Bankruptcy or Bailout?

The Dow Jones was extremely volatile Monday thru Friday. In percentage terms, it was the worst week since the 2008 financial crisis. Down 4000 points, it had the largest weekly drop ever. Although I have been worried about a stock market crash for a long time now, and everyone was sick of hearing me talk about it, I am NOT enjoying this, nor am I doing well. I’m worried about the world, loved ones, and my future as I’ve lost a ton of money in my retirement portfolio. It was my own fault, several mistakes I made, while trying to juggle the Fed’s market manipulation and people’s sentiment.

My biggest mistake was I held UVXY for 3.5 years, lost triple digits as it decayed over time, added a lot more to cost average down while waiting for the pop. Around September, the repo rate spiked way up overnight and the Fed started pumping mind-boggling amounts of money into the market to keep it from collapsing. This had a melt-up effect on stocks, and devastating decay on my UVXY. In January, I thought for sure the market would go down, but it didn’t. The news of the virus caused the market to soar higher (more stimulus!) and my UVXY lost big.

The cash in my account was getting really low at this point. I couldn’t trade anything, so I thought I’d be clever and sold aggressive calls against my UVXY to generate some income. I got called away for peanuts and lost it all. Instead of buying the stock back with the cash that I had left, I bought some very expensive at-the-money calls for the end of February. They literally expired worthless on a Friday, and the market started to crash on the following Monday. UVXY (which tracks the VIX) went from around $10 to $135. If I had held on to those shares and didn’t lose them selling calls, they would have been worth over a million dollars, which would have saved me.

Seriously, I kicked myself hard for that one! I put my remaining cash in the gold miners, thinking they’d go up in times of crisis. What happened? NUGT went to $45 and then fell to less than $5, causing me to lose a fortune. Why? A ton of people sold, probably with margin calls. JNUG did much of the same, only worse. Unfortunately, I’m stuck in these positions with big losses until they move again. My portfolio has never been this low, and it’s really scary because I don’t have a job. Trading was supposed to be my job and it hasn’t worked for me at all over the last four years. Everything I thought should work, based on logic, didn’t work, because the market is fake. It rose on government stimulus, completely disconnected from economic reality.

It’s very difficult to trade stocks when you know that fundamentals don’t matter. You have to consider  stimulus money and people’s sentiment about it, and stupid meaningless fads, as well as companies that don’t make any money selling $1 bills for .70 cents. It’s like everyone is dreaming in LaLa Land, and money grows on trees, until one day they wake up and smell the reality, and it stinks! I’m amazed at how abruptly things changed. Analysts were so sure that people would buy the dip and we’d have a big rally when the Fed dropped interest rates to zero and injected a trillion dollars (A TRILLION DOLLARS) into the market. The reaction this time? A plummet in the thousands. The Dow went from 30,000 to under 20,000 just like that…and I think it has a lot more to go.

The bad news is we are all scared and isolated over this virus, and people have lost fortunes. The good news is the bubble has popped. The fake casino-like market is dying, and stimulus money doesn’t work anymore. It was historical to watch the Fed pump literally trillions into the market over the past few weeks with no effect. The pin was indeed the pandemic, but the pandemic would not have caused a crash in a healthy market. Something was bound to break sooner or later, and while I never imagined before this year that it would be a worldwide virus, many people (myself included) have to now get through this period, into a murky uncertain future. Hopefully we all learn from our mistakes and grow.

There’s no doubt in my mind, passive investing is over. The question now is do you stay in your positions and wait for them to go up? Or do you get out into cash? Or do you change your investment strategy? There are certainly lots of bargains out there (assuming the stock market recovers), but there are a lot irresponsible businesses out there too, on the verge of bankruptcy. Why? For one, they were using borrowed money to buy back their own stock, which made the price to go up and attracted investors. This gave the “appearance” of growth when they weren’t producing any more, and were in fact producing and selling less. Now without the ability to produce and sell, they’re on the verge of default, and bankruptcy.

The other issue is leverage. Hedge fund managers have been blowing up their funds for the last two weeks. In essence, they were way over-leveraged, caught off guard, and their brokers stepped in and sold all their assets, contributing to the swiftness in the decline of the market. Both stock buybacks and too much leverage are reckless. If you’re invested with one of these guys, you’ve just lost everything. What you must realize now, is the old patterns are gone. We don’t live in a buy-the-dip mindless market anymore. You actually have to think about where you want to put your money, if you want to even hang onto it in the long run. You have to believe in your investments and the people behind them. The shining stars today are not going to be the shining stars tomorrow.

If you buy a “fad” debt-burdened company on the cheap, and that company goes bankrupt, you lose all your stock. It goes to zero. So the best thing you can do is look at the viability of every company going forward, given the amount of debt they have and their foreseeable income in an economy that shuts down for several months. Go to EDGAR and review the 10-K and 10-Q for the company of interest. Fact is the airlines, cruises, casinos, hotels, automobile companies, and movie theaters are not going away. The question is their ownership. Will they be bailed out so that current owners and investors don’t lose their fortunes? Or will they change ownership and investors through bankruptcy and start fresh without debt?

There are lots of people screaming for helicopter money now, massive money printing, and bailouts. Sure, they don’t want to lose their fortunes but they played their cards wrong, just like I did, in this big game. Now they want the Fed to take care of it for them. Well, let me tell you something, the Fed is actually insolvent. The Fed has no money, it merely acts as a coordinator of lending and borrowing. Now we are in a situation where the whole world is a borrower. So who will lend? Personally, I’m not counting on bailouts to get me through, and I won’t buy any company because I think they might be bailed out. I’m only buying what I think has a chance to go up as the dollar falls and we enter a hyperinflation.

Energy, utilities, commodities, crude oil and precious metals were all hit hard. I’m a value investor so I’m only interested in buying viable companies on sale. These sectors in particular are cheap because the dollar is so strong right now. But it’s not like the Fed can print all this money and everything will go back to normal. No, there is a price for the money which will be printed, and there are lenders on the other side. Who would lend their life savings with zero interest to an insolvent government with 23.5 trillion in debt who wants to bail everyone out? You’d have to pay me one heck of interest rate to take that kind of risk.

If you were one of the fortunate ones to have salvaged cash from your investments, that cash won’t buy you very much for long, so you should think carefully about what you want to purchase with it. Helicopter money, hyperinflation, and the bond market are in trouble, so your dollars will buy less and less, sooner than you think. Look at the Weimar Republic in the early 1900s for a screaming example, and check out what happened to their currency. Unfortunately, as I’ve been saying all along, debt does matter. And now we will all have to pay the price in one way or another. People with large amounts of cash sitting in bank accounts will lose that money when the banks go under, or when the value of that money is degraded by hyperinflation. 

While everyone was worried last week about their stocks falling, smart people were buying physical gold and silver from precious metals dealers, so much that they’ve run out and back ordered product which won’t be delivered until next month or later. Soon, physical gold and silver will all be gone and nobody will be able to find it anymore. This is because gold and silver are real money and dollars are just promissory notes backed by debt in an empire on the verge of collapse. Yes, the United States is falling. This country will change dramatically over the next several years—death and rebirth. I might watch The Wizard of Oz this weekend, and look again at American history, which doesn’t repeat but rhymes.

May God bless you and keep you and your family safe during these difficult times, and may God comfort the sick and needy.

***Nothing in this post or on this blog should be construed as financial advice. I write about what I think, what I have done, and what I will do. I’m not a qualified financial advisor, and I have no formal training in investing or fund management. For the record, I’ve made plenty of mistakes. So do your own research. Take your own risks. And take responsibility for yourself and your actions.***

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