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Pragmatic Capitalism

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A 1929 style market crash?

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Hi Cullen, if a hypothetical scenario where a 1929 style market crash (-80% decline) were to happen sometime soon, what can the investor do to protect their wealth when virtually all assets from stocks, bonds, precious metals and real estate will be declining?

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Posted by Incognito 7
Posted on 12/28/2016 2:38 PM
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Long duration bonds absolutely positively won’t decline in that environment. There will be so much fear that investors will naturally converge on the largest income generating entity in the world – the US govt.

This is why some long duration bonds are essential to diversification in a low interest rate environment where stocks are overvalued. In fact, as I’ve written about quite a bit lately, most of the fears over long duration bonds are totally unfounded and spread by people who don’t really know much about bonds (which is most people unfortunately).

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Cullen Roche Posted by Cullen Roche
Answered on 12/30/2016 6:10 PM
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    Bridgeway wrote a white paper about what to do in such a “tight money” or austerity situation (its hard to see how that could happen in the US again unless the Fed got fiscal policy powers or Congress started another global trade war). Basically, you had to go all to cash, ultra short term Treasuries and TIPS, etc. During the Great Depression, government bonds including long-term were imploding left and right so they were not a safe haven, but neither was the USA at the time either. Current day Treasuries are like playing a game of chicken… they will work until the market can and does switch to something else, so be vigilant and keep your eyes on Japan and Europe.

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    Posted by MachineGhost
    Answered on 12/30/2016 11:19 PM
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      BTW a -50% or so correction is rather average. To fall another 60% to -80% is truly extraordinary. It’s like a big fat tail that ought to be excluded from the data because it is such an extreme outlier. But if you’re really worried about it happening, then you need some kind of tactical risk overlay on top of your portfolio just for this most remote of possibilities.

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      Posted by MachineGhost
      Answered on 12/30/2016 11:24 PM
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