The biggest sword hanging on the entire "mother of all bull market" theory is the impending US fed rate hike, which is coming soon. How do we prepare for it? Well one possible approach is to study if a similar thing has happened in the past. If yes, what happened then? Fortunately it has happened in the past, so we have a reference point to study .. yay !!
Asian crisis 1997
Last time America raised interest rates in 1994 sparking a financial crisis in Mexico, which could no longer afford to service its debts. A couple of years later the crisis spread to asian countries like Thailand, Korea and the Philippines. Their currencies tumbled, investors fled, stock markets crashed, sparking fears of worldwide economic meltdown. Western stock markets also fell, but rebounded quickly after the Asian countries agreed to fierce austerity programmes. The whole asian crisis lasted for 46 days before recovering to the pre-crash levels. However the austerity measures adopted by the asian countries caused a slump in the commodity market affecting countries like Russia who run their economy on commodity exports which lead to another global panic in 1998. This also lasted around 44 days before recovering to pre-crash levels. Compare this to tech bubble crash of 2000 that lasted for 3 years and the 2008 subprime mortgage crisis that lasted for 1 year followed by the Greek debt crisis in 2011 which lasted for approximately half a year. US interest rate hike does not look like a big deal as long as other countries keep their debt to GDP manageable (for India that is the fortunate case).
What can happen when US hikes rate this time
I think there can be a blip effect (30-50% depending on your portfolio beta) and you have to be prepared for a couple of months of intense pain in the market, possibly followed by an equally sharp recovery. Which means if you have enough cash in hand and deploy it smartly during this blip (if you get it), you would earn enough for the next ten years in just a few months time. If you have atleast a percentage of money in hand during this blip and deploy it smartly to average out your losses, you would recover almost as soon as the blip recovers and be back in business in no time. If you are fully invested before this blip, you might take about a year to recover, still not a very big deal. It will be like a bomb blast, if you got caught at the center of it, it can be fatal (late entrants who rush to invest in wave-5 of the rally) but if you survived the moment, it should be fine from there on.
For the survivors
If this is followed by another crisis situation like Russia crisis the market could stagnate for a few years before getting back to what it does best i.e making you rich. However if this leads to an accelerated bust of the bigger time bomb, .. actually a nuke bomb .. called the global debt bubble .. then we are all screwed. Make no mistake then it won't matter whether you are invested in gold, real-estate, debt or equity, or you are dependent on your salary for monthly expenses, we will all fall down, flat & hard. Only people who will do well are the one's who have hard cash locked in their lockers at home. But you know it, nuclear bomb is usually an "end of the world" scenario so everyone will try their best to not let it happen.
Keep your bomb disposal suit on .. but don't give up the fight
Assuming that a financial nuclear explosion will not be allowed to happen through combined efforts of the world, I think equity is still your best option even today (weighing risk vs reward) and US rate hike is more of an opportunity (if you are smart enough and prepared in advance). Most of the symptoms are already unfolding around the world. Many small countries are on the verge of defaulting or already defaulted. Lot of commodity related sectors are already in deep crisis. However the world is and likely to continue to be supported by few big countries who will keep it going. Forget not, a very big global rally trigger is also impending. If the conflict situation in the middle east comes to an end in couple of years from now, it will trigger a global market rally of epic proportions, this time commodity market included. Luckily we are on the brighter side instead of on the darker side. So let's see how it plays out and be prepared .. keep your bomb disposal suit on for the smaller bombs which will explode, hope the bigger bombs don't explode and are diffused by combined efforts of the world together and wait for the middle east crisis situation to end which will also happen soon. You will love what comes next ..
Asian crisis 1997
Last time America raised interest rates in 1994 sparking a financial crisis in Mexico, which could no longer afford to service its debts. A couple of years later the crisis spread to asian countries like Thailand, Korea and the Philippines. Their currencies tumbled, investors fled, stock markets crashed, sparking fears of worldwide economic meltdown. Western stock markets also fell, but rebounded quickly after the Asian countries agreed to fierce austerity programmes. The whole asian crisis lasted for 46 days before recovering to the pre-crash levels. However the austerity measures adopted by the asian countries caused a slump in the commodity market affecting countries like Russia who run their economy on commodity exports which lead to another global panic in 1998. This also lasted around 44 days before recovering to pre-crash levels. Compare this to tech bubble crash of 2000 that lasted for 3 years and the 2008 subprime mortgage crisis that lasted for 1 year followed by the Greek debt crisis in 2011 which lasted for approximately half a year. US interest rate hike does not look like a big deal as long as other countries keep their debt to GDP manageable (for India that is the fortunate case).
What can happen when US hikes rate this time
I think there can be a blip effect (30-50% depending on your portfolio beta) and you have to be prepared for a couple of months of intense pain in the market, possibly followed by an equally sharp recovery. Which means if you have enough cash in hand and deploy it smartly during this blip (if you get it), you would earn enough for the next ten years in just a few months time. If you have atleast a percentage of money in hand during this blip and deploy it smartly to average out your losses, you would recover almost as soon as the blip recovers and be back in business in no time. If you are fully invested before this blip, you might take about a year to recover, still not a very big deal. It will be like a bomb blast, if you got caught at the center of it, it can be fatal (late entrants who rush to invest in wave-5 of the rally) but if you survived the moment, it should be fine from there on.
For the survivors
If this is followed by another crisis situation like Russia crisis the market could stagnate for a few years before getting back to what it does best i.e making you rich. However if this leads to an accelerated bust of the bigger time bomb, .. actually a nuke bomb .. called the global debt bubble .. then we are all screwed. Make no mistake then it won't matter whether you are invested in gold, real-estate, debt or equity, or you are dependent on your salary for monthly expenses, we will all fall down, flat & hard. Only people who will do well are the one's who have hard cash locked in their lockers at home. But you know it, nuclear bomb is usually an "end of the world" scenario so everyone will try their best to not let it happen.
Keep your bomb disposal suit on .. but don't give up the fight
Assuming that a financial nuclear explosion will not be allowed to happen through combined efforts of the world, I think equity is still your best option even today (weighing risk vs reward) and US rate hike is more of an opportunity (if you are smart enough and prepared in advance). Most of the symptoms are already unfolding around the world. Many small countries are on the verge of defaulting or already defaulted. Lot of commodity related sectors are already in deep crisis. However the world is and likely to continue to be supported by few big countries who will keep it going. Forget not, a very big global rally trigger is also impending. If the conflict situation in the middle east comes to an end in couple of years from now, it will trigger a global market rally of epic proportions, this time commodity market included. Luckily we are on the brighter side instead of on the darker side. So let's see how it plays out and be prepared .. keep your bomb disposal suit on for the smaller bombs which will explode, hope the bigger bombs don't explode and are diffused by combined efforts of the world together and wait for the middle east crisis situation to end which will also happen soon. You will love what comes next ..
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