Juggling Dynamite

Understanding that “defensive” equities offer little protection in bear markets is critical to meaningful capital protection. The table below (courtesy of Gary Shilling) shows what happened to different sectors and the S&P 500 index overall during past recessions.

Trying to hold through deep declines is hard; most people understandably panic after they have sustained big losses.  The final capitulation selling of all those who bought and held ‘high’ brings cycle bottoms, but that ‘deleveraging’ process typically takes 12 to 24 months to complete. We are currently just a few months into this downturn.

Proactive loss-avoidance requires steering clear or stepping away from bubbles before your capital implodes. We must be mature and sober enough to avoid/minimize our exposure to bubbles to miss out on the losses too.

As lovely as your investment adviser may be, the finance sector exists to sell products at every price and keep people holding the bag regardless of the risk-reward prospects for the individual client. Minimizing/avoiding losses takes counter-culture thinking and discipline, but it can be done with independence and a lot of focus.

As noted last week by insolvency counsellor Scott Terrio: “In matters of personal finance, avoidance is a huge protection, but it takes proactive decision-making and good advice. And there seems to be less and less good advice either on the internet or in terms of peer pressure. Avoidability.”

The cycle-savvy insights below are worthwhile.

DoubleLine CEO-CIO and Founder Jeffrey Gundlach joins CNBC’s Closing Bell with Scott Wapner on April 7, 2025, to discuss the recent reciprocal tariffs announced by President Donald Trump, emphasizing the significant widening of credit market spreads. He also expresses concern about the potential for leveraged investors to go bankrupt, stating, “This type of thing usually ends with forced liquidations.” Mr. Gundlach suggests maintaining a defensive position and holding cash due to expected continued volatility. In addition, he highlights rising recession probabilities, the Federal Reserve’s challenges in balancing inflation and recession risks, and the potential impact of tariffs on foreign investment in the U.S. Here is a direct video link.

Financial commentators predictably blame the Trump administration for ‘unexpected’ market losses.

Two things about that: the tariff file was not unexpected. Trump has promised to do this for a long time. Secondly, major downdraft cycles are the natural and recurring aftermath of debt abuse and asset bubbles.

Reckless risk-taking was an international pastime during the years of ‘easy’ money monetary and fiscal policies; it seemed fun while it lasted, but it was always a bug waiting for a windshield—bubbles burst every time—it’s what they do. The progress to date in some widely held benchmarks is summarized below.

The damage has been relatively light so far. As I have repeatedly pointed out, the average stock market decline during past recessions has been 30%, and 34 to 86% when valuations begin from extreme highs, as in 1929, 1973, 1999, 2007, 2019, 2022 and 2024. If prices are halfway through this bear market decline, historically, that would be a fairly mild loss cycle. These are the ladders and snakes of financial mania: Years of apparent progress are deleted in weeks and months. Most are taken by surprise.

The masses have no business gambling with savings they cannot afford or stomach to lose, especially for those at or within a few years of retirement. How long will it take for assets to recover losses this time?

It’s not too late to review risk exposures. It’s also worth repeating that real estate downturns have historically led to the harshest recessions, and that’s happening now.

I’ve diligently measured and mapped this incoming mess; frontline reports now confirm the unwinding. Insolvency trustees have entered their boom time. Hoyes, Mikalos’ consumer solvency counsellor Scott Terrio wrote this on LinkedIn last week:

Many people entered the housing market due to FOMO; many of them had really no business doing so as they couldn’t afford the homes they bought; yet buy them they did – somehow – co-signors, or with many qualifications being very suspect (mortgage-to-income ratios that would make your eyes water). ANYTHING to not miss out. But that kind of thinking can end up backfiring.

In many cases, things would’ve been ok had everything gone ok. But life isn’t like that, very often. The tipping points from doing ok into insolvency (whether legal insolvency or just technical insolvency) are often fine margins. Some of those factors are done by choice, even if never really intentionally.

In matters of personal finance, avoidance is a huge protection, but it takes proactive decision-making and good advice. And there seems to be less and less good advice either on the internet or in terms of peer pressure. Avoidability.

No truer words were ever spoken; none of this was unforeseeable. There was always going to be a catalyst for the delirium to break.

We have another opportunity to review financially destructive behaviours and make wiser choices that can improve health and stability for the rest of our lives. But we have to admit, repent and reform to recover. Repeating the same patterns and expecting different outcomes is just plain painful.

Many people are now starting to realize (again) that they lack meaningful risk management and their financial health is in danger. The segments below offer some lucid economic observations.

Wall Street economists predict a US recession this year and a return to pandemic-level inflation due to the Trump administration’s announcement of major tariffs on global trading partners. Liz Ann Sonders, Charles Schwab Chief Investment Strategist, talks about the risks of rising inflation and what the Federal Reserve might do next. Here is a direct video link.

Bay street veteran and economist David Rosenberg says Trump’s latest tariffs will backfire on the U.S. as he predicts the loss on free trade with major partners will only drain U.S. GDP growth. Here is a direct video link.

Trump’s tariff policy just resulted in a 22% effective tariff rate in the US, the highest since 1909. The result is a crashing stock market and declining bond yields, with many people now assuming the US will hit a recession in 2025. Here is a direct video link.

Thanks for the shout out Jay Martin!

“Ultimately, you always have to be aware of your risk exposure within these crazy cycles.”@kdaniellepark pic.twitter.com/1yHngqUUmi

— Jay Martin (@JayMartinBC) April 4, 2025