Yesterday the Dow Jones dropped 724 points (2,94%) and this made the chart look very ugly. The fact that the last 10 years of gains were driven by quantitative easing (fancy word for counterfeiting) and more dept makes it even more worrisome. A double top is forming and nearly completed, when the previous low of 23.860 get broken, a huge crash may appear.
A double top with a lower 2nd top, when the previous low get broken it is a very bearish sign
When the Dow breaks the 23.860 level I will open a leveraged short position
My previous post
HERE I described a reversed head and shoulders on the BTC chart and a double top in the make for the Dow. The reversed head and shoulders didn't play out, but the double top is almost there. The double top is a bearish sign, and since the fundamental reasons for the recent drop are very relevant I think the likelihood that it will play out is quite big.
Why did the reverse head and shoulder in BTC not complete?
The recent reverse head and shoulder formation in BTC was really a beauty and could rocket the BTC price to 17 K, but it didn't complete. The volume in BTC is relatively low, so one single whale can manipulate the price with a few million dollars and break the entire pattern.
Also the Dow can be manipulated, but because the volume on the stock markets is way higher it will be way more expensive to do so. I don't say it was manipulation, technical analysis doesn’t always play out, I use it more as a tool to increase my chances when I trade on fundamentals (when fundamental and technical indicators match) or to time a sell or buy.
The fundamentals of stocks
The Dow made a big drop yesterday because of 2 main fundamental reasons: Fear for rising interest rates and fear for a trade war with China. Both are a big deal when you understand them!
Rising interest rates:
Individuals, businesses and governments have been lending money for almost free in the last ten year, so there is a lot of accumulated dept in every layer of the economy. When interest rates are rising, the interest on the dept isn't (nearly) free anymore and every entity in the economy will see it’s expenses going up while income remains the same. This means that consumers will have less money to spend, companies have less to invest and also governments will have less to spend.
This will push down the entire economy, and the effect will be big. The US government dept is just above 100% of the total GDP, but the total dept is around 330%. This means that for every percent that the interest goes up around 3,3% of the value created by productivity have to be paid in interest.
When the interest rate rises with 3% (what is nothing historically) the expenses for EVERYONE involved in the US economy will go up by 10%! The interest rate broke out of a 30 year downtrend a few weeks ago, if this is a turning point to a long term uptrend the outlook for the current system is not good at all.
Historically interest rates of 5 to 10% are very normal……….
Looming trade war
A trade war with China is bad for the global economy overall and will reduce trade and put extra expenses on the the citizen (import will be more expensive), but that is not the biggest risk. China is a HUGE holder of USA bonds and could react by dumping them. This will create weakness for the US dollar, and even cause a worldwide sell off in the panic.
This is certainly not unlikely, because China has already started to buy gold and trade in other currencies than USD over the previous years. They were already preparing for this scenario what can make them the new world economic power. Also, it could be a strong strategic move to put pressure on Trump to cancel his trade limitations by harming his economy.
When China dumps the USA bonds and stops trading in USD, the USD could lose the world reserve currency status. This could lead to the end game that many Austrian economics are expecting for decennia already. The FED is able to print a huge amount of USD without devaluing the currency because of the world reserve status.
Because the entire world is using it for international trade, there is a way bigger pool of dollars, so a bigger amount can be printed with the same effect. E.g. when there are 1000 units around and you print 10 new units the inflation will be 1%, but when you print 10 units while there are only 100 around the inflation will be 10%.
When the world stops using the USD as reserve currency, the pool to inflate will decrease enormously and inflation will increase at the same rate. Because the USA government can’t stop printing without crashing the entire economy (the entire growth was driving on QE) extremely high inflation will be the only likely outcome.
- Rising oil prices are making life more expensive for everyone = inflation
- Rising interest rates will make life more expensive for everyone = inflation
- Trade war increases prises for everyone (import costs) = inflation
Combine this with the event that USA bonds are dumped or the end of the dollar as world reserve currency and HYPERINFLATION is very likely…….
How to set yourself up for a bear market
In a bear market everything tend to crash, except for the so called safe heaven assets. You never know when a crisis will hit, because the way down goes way faster than the way up. It is smart to accumulate safe heaven assets during the bull market and double down when certain technical levels get broken or things turn really negative. Also short positions can be used to earn in a crash, but this is way more risky.
