Author: Uncomprehendable SOL
Is a global financial crisis about to come? It seems likely!
1/ Storage continues to collapse, and the South Korean stock market continues its circuit breaker. Many people see it as a joke, thinking it's just that local leverage in Korea is too high. But if you look back at the history of global financial crises over the past thirty years, you will find a pattern: in every major crisis, Korea is always the first to fall.
2/ In the stock market crash due to the pandemic in 2020, the US stock market experienced four circuit breakers, but the South Korean KOSPI had already dropped 35% three weeks prior.
Two months before Lehman's bankruptcy in 2008, Korea was already experiencing a dollar shortage.
Before the NASDAQ crashed in 2000, Samsung and Hynix already revised down their expectations, indicating that South Korean semiconductors were peaking. In the 1997 Asian financial crisis, Korea was the first core economy to be breached.
3/ This is not a coincidence. The South Korean capital market is almost completely open, with foreign investment holding over 30% for years. Samsung and Hynix are among the most liquid assets globally. Capital flows in and out freely, with sufficient buyers to absorb large sell-offs quickly.
4/ Therefore, Korea has become the "cash reserve" for global capital. European and American institutions normally earn returns in Korea, but when local liquidity tightens, margin calls arise, and debts are due, their first reaction is to: sell offshore holdings and pull the money back to save the domestic situation.
5/ The priority is very clear: first protect the domestic market, then abandon the periphery; first sell those that are liquid, then deal with those that are hard to liquidate. This has little to do with whether the South Korean economy is doing well or if there is a bubble in the stock market; it is purely an instinct of capital self-preservation.
6/ This time, the trigger in Korea is the semiconductor bubble combined with leverage. The average person in the country has two stock accounts, and one out of every three trades involves borrowing. Once foreign capital withdraws, domestic leveraged positions trigger a chain collapse, and the circuit breaker cannot stop. There have been 35 programmable circuit breaks from the beginning of the year until now, including five full-market circuit breaks, breaking the 2008 record.
7/ But South Korea's problem is not just its own. It is a warning signal of tightening global liquidity. When global capital begins to withdraw from overseas, Korea is the first to bleed, and then it spreads layer by layer along the capital and industrial chains.
8/ In the four historical crises, the triggers were different, but the underlying logic was the same: a liquidity gap first appeared in Western countries, capital withdrew from Korea, which then collapsed first, spreading to the Asia-Pacific, commodities, and emerging markets, ultimately returning to Western countries.
9/ Will this result in a global financial crisis? The key variable is not Korea, but the United States. In 2020, the Federal Reserve suppressed the crisis with infinite easing and zero interest rates. What about this time? If the Fed can lower interest rates and inject liquidity, the market might be supported like in 2020. If the Fed continues to raise interest rates or delays help, then the real crisis may just be starting.
10/ Therefore, my judgment is that the Korean circuit breaker is a warning, not a conclusion. Whether a financial crisis will come depends on whether the Fed still has ammunition and whether it is willing to fire. Both are uncertain at this stage.
11/ For ordinary people, the most important thing at this time is not to predict the crisis, but to control positions. Never go all-in, and definitely don't use leverage. Always keep some cash, because real wealth opportunities often arise in the most panicked times.
12/ My approach: Keep 60% of the core position in the S&P 500 and NASDAQ 100 as a long-term hold. The remaining 40% is cash or short-term bonds, specifically waiting to add positions when the index drops by 15%, 30%, or 40%. It's not about buying the bottom; it's about executing the plan.
13/ Historical data shows that the NASDAQ 100 and S&P 500 have reached new highs after each major crisis. In 1987, 2000, 2008, 2020, and 2022, without exception. Crisis is not the enemy of long-term investors; it is an opportunity.
14/ So, I am not afraid of a crisis. What I fear is that when the crisis comes, I don’t have cash to add positions. What I fear even more is that when the crisis comes, I panic and cut losses, giving my bloodied chips to others.
15/ The Korean circuit breaker is a wake-up call, but it does not mean you should liquidate your positions. It reminds you to check your positions, control leverage, and retain cash. The real winners are not those who can predict crises, but those who can hold onto their chips and have the ammunition to add positions during a crisis.
