Did my time, took my chances
Of course, that is the opening lyrics from the timeless Survivor classic, which to this day makes we want to run (well, actually more of a very slow jog these days) up the stairs in Philadelphia. It continues:
Went the distance, now I’m back on my feet
Just a man and his will to survive
Today’s post will be a relatively short and simple one.
My process progressed starting late last year to warn of a cyclical recessionary bear market approaching.
The subsequent conditions have continued along that path and now have a high level of confirmation.
The Federal Reserve Chair has explicitly stated twice in the last month that their policy objective is to intentionally slow growth and that a recession may be part of what is ‘required’ to tame inflation.
Denying the likelihood of a recession unfolding at this point is not wise. If you have not already, it is time to come to grips with what this may mean.
Cyclical recessionary bear markets are a different animal. I happen to have been around long enough to have been investing and trading during the two most recent examples in the United States- from 2000-2003 and 2007-2009. Survival is the name of the game, as the Fog of Cycles results in markets and the news backdrop deceiving and playing tricks on our minds. Confidence and conviction levels become shaken, and even the most experienced and successful investors/traders can fall prey.
Survival is the key because simple mathematics tells us the importance of drawdowns in long-term compounding. This is a concept that is terribly under-focused upon by the financial industrial complex. As I wrote about two weeks ago, they are playing a different game than you and I should be. As luck would have it, the Utilities Sector ETF (XLU) is down about $6, or over 7% since September 9th, which may be ‘good’ in the relative world vs -9% for the S&P 500, but you DO NOT have to live in that world.
A 40% decline requires a 67% return to get back to breakeven. A 60% decline requires a 150% return. Avoiding big drawdowns is one important key to long-term compounding. To do so, being a cyclical recessionary bear market prepper can be a big help.
What do recessionary bear markets actually look and feel like? The last nine months!!! Widespread debates on Fed policy, the timing of and potential for a recession, defensive market sectors outperforming cyclical ones, the yield curve inverting, commodity prices peaking and then rolling over, earnings decelerating and then rolling over, etc. The list is long and distinguished.
As aspirant Survivors, what else can we reasonably expect to confront in the coming weeks and months? Yes- I said months. Go back and revisit the timelines of the prior two cyclical recessionary bear markets mentioned or various other historical examples, and you will see these are closer to marathons than sprints. Here are a couple of other concepts of which to be aware:
Ridiculous resilience is normal…and likely to be fleeting
The ‘hiding places’ of those living in the relative world will eventually be taken out back and shot
Correlations will eventually go to one - almost everything goes down together
An example of the first:
This is a weekly chart of JPMorgan (JPM) during the runup to and through the 2007-2009 cyclical recessionary bear market. I’ve thrown in two lollipops to designate the peak in the Bank Index (BKX) in February 2007, and then the second over the week ending September 29, 2008. Yes, JPM traded within 5% of its then all-time high that late in the cycle, even as the BKX was down over 40% prior to JPM finally succumbing, and eventually falling over 71% from its cycle peak.
As mentioned, I covered utility stocks in the piece from two weeks ago, in which that so-called defensive sector declined severely during the last two cyclical recessionary bear markets. Hiding places, relative strength names, your favored long-term macro theme…they all get taken out back eventually.
That chart goes even further back to the period around the 1973-1974 cyclical recessionary bear market. It shows Exxon (XOM) and Chevron (CVX) versus the price of oil, which exploded higher via the OPEC-coordinated embargo. Note that despite having higher oil prices as a tailwind, the stocks dropped sharply during the bear market.
There are many other nuances to consider as preppers, but the key is to have a survival mindset, in my opinion. This substack was created to try and offer a prepper’s guide to what appears to now be transpiring. I recommend you be prepared and have a plan anchored in the world as it is, and not as you wished or thought it would be.
I’ll finish with more wisdom from Survivor:
They stack the odds ‘til we take to the streets
For the kill with the skill to survive