American investors can have short memories – especially when it comes to bear markets. In stock market lingo, a bear market is defined as a decline of 20% or more.

You may remember that we suffered a Covid-inspired bear market in stocks in 2020. But, it was one of the shortest bear markets in history. After plunging 20% into the March 2020 low, the U.S. stock market fully recovered to pre-crash levels in just four months.

That’s not a normal bear market.

Let’s look back in stock market history to explore other bear markets.

There have been eight bear markets going back to the infamous 1929 stock market crash. That devastating bear market took almost three years (34 months) to hit bottom, with a total decline of 83%. It took 25 years for the Dow Jones Industrial Average to recover to its previous peak. That’s right a quarter of a century.

More recently, during the 2008 Global Financial Crisis, the U.S. stock market lost a whopping 51% between November 2007 and February 2009. From there – it took 37 months (over three years) for the stock market to get back to even.

Taking a look at all eight bear markets since 1929, it took on average 57 months for the stock market to get back to even – or almost five years.

That’s why you may have heard the conventional advice about not putting money you may need within five years in the stock market.

Yet, Americans over the past 100 years have been conditioned to believe the stock market will recover and continue to go up. Is that true?

The Japanese know a different reality about stock market recoveries. While the U.S. stock market has recovered from its downturns over the past 100 years – that’s not true in Japan.

In fact, since 1989, Japanese stock market investors still haven’t gotten back to break-even levels after a major stock market bubble popped. That’s right…for the past 33 years Japanese investors who had money in the Nikkei stock index in 1989 have seen negative returns.

We cannot necessarily count on the U.S. stock market coming back – just look at Japan.  At some point the piper will need to be paid. The mounting levels of U.S. government debt – now at an all-time record high of $30 trillion – and the Fed’s role as money printer and buyer and lender of last resort – will eventually have consequences.

The case for diversification into tangible assets like gold and silver is rising every day. Major firms from Bank of America to Wells Fargo project further gold gains in 2022.

The lesson from Japan is a painful one – and one that is foreign to American investors.

Consider how your investment accounts would look if, 33 years later,  the S&P 500 still hadn’t recovered from this year’s market crash? What would that mean to your retirement? What would that mean to you and your family’s financial security?

Gold is a powerful tool to diversify your portfolio and to protect and grow your wealth.

Do you own enough?

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Sitting through a red light, watching a commercial, and drinking a cup of coffee are all things that last longer than the average amount of time a stock is held in the US.

Research published in The Telegraph shows that in the US “the average share holding lasts just 22 seconds.” Incredibly, this is not the shortest time on record. In other periods, this duration as been 20 seconds.

Despite the conventional wisdom that “buy-and-hold” is the most effective investing strategy, it seems few people put it to work. Michael Hudson, a former Wall Street economist at Chase Manhattan Bank, explains that these short holding periods occur among other asset classes. He remarked, “The average foreign currency investment lasts – it’s up now to 30 seconds, up from 28 seconds last month.”

It seems everyone is in a rush. This accelerated timeline can be seen outside finance. Research from the Federal Reserve Bank of St. Louis shows that the “average job tenure steadily declined, from 9.2 years in 1983 to 8.6 years in 1998.”

It is likely that high frequency trading (HFT) is the primary cause of the rapid fire buy and sell cadence of stocks today. In fact, data shows that HFT might account for up to 70% of all equity trades. This finding agrees with additional research from JPMorgan which shows an alarming statistic: an estimated 10% of all trades are made by a person logging on and executing a transaction like an ordinary person. The rest are automated.

This finding is not new. Major firms like JPMorgan have seen this phenomenon for years. More of the general public is awakening to this reality as headlines like those about Twitter reach the front page. People are learning that automation represent more of our lives than previously thought as Elon Musk suggests that a significant portion of Twitter accounts are in fact artificial and governed by algorithms.

In this setting even a disciplined buy-and-hold investor is subject to the constant turnover of shares resulting from incessant transactions. Finding stability means finding other asset classes.

Gold is one solution because its value is not as influenced by trading as equities are. Consider research from Joerg Picard who learned that ETF gold trades, which can be traded as easily as HFT equities, “do not contribute much to price discovery.” This should be welcome news to investors looking for a counterbalance against the increasing volatility in today’s market.

It is getting harder to win in today’s equity market because investors must battle more than economic cycles, interest rate changes, and geopolitical tensions. Now, they must also face the threat of HFT. Regaining control means allocating cash to assets like gold which are not nearly as influenced as equities.

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Volatility came roaring back to the market this year. The S&P 500 has fallen more than 15% since the start of January. Many analysts cite the Fed’s decision to raise rates as the major contributor to this drop.

This move means that the flow of cheap money is slowing significantly. The result is a higher cost of doing business.

Meanwhile, many investors who long believed that stock valuations were unreasonably high are starting to see their fears confirmed. More people are looking to different asset classes as a means for preserving wealth as equities drop in value and investor sentiment dampens.

Doing so is especially important in a rising cost environment. As inflation exceed 8% more Americans are considering ways to buoy the spending power of their dollar as gas, groceries, and housing costs all rise.

This setting has prompted renewed interest in gold. “Historically gold has outperformed equities by an even larger magnitude when volatility is rising from an already elevated level,” explained CFA Russ Koesterich at BlackRock.

This same body of research concluded that changes in the VIX, often called the “fear index,” explains almost 20% of the difference between the return offered by gold and the S&P 500.