So the question arises: Can we invest in the S&P 500 and NASDAQ now?
1/ First, let's state the conclusion: Yes, but not all in. You can buy now, but unlike three years ago, you cannot buy with your eyes closed. High valuations are a fact, but high valuations do not equal doomsday; they simply mean future returns will be compressed.
2/ The Buffett indicator for the S&P 500 is 236%, and the Shiller CAPE is 41 times. Buffett has net sold for 13 consecutive quarters, and cash reserves have reached an all-time high.
All these data points say the same thing: it is not cheap right now.
3/ But cheapness and good investment are two different things. In 2000, the CAPE was 44 times, and the S&P 500's annualized returns were indeed negative for the next ten years. However, in 1996, when the CAPE was 25 times, some people still shouted that it was expensive, yet the S&P 500 rose by 80% in the next three years. Those who wait for a crash often find that what they get is not an opportunity but a missed chance.
4/ What does high valuation mean? It means that the annualized returns over the next 10 years are likely to drop from 10% to 2%-5%, or even lower. But it does not mean a certain crash will happen. The market can stay at high levels for many years, digesting valuations over time rather than through a crash.
5/ Therefore, the question of "whether to buy" depends on how long you plan to hold. If you plan to hold for three years, the risk-return ratio is indeed quite poor right now. If you plan to hold for twenty years, the current valuation is just background noise at the start.
6/ Historical data is very clear: buying the S&P 500 at any time and holding it for 20 years still yields a median annualized return of over 7%. Even buying at the highest point in 2000 would have doubled by 2020. What you fear is not buying at a high point, but that you have no position at all.
7/ But you also cannot ignore the risks. CPI may exceed expectations again, the Fed may raise rates again, AI commercialization may not meet expectations, consumer spending may decline, and geopolitical tensions may escalate—any of these could cause the S&P 500 to drop by 20%, 30%, or 40%.
The question is, which of these can you predict? If you cannot predict, then your strategy cannot be built on "waiting for a big drop."
8/ The biggest problem with waiting for a big drop is not that it doesn’t happen, but that when it does happen, you may not dare to buy. In March 2020, how many people shouted to wait for a crash, yet when it really came, they panicked and cut losses. Human nature is such; do not overestimate yourself.
9/ So what should you do? For those with positions, continue to hold but don’t go on a buying spree. Especially for those heavily invested in NASDAQ, consider shifting part of it to the S&P 500, dividend ETFs, or short-term bonds to lower the volatility of the portfolio. This is not bearish; it's rebalancing.
10/ For those without positions, do not go all in, and do not remain entirely out. Dollar-cost averaging is the least sexy but the most correct strategy. Spread it over 10 to 15 months, buying a fixed amount of the S&P 500 and NASDAQ 100 each month. Buy more when it drops, and buy less when it rises. After all, you are buying for twenty years, not twenty days.
11/ As for NASDAQ, be more cautious. In the technology industry, winners take all, but the winners keep changing. A decade ago, the top ten in NASDAQ included Intel, Cisco, and Qualcomm; now they are all gone. If you bet on Nvidia, Microsoft, or Tesla today, they may be replaced by another group twenty years from now. The advantage of NASDAQ 100 is its auto-replenishment, but the downside is much greater volatility compared to the S&P 500.
12/ Therefore, my personal allocation strategy is: a core position of 60% in the S&P 500, 20% in NASDAQ 100, and 20% in cash or short-term bonds. The cash is not for waiting for a big drop but for waiting for market opportunities. When real opportunities arise, you need to have cash to pick up chips.
13/ Lastly, one more point: Price determines the return rate, but time determines if you can achieve that return rate. Buying good companies when they are expensive may yield mediocre short-term returns; but buying good companies when they are cheap, you likely won’t even get the chance to buy. Ordinary people should not always aim to buy at the lowest point but should first ensure they are always in the game.
14/ Cash in hand is not too hot, but completely exiting is hotter. Because you don’t know when you should return. The best strategy is not to time the market but to: stay in the market, always have ammunition, and never panic.
Let’s encourage each other, brothers!
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