Why One Trader Is Finally Getting Ready For The Market Crash

Via AdventuresInCapitalism.com,

It is something of a tradition amongst market commentators to make bold stock market calls because they gain you notoriety if you get it right. Over here at AiC, I don’t particularly care what people think. I’m here to make money—that’s it. Therefore, I’ve refrained from big market calls—particularly as I have no real edge in guessing where an index of a few hundred companies will be trading at a certain date in the future. This doesn’t mean that I don’t recognize economic and share-price cycles and manage my portfolio accordingly.

Over the past few years, I have been increasingly concerned about the massive structural imbalances in the world, along with excess debt and asinine monetary policy leading to an epic equity market bubble. Remember, your investment returns are directly correlated to the price you pay, not your analytical ability and I refuse to play in the greater-fool theory of finance. With that in mind, I have consistently managed my portfolio with a rather reduced overall exposure profile. Despite holding plenty of cash, I have certainly not been a perma-bear—those guys tend to complain a lot but make no money. Rather, I’ve continued to find opportunities to do smart things in esoteric sectors of the market, leading me to consistently trounce the US equity markets over the past few years. Yet, the whole time, I have been quick to sell companies that appreciated to 80% of fair value, I have been un-willing to take on risk and have passed on many perfectly good investments as I preferred to miss something than increase my market exposure. This fear of a collapse at any time has cost me a lot of upside but I accept it as part of the game. It’s always better to avoid losses, than swing for extra gains, particularly as I see something truly nasty coming for global equity markets. There is no way to know when we crash and there is always the possibility that we crash upwards on economic chaos (think of Venezuela and Zimbabwe). However, I feel we’re inching increasingly close to a market collapse.

The world is awash in data and I cannot possibly process it all. As a result, I scan the numbers, remember my two decades of investing and tend to trust my gut when I’m in doubt. My gut says to sell everything as the washout is coming soon. Especially as we’ve seen multiple events that remind me greatly of that period of foreboding right before the crashes of 2000 and 2008.

What are those events?

–There’s been a massive VAR unwind where “momentum” gets sold and “value” gets bought—yet there aren’t actual flows into value. Rather, funds are pulling in exposure and reducing “value” shorts. While it looks like a sector rotation—I see it as a massive “risk-off” event.

–Vision Fund, a prominent Ponzi Scheme literally detonated overnight and destroyed confidence in all similar VC ventures. Global Crossing, Worldcom and Adelphia destroyed confidence in “new age” telecom, Tyco did it to industrials while Madoff destroyed the last vestiges of structured finance. Capital gets scarce when you cannot trust the data. Is a massive risk-parity fraud about to be exposed and complete the cycle?

–Risk assets tied to liquidity have been sold hard lately. Bitcoin dropped in October 2018 right before they pounded the S&P. Is it telling that Bitcoin broke down hard this week?

–There are funding stresses in obscure places like the repo market. In both prior crashes, there were odd pockets of funding stress before it all blew apart, including plenty of funds with redemption issues.

–Miami real estate has simply gone “no-bid.” You can have a Miami real estate flush without a stock market crash, but it hasn’t happened in my lifetime.

–Thousands of unprofitable companies are suddenly caught in an existential vise. If you grow revenues but can’t raise money in 6 months, you die. If you cut spending to reduce losses, you don’t grow and no one funds you. I remember this happening in both crises. WeWork is cutting every cost—including the free peanuts. Does that add or subtract from community adjusted EBITDA?

Look, I can throw a few dozen more reasons why I think now is the time. No one really knows what will happen. However, as an investor, I don’t have to get it precisely right. It’s a simple trade-off; reduce long exposure and potentially miss some further upside or keep exposure and take a beating if it really is the next time down. With that in mind and a gathering storm of data saying something big is coming soon, I’m cutting back dramatically. Back in May of 2019, I said to sell something. This week, I’m getting serious. With a few exceptions, I sold 10-50% of almost every position I have. Remember, the best defense against the coming crash is to not be exposed to it.

I have been writing on this site for nearly a decade now. I have repeatedly warned against the dangers of going short. Your upside is capped at 100% and your risk is unlimited. However, I’ve gone to the dark side and even added some direct short exposure. My shorts are mostly clustered in indices, though I have my fair share of exposure to Ponzi Sector stalwarts, along with a hillbilly bank exposed to Miami real estate (guess which??) and another West Coast bank exposed to Ponzi Sector fraud. I laid into Hong Kong as the country has forever been changed. I already have a lot of put exposure, but I feel like now is the time to get more aggressive and I don’t want to keep burning theta on my options. This is the first time since 2007 that I have shorted anything. In retrospect, I was a year early last time. I may be a year early this time. Hence, I’ve done it on a scale that lets me take some short-term pain if I’m wrong.

Every day in the markets, you can get it wrong. Dramatically reducing my exposure could be the wrong decision, but why take the chance? Cash doesn’t care what happens to the market. Cash is always seeking out the best opportunities. Even if I’m wrong, there will always be another great opportunity to do something smart in the future. Why take the risk of being wrong when all the data says the global economy is collapsing and the stock market is about to detonate? Now is the time to reduce risk.

Disclosure: Funds that I control are short various market indices and public securities