Last week the Repo rate jumped more than 400%.
Now, I'm not talking about the South African rate which is set by the South African Reserve Bank.
I'm talking about the “real Repo rate”. The US one, which affects over trillions of dollars' worth of transfers each day.
This rate, which is normally just over 2% spiked up to 10% last Tuesday (17 of September) as global lending markets started to grind to a halt.
Luckily, the US Fed acted quickly. It pumped $75 billion per day, every day for a week, into the market to stabilise things. The Fed has also committed to a further $30 billion per week until mid-October.
Calmed by this massive injection, the rate quickly returned to normal.
The last time something similar happened was just before the peak of the 2008 Financial Crisis.
Talk about a close call!
So, while this fact alone has got me worried, my real concern is this isn't the only indicator flashing red at the moment.
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Two reasons why the writing is on the wall
Across the world, there are several signs that the next couple years could be very stressful for the global economy.
Global growth is slowing rapidly. In fact, areas like Germany may already be in a recession. Even the growth engines of Asia, China and India, are showing signs of strain. At the same time, elections in the US, Brexit in Europe and political protests in Hong Kong all seem to be competing to be the spark that sets off the next crisis.
But, perhaps the clearest indicator is the fact that not a single major Central Bank is thinking about raising rates. The only questions they seem to be asking is how much can they cut and how soon? So maybe, just maybe, they too are seeing the writing on the wall.
While a concerted effort by Central Banks to cut rates may actually be enough to keep markets up, just remember that Central Bank liquidity has fuelled the current global bull market for the past decade. Every time, there seemed to be a threat, Central Banks were willing to do whatever it took to support the market. Eventually, though, they will run out of ammunition and we’ll see a massive pullback.
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The number one strategy to prepare yourself for the eventual crash
To survive in these uncertain times, you need a combination of high protection, so that you don’t lose everything in a downturn, and high risk, so that you can take advantage of the Central Bank fuelled bull market when markets rise.
But how do you do that?
The answer is the Barbell Strategy.
This strategy encourages you to be as hyper-conservative and hyper-aggressive as you can be, instead of being mildly aggressive or conservative and sticking to “safer” middle-ground investments.
In the case of this looming crash, look to hard currency denominated bonds to give you protection (historically, these have weathered downturns the best) and invest in multi-year call options which will outperform when markets rise but limit losses on the down side to give you the growth you crave.
For help with this strategy, contact me at firstname.lastname@example.org
. To get my attention simply include the word “barbell” in the subject line!
Rand Swiss, Wealth Manager