A big bounce this morning affords another opportunity to review capital risk for the masses who have come into this downcycle imprudently exposed, unprepared and illiquid.
The damage of the past week has been dramatic and widespread and the knock-on effects are not yet fully evident for many funds, managers and traders. Fallout is in motion.
Moreover, given the epic leverage cycle top for the history books –just three short weeks ago–it is also highly likely that the mean-reversion cycle here has significantly further time and downside yet to run.
My partner Cory Venable’s chart below of the Canadian TSX Composite since 1995, offers a big picture view of where we are at, so far, compared with the last two market cycles (rectangles on left), which were also marked by record central bank intervention, excess liquidity and rampant financial speculation.
As shown below, the 28% drop since February 20 retraced the TSX to levels it first reached in October 2006–over 13 years ago. This is a strong start; but potentially just halfway through the full cycle decline now in motion.
Moreover, it should be noted that excessive debt-weight, demographics and exhausted monetary gimmicks suggest that the recovery from the final bottom this cycle will be a multi-year “L” shaped formation rather than a “V”. This will prove extra harsh for those who suffer big losses and have no meaningful cash to redeploy when prices are low and yields finally worth buying.
If your financial plan does not contemplate and allow for such outcomes, it is not sufficiently robust, nor likely to serve your needs in the years ahead. It’s not too late to fix that.
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