Hold’em or Fold’em

Column #370      September 30, 2022

The market indices had rallied off their June bear market lows to peak in mid August. Then they retraced back to their June lows where they are now. Because markets cycle like being tethered to a rubber band, a stretch to the downside is usually followed by a rebound. This fits in nicely with the idea that staying invested in the stock and bond markets for the long term always works. On that note I must wave the caution flag.

Most investors do not manage their own investments. They invest in “professionally” managed structured mutual funds. Unfortunately, “professional” managers rarely if ever fold’em and cash out of the market sectors they manage. There are two primary reasons why. (1) They are paid to invest in their sector and investing in cash means they are not fulfilling their obligation to be invested in their sector. (2) If they move into cash, even partially into cash, investors will most likely withdraw their funds which lower the fees the managers earn. This is why investors are told to hold on for the long-term because stocks “always” go up. They also say big dips in the markets are “always” very brief and merely buying opportunities.

Unfortunately, history does not support their marketing pitches which are why holding on for this bear market will be a huge mistake. The reason is that every so often markets collapse for the count and take decades to recover. These collapses are usually caused by people, businesses, and governments ignoring time-tested rules involving money and credit. Yes, wars and natural disasters are also catalysts. And right now, all of these factors are coming into play in what is known as a “super cycle.” For the big picture of super cycles look at the long-term constant dollar DJIA chart.¹

A few weeks ago I posted my “Grand Supercycle Bear Market” column. It explained how some cycles are short, some take years, and some take decades. The cycles that cover decades are very rewarding and also very brutal. In looking back over the years, there is no question that since 1980 markets have been in a rising cycle with bonds and stocks moving ever higher and higher. At the same time, debts compounded higher and higher being supported by ever lower interest rates that eventually reached zero. It’s been so good, everyone and their hound dog believes that you always want to hold’em—you never want to fold’em.²

In spite of the general optimism there have been many times in history when it was worthwhile to fold’em. Let me explain. The most famous fold’em market top of all time occurred in 1929. The DJIA peaked at 381.17 (17.30 Consumer Price Index) on September 3, 1929 and plunged 89% to 41.22 (13.60 CPI) on July 8, 1932. But most folks don’t realize that it took until November 23, 1954 (9,212 calendar days or 25 years) for the DJIA to close at 382.74 (26.80 CPI) and exceed its 1929 peak. In constant dollars it took until May 1959 to best the 1929 peak.³

Obviously, to fold’em in order to avoid a 90% crash is worth it—especially if it takes 25 to 30 years to get even. Also, in the wake of the 1929 crash there were numerous opportunities to get back in on the cheap. Looking back, we see that the 1929 top was exceptionally prominent because it completed a super cycle. Too much debt was outstanding and the debt structure imploded.

Another classic fold’em moment occurred on February 9, 1966 when the DJIA peaked at 1001.11 (32.00 CPI). It made a bottom on December 9, 1974 at 570.01 (51.90 CPI). In those nine years the DJIA had dropped 43.1% before adjusting for inflation. In terms of real purchasing power the DJIA had dropped to 351.45—down 50.2%.

But that wasn’t all there was for that cycle. On March 26, 1980, the DJIA bottomed at 758.80 (80.10 CPI). In just over 14 years, in real dollars, the DJIA had dropped to 351.45—down 57.0%. Then on August 9, 1982, that super cycle made its last bottom at 769.98 (97.70 CPI). In real terms, let’s say the price of a hamburger, in 16 years the DJIA had plunged 64.2%.

What’s really amazing is that in constant dollars, it took until August 1989 for the DJIA to recover to the same purchasing power that it had in February 1966. That was more than 23 years!

There was another fold’em moment on March 10, 2000 when the NASDAQ index peaked at 5132.52 (171.20 CPI) and spent the next 2.5 years going down. In nominal terms it dropped 78.4% to bottom at 1109.64 (181.30 CPI) on October 8, 2002. Then again during the market debacle on March 9, 2009 it touched 1265.52 (212.71 CPI) which was down 80.2% in real terms. The NASDAQ didn’t decisively break out above its 2000 high until July 27, 2016 when it closed at 5139.87 (240.63 CPI)—more than 16 years after its peak. Even then, in real terms it was still down 28.8%!

The thinking is that the Grand Super Cycle that started in 1789 ended in late 2021. It consisted of several super cycles such as we saw in 1929 and 1966. For an idea of the coming severity of this Grand Super Cycle, look to the brief credit squeeze in 2008 and 2009. It was just a preliminary example of coming attractions. That start of a credit implosion was kicked down the road with zero interest rates and massive money printing which resulted in the current stagflation. Now, with interest rates soaring, default risks are a growing concern. If more money is printed, interest rates will soar even higher. As interest rates increase for Federal government debt, corporate and business bonds, adjustable rate mortgages, private financings, and credit cards, the higher interest expense will make those debt servicing obligations unsustainable. That’s when the debt structure implodes.

We got to see a glimmer of what that will be like with the recent actions by Great Britain’s new conservative government. It cut taxes to get the economy kick-started, which is inflationary, while starting to tackle double digit inflation with quantitative tightening and increasing interest rates. But all hell broke loose. With billions in pensions set to suffer catastrophic losses from falling bond prices and with 26% of the total outstanding UK mortgages being variable-rate, the sharp increases in interest rates that was occurring put Great Britain’s economy in jeopardy. By just beginning to try and control inflation the currency floundered and markets roiled in turmoil.

In response the Bank of England pivoted and attempted to restore calm by restarting quantitative easing (QE). But the markets don’t like that either. Now that country is between a rock and a hard place.

As you can see, if it can take decades for a market index to recover from a Primary Cycle peak, it’s no telling how many years it will take to recover the former high ground in a Grand Super Cycle event. Yet I believe we just rode over the top in a Grand Super Cycle event the beginning of this year.

To survive financially, one must unitize the fold’em strategy before the coming plunge shaves off anywhere from 50% to 80% off the indexes’ peaks. So far, the indexes are only down 20% or so. After the upcoming highly emotional crash takes place, if they have cash investors can get back into the market for a few years of hold’em before retreating back with another fold’em as the Grand Super Cycle unwinds the bull cycle from 1789. I’m too old to sit in one position and wait 30 years to get even. So I’m forced to switch from hold’em to fold’em for financial survival.

The key time to start a fold’em is near the top of the cycle which would have been the beginning of 2022. But since we’re expecting this first serious leg down to drop between 50% and 90% that means this bear phase has only just started. Since the bottom for this bear market phase may be 18 months away there is time to take advantage of current “high” prices to fold’em and move into cash.

It’s cash that will be king during the next year or so.

To your health.

Ted Slanker

Ted Slanker has been reporting on the fundamentals of nutritional research in publications, television and radio appearances, and at conferences since 1999. He condenses complex studies into the basics required for health and well-being. His eBook, The Real Diet of Man, is available online.

Don't miss these links for additional reading:

1. Dow Jones - DJIA - 100 Year Historical Chart Inflation Adjusted

2. Grand Supercycle Bear Market by Ted Slanker

3. CPI Table by Month