My Dream Short Turned Nightmare (2009)
Back in 2007, I began exploring the Daily Reckoning.
At that time, Bill Bonner, founder of Agora (our parent company), was still leading the DR.
The content was captivating. It addressed all my queries about the real estate market, gold, silver, and the overall economy.
Most significantly, Bill explained the Federal Reserve’s role and its undermining impact on our currency, demonstrating how the Fed generates and bursts bubbles through imprudent monetary policies.
Around then, I purchased my initial precious metals. Silver was priced near $11/oz, and gold stood at $842.
I quickly became certain that a major crisis was looming.
In 2007, I heavily shorted banks and REITs.
The timing worked perfectly. Within months, these sectors plunged, prompting me to increase my short positions.
For a period, the trade rewarded me handsomely. I felt brilliant as my portfolio surged over 40%. I vividly remember feeling victorious at Thanksgiving 2008 when my account hit all-time highs while the broader market nosedived.
Then came the enormous $700 billion bailout. Massive cash infusions and endless loans through the Fed’s “discount window”—true helicopter money, but mostly benefiting Wall Street.
Never mind that, I insisted. The bailouts and the Fed’s maneuvers were pointless. Those banks and real estate stocks were destined to hit zero.
So I clung to my shorts as the markets recovered, certain that disaster was inevitable.
Unfortunately, I missed the optimal exit and closed those shorts at a significant loss. At one point, I could have locked in gains exceeding 70%, but greed clouded my judgment. That final 30% cost me dearly.
Lessons Learned
I currently hold some short exposure. I own puts and inverse ETFs targeting the S&P 500, Walmart, and the Russell 2000.
However, these represent a small portion of my overall portfolio. Nowadays, I favor hedging with gold, silver, oil, and inexpensive high-dividend stocks.
If you have the expertise or guidance from professionals like those at Paradigm, maintaining short positions in volatile times can be sensible as a form of portfolio insurance.
But be cautious—don’t go overboard or repeat my 2009 error by assuming stocks will fall to zero. If a market crash occurs (I sincerely hope we don’t), the Fed will likely intervene decisively to halt the downturn.
Between 2007 and 2009, multiple bailouts and interest rate reductions were required before the crash stopped. But ultimately, recovery happened.
For me, the main purpose of puts and shorts today is wealth preservation during possible crashes, not enormous profits.
Most investors shouldn’t attempt shorts or puts due to the difficulty of perfect timing.
If you pursue this route, here are key points to keep in mind.
Inverse ETFs, Puts, and Shorts
Currently, there are numerous tools for investors seeking downside protection, but all carry risks and deserve careful consideration.
Leveraged inverse ETFs are common but risky. Examples include:
- SDS – negative 2x the daily return of the S&P 500
- SRTY – negative 2x the daily return of the Russell 2000
Keep in mind these ETFs target 2x inverse performance but don’t always achieve it precisely.
While helpful at times, their timing is challenging. Plus, there are hidden tax liabilities.
These funds employ derivatives and rebalance frequently, distributing income taxable to holders—even in losing periods.
Understand these risks fully and consult a tax professional if uncertain.
Also, leveraged inverse ETFs are unsuitable for long-term holding. I use them sparingly, usually hedging for just a month or two.
I avoid 3x leveraged ETFs altogether, as their volatility makes long-term holding too dangerous.
Put options can be effective for hedging but require expertise. Following our Paradigm experts, especially Jim Rickards and Dan Amoss, is wise—they deliver excellent insights (no pun intended).
Shorting individual stocks is less common now since puts limit losses to the contract price. Shorts can lead to unlimited losses if stock prices rise indefinitely.
In general, shorting isn’t suitable for most investors. Safer, less risky alternatives exist. If pursuing puts, follow reliable authorities like Jim and Dan closely.
Stocks Still Bubbly
Although recent weeks have seen sharp declines in software and other once-hot sectors, the broader markets have remained surprisingly resilient.
Valuations are still high, with stocks trading at elevated levels.
The conflict with Iran threatens major supply chain disruptions. Oil prices will likely stay elevated, impacting key products like petrochemicals, fertilizers, pesticides, and herbicides.
Consumer spending is expected to contract as well.
If the war prolongs, conditions could worsen. If you’re planning to lighten stock exposure, now remains a good time.
Holding a sizeable cash position isn’t problematic—it acts as a hedge and preserves buying power for potential lower prices.
We continue to favor oil investments. Exxon Mobil (XOM) and Petrobras (PBR, PBR.A) remain my top picks in this sector.
Mining stocks have sold off sharply recently, but as discussed yesterday, this is likely due to hedges and quant funds exiting positions.
Volatility will stay elevated, but I remain bullish on gold, silver, and miners as sound long-term hedges.
Prepare yourself; it looks like volatility is about to intensify.
About the Author
