American Financial Markets Experience The Calm Before The Storm

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From Birch Gold Group

We are living in strange times. To demonstrate how strange (at least partly), here’s a brief “State of the Economy” as 2021 winds down.

Between November 8th and December 1st, the Dow Jones Industrial Average lost 2,400 points. That loss is quite substantial, but the Dow’s volatility has been incredible since January.

The Dow has whipsawed all year long. It lost, then regained, more than 1,200 points in January, again in May, then again late May through June. You might think the Dow was nervous. Investors certainly are.

Which brings us to the present moment, and more proof that the state of the U.S. financial markets could be described as perilous (at best).

All it takes is the “Fed Signal” to panic Wall Street

Much like the Bat Signal, which immediately gets Batman to spring into action, the “Fed Signal” has appeared. Recently re-appointed Chairman Powell mentioned the possibility of discussing faster tapering of asset purchases sometime.

Note this wasn’t an official declaration (the next FOMC meeting is Dec. 14). According to a recent Wall Street Journal article, Powell only gave a hint of potential tapering:

Mr. Powell during a Senate hearing on Tuesday said it would be appropriate for the Fed to consider accelerating the reduction of its asset-purchase stimulus program at its meeting on Dec. 14-15.

Basically, Powell talked about talking about considering a small change in the Fed’s plans. No action was taken. Nothing changed.

Even that was too much for Wall Street. The Dow immediately lost 650 points on November 29.

Wolf Richter called what was supposed to be a hugely profitable day for retailers “Red Friday” and leveled sharp criticism at Wall Street:

And already the crybabies on Wall Street have come out in force, clamoring for the Fed to end the tapering of its asset purchases, and to push out the expected interest rate hikes into distant infinity, and to maybe even re-start QE all over again before they even ended it, because, you know, stocks aren’t ever allowed to drop, not even a little bit off their ridiculously inflated highs.

During what was supposed to be a popular holiday travel week, major travel companies listed on the S&P 500 took a huge hit after Powell’s remarks:

  • Royal Caribbean: -13.2%
  • Norwegian Cruise Line: -11.4%
  • Carnival Corporation: -11.0%
  • United Airlines: -9.6%
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According to WolfStreet, the damage wasn’t limited to the travel sector. Major companies like American Express lost 8.5% in value, Visa took a 2.7% hit, and Apple dropped 3.2% (for context, that’s about $80 billion of paper profits disappearing)  shortly after Powell’s comment.

If we look at the numbers, the Fed’s ongoing quantitative easing (QE) buys up $120 billion in bonds per month, every month, since March 2020. Wall Street’s fear of losing even a fraction of that free money resulted in plunge of $120 billion in stocks in a single day.

Either that’s a gross overreaction, or Wall Street and the stock market are simply puppets of the Fed.

Either way, this taper talk isn’t the factor highlighting the market’s fragility…

Omicron stampedes stock bulls

One word that spooked Wall Street and mainstream media in a major way on December 1st was “Omicron.” Early reports show this latest COVID-19 mutation to have only mild symptoms and fast transmission.

But that didn’t stop the Dow from going crazy on mainstream media reports of the first case in California:

Average DJIA fell around 462 points, or 1.3%, to close near 34,022, according to preliminary figures — a pullback of more than 980 points from the blue-chip gauge’s intraday high

Extreme volatility like this is a symptom of fear that can be triggered at a moment’s notice. Even if the market bounces back quickly after this kind of abrupt drop, the canny observer sees just how fragile the market is. At a time like this, when fundamentals are weak and prices absurdly high, any bad news could send everyone trampling one another to get to the exit.

But where are they running to? Typically, fleeing the stock market means hoarding cash. However, one of the smartest investors alive claims that cash isn’t safe…

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Ray Dalio: “Cash is not a safe investment”

Just the few examples above clearly show that the market is extremely volatile right now. They also serve as a good reminder of how fragile the U.S. financial market is.

If all it takes is a new virus variant, Powell’s prognostication, or other minor media triggers to spook the market into a downward spiral, then it’s a good idea to keep a frequent eye on your money.

Ray Dalio, founder of the world’s largest hedge fund Bridgewater Associates and one of the sharpest analysts in the world, agrees:

Cash is not a safe investment…because it will be taxed by inflation. Know how to balance a portfolio. When equities go down, then you see the bond market, gold go up. Wealth is not destroyed as much as it is transferred. And if you know how to balance those investments, that’s the most important thing. Be in a safe, well-balanced portfolio. You can reduce your risk without reducing your return. [emphasis added]

We know the markets are overvalued. Dalio seems to think that excess “wealth” will transfer, and the solution is a “well-balanced portfolio.” Basically, that means own different kinds of assets, so that when one asset class goes up you can “transfer the wealth” into lower-priced assets. His claim that diversification reduces risk without reducing return is well-documented.

So take a look at your own portfolio, and determine whether it’s diversified into assets that can reduce your risk during volatile times like these. Don’t neglect the so-called “alternative assets” like physical precious metals.

By diversifying with physical gold and silver, you’ll gain exposure to assets that may perform very differently over the long-term. You’ll also enjoy a significant advantage in a high-inflation environment.

Dalio’s advice reminds us it’s our own responsibility to do everything we can to ensure our savings are both diversified and balanced, our risks are managed and our futures secured.

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