I wanted to share my experience of the 2008 bailouts because we are among friends. Right? And friends help each others, and share their experiences. Right?
During the financial crisis of 2008, it became clear that the government had to step in. People were losing their jobs, stock market dropped by more than 30%, the market was going up and down by 5-10% a day (the amount my brokerage accounts would go up or down was more than what I was earning in a month at work). It was humbling.
It was really tough and difficult to trade. Buy on the down days? Sell on the up days? Hold it until sky clears, despite having bled a lot of money already? I was over leveraged too (through LEAP options), which was not the smartest thing to do at the time, but heh, are you going to lock the loss?
Then came the bailout, with a lot of volatility leading to it. A lot of back and forth for days for politicians to get a chance to pass it. (They may have failed to pass the first version even, I don’t remember).
Finally, one of the branch passes it, and it’s time for the other branch to pass it. “About time, after the bailout, things are going to get better, we can save those companies, we can move ahead and blue sky is coming.”
I remember at the time, I was looking at the final votes, and I could not believe it. As the votes would come in, and it became clear that the bailout would pass, S&P futures started to drop, like a stone. WTF!!! Help is coming, everything will get better, why is it dropping?
Well, the reason is simple, by signing the bailout, politicians agreed that we were in a shitty situation, companies needed to be saved, and the lousy bailout was getting signed, and there was no more good news down the line for a while. We shot our ammos, and now let’s pray. So it became sell the news.
As the market continued dropping days after days, and I was going to be wiped out, I had to sell to not be over leveraged anymore. I had to take a 6 figures loss. And I am fortunate that I sold, because the market continued to significantly tank for almost 6 more months to level I did not think we would reach. After selling, I was not taking as much risk anymore, I got burned hard.
After we reached the bottom, I switched my positions to risky assets, and I was able to make up some of the losses. But that was a great learning experience, and I figured that I preferred to learn that lesson at the time, when my accounts were not too big than later. Recovering from a 6 figures loss is doable, but more than that, and it is a decade or more of setback.
Well, I can say that almost 12 years later (fuck, already!), the situation is very similar. This time, I was ready, and maybe that will be another post to explain what I did in 2019-2020, as it can be easily applied.
- People were losing their jobs. Check.
- Stock market dropped by more than 30%. Check.
- The market was going up and down by 5-10% a day. Check.
- Bailout in the process, taking days to agree on. Check.
I am not saying that the market is going to drop after the bailout is voted, but watch out for that. Unlike 2008, there is no blue sky coming. The bailout is only a short term fix. How long do you think $1200 per person is going to last?
Unlike 2008, we know that the worst is ahead of us. We still don’t know. In the US, the coronavirus pandemic is expected to peak in at least 2-3 weeks. But who knows? As we are doubling every 2-3 days, it could mean 100 times more new cases per day. 100 times more death per day (few weeks later the infection). It’s absolutely a staggering and awful number. Hopefully, lockdown will be enforced in every state, so we can reduce this grow rate. Hospitals are already over capacity, nobody can tell exactly how this is going to end (except that’s going to be a carnage). Esp. as some are talking about removing the lockdown in 2 weeks! And even after the peak, it means that people are still getting sick, people are still dying, as they are hospitalized for 2-4 weeks. Expect at least 1-2 months of pain, even after peak.
I understand that the market is forward looking, but there are still many opportunities for false head starts, and failed bounces from the bottom.
From my experience with the 2008 bailout, nobody could really predict the bottom. Even as it was a financial crisis. This time, it is not looking pretty, so please don’t be like the 2008-me, don’t be over-leveraged (yet), things can go either way. Politicians are very good at messing up a crisis.
And most of all, be safe and healthy, stay home as much as you can. It is going to be a rough ride, and unfortunately we are only getting started. My sincere thoughts for people with friends and families that are going through hardship, sickness and death. Hang in there!
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.