 trillion next year. Fed has no choice but to start unwinding its sizable bond portfolio estimated to be $4.5 trillion. With cash-rich countries all slowing down in debt acquisitions, who else in the market will take over the junk?

When Fed starts selling, institutional investors start panicking. When institutional investors start panicking, the market starts crashing.

When somebody makes a mistake, someone else is going to pay for it. When the central bank makes a bad decision, the retail investors are going to suffer.

They are people who saved money, bought a house, got out of debt, and invested for the long term in the stock market. Those are the people who may be wiped out.

– Robert Kiyosaki, Why The Rich Are Getting Richer

Protecting ourselves from the next market crash

Why do we continue to be caught off guard in every market crash, despite its frequent occurrence in history?

It is a human instinct to have ‘status quo bias’ and prefer things to stay the same by doing nothing. We would like to believe that this time it is going to be different.

You can’t end a problem like that with no pain. Somebody’s got to suffer.

When the downturn takes hold the world is going to be in worse shape because the world has shot all its bullets.

– Jim Rogers

To hedge against the next market crash, below are three things you can do right now.


1. Go back and check the value of your assets

I am not asking you to sell off your assets. You can still stick to your buy-and-hold strategy.

But take a step back to look at the true value of your assets using the fundamentals of value investing. Check whether any of your asset is overvalued.

It doesn’t matter what is the asking price or how much it is sold last. Value it with the set of perimeters that matter to you as a value investor. Find out what you think it really worth and how much you are willing to pay. Add in your comfortable margin of safety.

Hold only assets that can guarantee protection of your principal in any circumstances. Hold only properties which can still provide a positive passive income after a market crash.


2. Minimize exposure to any risky investment

In case of a market crash, minimize your risk by avoiding to hold assets that are heavily leveraged.

– Are you tempted to chase the price of any investment which has too much hype? You’d better be safe than sorry.

– Are you being drawn by cheap money to stock up overpriced properties? In view of irrational land bidding and acquisition, it’s time we looked for a sensible margin of safety and a reasonable positive return.

– Are you flooded and blinded with liquidity and lots of spare cash (who aren’t these days?)? Stay in sane and hold your cash until the real opportunities come.


3. Hold your horses and be patient

You may be frustrated and restless that your cash is not working hard enough for you. But remind yourself that not making enough profit is far better than losing money, despite the fact that we often act the other way round.

Remember, no property owner want to end up with a depreciating liability on a cash-stretch day, or a negative asset at a retirement age.

Property prices always go up in the long-term? That is the line of property agents. As an investor, always make sure that you have enough capital to see another day.

Experiences told us that after a market crash, everything is on sale. Good deals are aplenty. The market always rewards those who are patient.


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