Lets review some of the major events of the market meltdown;
- -The DOW reached 14k in Oct 2007 at the peak of the housing market boom
- -Six months later, the DOW crashed to 6.6k in Mar 2008
- -GDP was negative for 4 quarters, until Q3 of 2009
- -Congress and the Fed have pumped trillions into the financial, auto and housing industry
- -The Fed continues to hold interest rates at zero
- -Hundreds of banks have collapsed and many more will follow
- -Unemployment is nearly 10%, millions have lost their jobs and homes
- -Congress has passed several bills that are sure to stifle small business growth
To my amazement, the market has climbed back up to 10k, while the economic fundamentals are actually worse than they were when it was at 6.6k.
The Obama administration has attempted to stop the market meltdown by adding trillions into the economy, as the expense of the value of the dollar. The result is that the dollar is sinking against all major currencies and the world is questioning its place in the global economy.
Obama and company have pushed the dollar to the edge of a cliff. Perhaps is it already too late to save the dollar from a major crash. They are backed against the wall with no more easy choices to make. Facing a dollar crisis, they must pull back the easy money and that means the market is going to crash.
When the market crashes the dollar will probably strengthen. After the market crash the dollar will continue downward and we will be facing a deepening recession, with housing, the stock market and the dollar all going down at the same time. Ok, that might sound depressing but I'm not going to let it get me down.
Doubling My Money
Last year when the market crashed, I moved my investments into Bonds to preserve my wealth and it worked out quite well. My 401k increased 3.5%, when most people lost 40-50%. Then I bought back into the market this year and have gained 40% until a few weeks ago when I moved back into Bonds.
This time, when the market crashes, which could start at any time, I'm going to short the market with the ETF DXD. DXD is a 2x ultra short of the DOW. So when the DOW drops 50% DXD rises by 100%. This will allow me to not only preserve my wealth but double my money as the market sinks.
Unforturately 401k plans have limited investment options, which is just one of the reasons that I don't like 401k investment plans. So I can only use my investment funds that are not trapped in my 401k plan to take advantage of this market crash by shorting the market.
Doubling My Money A Second Time
Last year when the market crashed, the dollar strengthened and gold held its value as investors piled into Treasury Bonds to stop the heavy losses they were taking. Gold is the ultimate inflation investment, but gold has not rallied yet because the trillions of dollars the Fed has poured into the economy have not been released into the market because the Fed is guaranteeing the banks 5% if they borrow the money back to the Treasury.
This is the only reason banks are showing profits. They are borrowing dollars from the Fed at zero percent and borrowing back to the Treasury at 5%. Therefore they have no incentive to borrow to businesses.
This is about to change when the Fed starts increasing interest rates. Banks will begin lending money to businesses that will pay higher interest rates. The economy will be flooded with the new money that the Fed has been adding. Once the new money reaches consumers, prices will increase and inflation will be visible to all.
During the market crash gold will probably not increase much - unless foreign nations lose patience with the dollar and start selling T-Bonds. But after the crash, gold will rally. Gold mining stocks offer more leverage with up to 10x the price of gold. If gold prices increase by 100%, gold mining stocks could increase by 1000%.
So after the market crash I move into gold and double my money again.
Best Case
If the market crashed by 50% and my money increases by 100% and then soon after the market crash I move into gold and gold increases by 400% with gold mining stocks increasing by 4000%, I could end up with 80x my original investment.
If gold rallies while the market crashes, I will miss out on a once in a lifetime opportunity. Staying in gold is perhaps a better choice, but if the market crashes quickly then perhaps gold will not have a chance to start increasing because investors will wait for prices to increase before piling into gold.
Therefore I think there will be a windows of time to move from shorting the market back into gold.
Of course anything can happen and I will let you know how my investment strategy turns out.
Disclosure
I am not a licensed financial advisor, so please consult a licensed professional before making any investment or financial decision.