It’s easy to get lost in the financial weeds. What should you focus on? Growing revenues, technical breakdowns, sentiment extremes? The list is endless and every day the noise amplifies. Before you know it, you’ll be paying attention to excess inventories at retailers and trying to correlate it to seasonal sales cycles. But how does all that help you make money?
Let’s take a look back in time because history may not repeat but it does rhyme. And 1929 provides a clue.
1929: The Dirty Secret
Most students of financial markets know 1929 to be a horrendous year in the stock market. Indeed, during the Great Depression stocks had lost nearly 90% of their value.
What you don’t hear so much is what precipitated the Great Depression: a sovereign debt crisis. Capital fled Europe, causing the dollar to spike. And subsequently fear of a dollar devaluation led capital to flee the dollar.
It doesn’t take a rocket scientist to connect the dots now and see similar parallels. We’re in the midst of a massive debt bubble that will lead to sovereign debt crises. Evidence of big money fear is apparent already as capital is fleeing the euro and pound, and other currencies into the dollar.
The way the world falls apart is from the periphery economies to the biggest of them all. We’re already seeing serious issues in the once fortress-like German bonds. And if Germany falls, so goes the rest of Europe. Asia, too, will be in trouble. But it won’t be some time before the chickens come home to roost in the USA.
Make no mistake about it, however, they will come home. Specifically, that means bond markets will suffer. In a sovereign debt crisis, government bills – widely regarded as “risk-free” – become susceptible to risk.
The dirty secret of 1929 is that a sovereign debt crisis (bonds) was at the core of the troubles. Stocks simply got the headlines.
It’s no surprise today that a run on bonds will leave a trail of economic destruction in its wake. After all, the bond market is significantly larger than the stock market.
As interest rates rise now, countries that issued dollar-denominated debt, like Argentina, face serious economic risks because the obligations to pay back debt are significantly higher than originally estimated when accounting for the currency adjustments.
If a tidal wave of debt crises hit countries abroad, when will the tsunami hit the USA and how can you survive it?
How To Survive: A Lesson From 1929
As the dollar rises to its purchasing power peak, expect a chorus of market analysts to chime in that 1929 is upon us again. Another Great Depression is coming, they will likely claim.
Just as the dollar rose in 1931 as other nations defaulted, so too will history repeat as the dollar climbs ever higher…. so the rhetoric will go. And just as the 1929 market crash sparked fear, they will claim today’s stock market won’t bottom for years… just as the market back then didn’t find a low until 1932.
But beware the proclamations of Armageddon. It’s wise to stay safe. But staying safe doesn’t mean what it used to: tying up capital in the bond market. If and when the sovereign debt crisis comes home to roost, it will be tangible assets that keep you safe in a liferaft when the waters get choppy. That means three things: stocks, real estate and precious metals.
The bottom line is pay as much attention to bond markets now as stock markets. When you see concerning headlines about German Bunds and the dollar continues to rise, know that history is repeating and a sovereign debt crisis is upon us and moving towards the USA. It just hasn’t arrived yet. But when it does, you’ll want to have your money parked in tangible assets, not paper debt markets.