Put another way, during months of rising volatility in the S&P 500 gold outperformed the market by approximately 2% on average. Moreover, this relationship becomes even more stark when the VIX rises above 20. During these times, gold outperformed the S&P 500 by an average of about 5%.

Today the VIX is at more than 29.

This research confirms the long-held notion that gold can have a stabilizing effect on a portfolio because its correlation to equities is low. In fact, the correlation between gold and equities is lower than that of the correlation between the stock market and REITs, private equity, and hedge funds.

The low correlation between gold and US stocks was evident during other periods of upheaval including the Long-Term Capital Management crisis, the September 11th terrorist attacks, the 2008 Global Financial Crisis, and Brexit, during which gold climbed 9.8% and global equities fell 1.2%.

The volatility in today’s market is unlikely to decrease any time soon. Investors and markets are concerned with the war in Ukraine, rising COVID transmission in China, more interest rate hikes to come, and of course the highest inflation we have experienced in more than forty years.

Solving many of these structural problems will take time. Companies will need to shore up their operations as a safeguard against existing and future supply chain disruptions. The global food system will need to adjust to the lack of agricultural products, namely wheat, coming from Ukraine. Additionally, investors will need to wait out the inflation problem.

In the meantime, gold offers a hedge against uncertainty.

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Students of market history know that it’s not a question of will there be another financial crisis – but when will it occur and what will be the trigger. History is littered with market bubbles that burst and the crises that followed.

Walter Bagehot, editor of the Economist between 1860 and 1877, once stated that financial panics develop when the “blind capital” of the public floods into unwise speculative investments. Today’s cryptocurrency market collapse could be a prime example of that. Going farther back in recent history – the 2001 dot.com crash emerged after the public chased after and bought a variety of new technology companies that had zero profits – only potential.

Then of course, the 1929 stock market crash and subsequent Great Depression looms large in the economic history books. The stock market was booming in the late 1920’s as new companies embraced the technologies of the day including radios, aluminum and airplanes. Yet, few of these companies had a performance track record or dividend payments. However, speculators fueled by the fear of missing out (FOMO) drove the market ever higher. In October 1929, the speculative rally began to unravel with a nearly 25% drop in the Dow.

By November, the Dow had crashed 45%. In the wake of the 1929 market crash, banks failed and America entered an economic Depression that lasted ten years.

History shows that bubbles and crises are repeating patterns

From the Dutch Tulip mania in 1637 to the South Seas Bubble in the UK in 1720 to the more recent 1987 Black Monday stock market crash and the 2008 Global Financial Crisis, they are easy to find.

Sometimes crises are triggered by Black Swan events that you simply couldn’t see coming. Other times, crises build up over time, quietly in the background. That is what we are seeing today.

America is slowing but surely grinding toward a major debt-inspired fiscal crisis

Many can see it coming and some ring warning bells. But, our nation’s debt feels so esoteric, so vastly huge that it becomes meaningless to the average American.

A recent Wall Street Journal article headlined: CBO Sounds a Warning of American Fiscal Ruin is another attempt to highlight this ticking time bomb that lurks behind the scenes of our daily lives.

Our nation’s national debt recently passed the $30 trillion mark, according to Treasury.gov

See Total Public Debt Outstanding here. The debt load simply keeps climbing.

So what could lie ahead? The non-partisan Congressional Budget Office (CBO) warned in a new report that you may face two scenarios in the years ahead.

Spoiler alert. Neither scenario is pretty. Get ready for higher taxes and lower benefits.

“The first would gradually raise personal income-tax rates in equal proportion across the income spectrum. The second would gradually reduce benefit payments for Social Security, Medicare, Medicaid, and ObamaCare. The budget gnomes analyzed each scenario with three different starting dates, with fiscal tightening beginning in 2026, 2031 or 2036,” according to the Wall Street Journal article.

No surprise: the longer your representatives in Congress take to deal with this situations, the larger the tax increases and benefit reductions will be needed, the CBO said.

While higher taxes and lower Social Security and Medicare benefits sound bad, the alternative is even worse.

A debt-driven U.S. fiscal crisis in the future has the possibility of completely upending our way of life, our markets, interest rates, the dollar and our financial system as you know it.

Here’s what the CBO report said:

“The likelihood of a fiscal crisis increases as federal debt continues to rise in relation to GDP, because mounting federal debt could erode investors’ confidence in the government’s fiscal position and result in a sharp reduction in their valuation of Treasury securities. In turn, investors would demand higher yields to purchase Treasury securities and thus drive up interest rates on federal debt. Additionally, concerns about the U.S. government’s fiscal position could lead to a sudden increase in inflation expectations, fear of a large decrease in the value of the U.S. dollar, or a loss of confidence in the federal government’s ability to repay its debt in full, all of which would make a fiscal crisis more likely.”

This crisis would be a dollar crisis

If that were to unfold, your dollars would decrease in value by an exponential basis. Think it won’t happen? How confident are you in your lawmakers in Washington D.C. to work together, across the aisle, in a collaborative manner – making compromises – to achieve a deal to stabilize the nation’s finances. Too many politicians today are willing to gamble with significant financial issues in order to create news that will go viral in a social media world.

Gold offers you protection, yet again

If this day comes, investors holding an allocation to gold will have diversification and protection from a collapse in the U.S. currency, the dollar. Gold and silver are monetary metals that are recognized and valued in every country on earth. While the policymakers in Washington play politics with your hard earned paper dollars, tangible asset investors have a strategy to shield a portion of their wealth by investing in good old fashioned hard currency – gold.

Investors diversify into precious metals for many reasons. The looming fiscal crisis is simply another one to add to your list.

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