Classic safe heaven assets are gold, silver, USD and Swiss Franc. Actually everything that is not connected with the regular financial system. Since the described scenario will be a crises in the USD and affect every fiat currency, the USD and Swiss Franc will probably not fit this purpose this time.
A new safe heaven asset is Bitcoin because it has many of the same properties as gold. Gold is the more stable safe heaven with the longest track record and Bitcoin is more volatile and speculative. The advantage of gold is that the risk is way lower, but in positive economic times it tend to go slowly down. Bitcoin will probably go up in good times too, but the risk is way bigger, it can crash by 70 or 80%. However, the long trend is UP.
How to set yourself up for a total collapse
A worldwide currency crises can turn really bad when multiple countries face hyperinflation one by one. In this case a total collapse or reset of the current system could happen. Most governments will do everything to keep themselves alive as long as possible, and after taking the wealth from the population by increased taxes and QE they can do it through confiscation.
To avoid confiscation all paper assets have to be avoided. Physical assets are better, but even better is to spread it geographically. Bitcoin is a perfect asset to avoid confiscation, because you can hide your private keys very easy and bring them over borders.
Gold as a safe heaven
Gold is a very safe asset, not affected by inflation and privacy can be maintained. Gold is used as a store of value for thousands of years. The disadvantage of gold is that it exist in a physical location, so it is possible to confiscate. Paper gold is very risky, because it is not always backed by real gold and when everyone tries to redeem his gold, it could happen that your gold isn't there anymore (as is the case with money in the bank).
Recently I found a really nice way to buy gold with bitcoin (or fiat of course). A Singaporean dealer where you can buy in the shop or online and they can store it for you or send it to your address. The Singaporean law is very easy, trading gold is tax free and there is no KYC and AML involved because they don’t recognize it as an financial transaction. Also your private details will not be shared by a 3rd party, only when the Singaporean court orders to do so, what never happend yet.
This dealer has only good reviews (do your own research too!) and the founder is respected and long time around in the space. Ease of use is one of the things you will remark, it cost really only 1 or 2 minutes to create an account and buy gold or other precious metals. This is the dealer I am talking about:
Bitcoin as a safe heaven
Bitcoin is seen as a safe heaven too, it spiked during events like the Greece and Cyprus crisis and Brexit. Bitcoin is now after the crash very undervalued in almost all metrics and all the regular markets are heavily overvalued. It will be extremely interesting how BTC reacts to a mayor stock market crash, because we haven’t seen one yet since the creation of Bitcoin. In my opinion it makes a lot of sense to move from the stock market to Bitcoin.
Bitcoin is like gold not affected by inflation and could even be the replacement of the monetary system in case of hyper inflation (happening already in Venezuela and Zimbabwe). Beside that Bitcoin is by far the best asset to protect yourself against confiscation. Bitcoin could be the next most popular safe heaven and rescue people from the loss of life savings by mismanagement of others (banks and governments).
My diversification protocol
Because I was all in crypto during the last crypto bear market I was very frustrated that I didn't have any funds at the sideline to buy more now the price is very low (I see the same opportunity now as in 2014 at 200 USD) and that I had to cash out at a bad price for living. I been thinking about a way to do it better through the next cycle.
I am creating a plan how to allocate my income to Bitcoin, gold and stable coins in the coming bull run so that I buy gold when Bitcoin becomes overvalued and live on this gold and buy Bitcoin when it is undervalued. For the valuation I will use the Mayer multiple, what is calculated by the current price divided by the 200 day moving average.
I will publish my plan tomorrow and update every week how the allocation will be done and some general market thoughts. If you want to use this plan you can follow me and adjust the weekly updates to your situation. Following this plan you will get more out of your allocated money, you don’t have to stress in a bear market and you will be able to go shopping at a huge discount after a crash.
Conclusion
I think it is time to get rid of stocks and bonds and accumulate gold and Bitcoin. The technicals could change, but the fundamentals will not be solved anytime soon so a crash can not be canceled but only delayed. It is advisable to go over your portfolio and make it more crash proof as soon as possible.
Disclaimer
This is no trading advice, just my view on the market
Previous post
https://steemit.com/bitcoin/@michiel/bitcoin-is-here-to-stay-and-will-dominate-the-world
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