Learning From the Great Financial Crisis as Trump Shocks System
Stocks might be up or down by 30% a year from now and I've learned how to prepare for major changes.
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On Friday night, after the markets were closed, a bunch of exemptions for tech were announced. Then they seemed to get walked back on Sunday.
With all of the tariff news, many missed that at a recent cabinet meeting, Elon Musk said DOGE was on track for $150 billion in savings in fiscal 2026 (a far cry from $1 trillion, and even that number has been questioned by The Wall Street Journal, for example).
Basically, there is a lot going on.
I think we can agree that the administration is trying to shake up the world order.
So, for today, let’s do a thought experiment as it has become insanely difficult to figure out what policies are on or off; important, or negotiating tools. But, for now, let’s stick to the premise that we are seeing a shock to the global system.
To me, that creates the possibility that a year from now stocks are 30% higher or 30% lower.
Two quite extreme outcomes, but they don’t seem that extreme, to me, when we are talking about a generational change in attitude towards global trade and global relations.
Today, we won’t argue over which possibility is more likely. Just for the moment, let’s pretend that the two outcomes, a year from now, are that stocks are plus or minus 30%.
Which outcome are you more afraid of?
- Are you more afraid of missing a 30% rally?
- Or, are you more afraid of being caught in a 30% decline?
That probably depends a lot on your savings, your age, what stage of life you are in, etc.
But let’s examine these two opposing conditions more closely:
- What is your job situation with markets up or down 30%? Your family’s job situation? Down 30% is easier to weather if your job situation remains unchanged — but that seems like a risky bet. The correlation between a big move down in markets and job conditions is likely to be high — meaning losing money on your investments and having less comfort on your income side.
- What happens to your house price? I find it difficult to believe that housing prices won’t correlate the equity market (regardless of what rates do). If you are renting, this might not be bad. If you own a home, this could add an extra layer of anxiety.
When I examine my personal situation, I lean towards being conservative on my equity allocations. Not because I fully understand where we are headed, not because I completely discount the chance of markets being up a year from now. But because, if I miss the rally, I think I will make up for it in lots of ways. If I get caught long and wrong, it might only be a portion of the troubles I face.
Maybe that is wimpy. Maybe that isn’t the correct way to value risk, but I think we are at an extraordinary moment in global economics (and hence markets and jobs), and I saw what happened to the biggest risk takers during the Great Financial Crisis (in my industry). Some lost their portfolios, jobs and homes. Some took a hit, but we able to pivot, position, move around and rebuild.
Sorry if this isn’t helpful in whether or not to buy Monday morning’s rally, but I think this deserves to be something you think about.
Separately, I will be selling some KWEB (possibly into FXI or ASHR, or just reducing exposure) as KWEB does own some ADRs and the ADRs have come under some discussion about delisting. I don’t think it is a huge threat, but FXI is primarily Hong Kong listed shares and ASHR is primarily China listed shares, so might make sense. Not sure I’ll do it, but figured I better highlight that risk.
At the time of publication, Tchir was long KWEB.
