Let’s face it. The main reason why stock markets are hitting record highs recently is not due to solid corporate performance. There are some economic bright spots and some companies are doing really well, like Apple. But for the most part, a lot of the record valuations are due to the huge amount of stimulus money flooding finance markets. As the Bank of Japan, the U.S. Federal Reserve, and the European central bank scoop up bonds with money they print out of thin air, all this cheap liquidity has to be invested somewhere. This is a tremendous moral hazard.
As I have written earlier, the whole point of economic stimulus programs is to have some of this cash end up on Main Street. However, this is wishful thinking. If you were in the shoes of investors who have access to this cash, where would you put your money? Would you put it in a Main Street business where it can take years to get a return on your investments? Or are you going to put it in stocks where you can cash out quite quickly? It is a no-brainer.
It is no surprise that the vast majority of this money has ended up and stayed in financial markets. It is also no surprise that American stocks now are, on average, overvalued. We are headed for a crash, folks, and it is only a matter of time. This is why it is extremely important to start thinking about a golden parachute escape strategy. A certain portion of your portfolio should go into precious metals like gold or silver.
I recommend this course of action because, when a crash happens, the price of stocks goes down but the price of gold and silver spikes up. This acts as a golden parachute because a portion of your total investment portfolio dedicated to precious metals would rise up in value to offset your paper stock losses. I don’t recommend exiting your paper stock positions. Instead, once the market bottoms out and precious metals spike to a very high level, cash out of your precious metals positions gradually and start scooping up blue-chip high value stocks that are temporarily depressed.
If you play this game correctly, you actually end up making more money during crashes than during market highs. Once the market fully recovers, you should exit precious metals and start accumulating stocks again to ride another high. That is how you play the game. It takes several years and it takes impeccable timing. However, it is worth playing if you want to keep your shirt. At the very least, don’t panic and sell all your paper stock positions.
