A0 Financial

Date: 10/22/2023

(Not Financial Advice)

Table of contents:

1. The Four Stages of a Bear Market

   1. Stage One: Fed Begins The Quantitive Tightening Cycle

   2. Stage Two: Bad Earnings

   3. Stage Three: Inflationary Panic

   4. Stage Four: Deflationary Depression

2. Where are we now?

3. Our portfolio allocation

The 4 Stages of a Bear Market

Stage One: Fed Begins The Quantitive Tightening Cycle

In this bear market, stage 1 started in November 2021. Bonds are a great indicator of where we are on the market cycle, and we were at a peak then. The bond yield curve made a lower low on the weekly, which signaled that the Fed is done with the quantitive easing. For the aware investor, this was a red flag, and in turn, the market took a turn down in January and hasn’t seen the highs since. This was the first stage of the bear market.

Stage Two: Bad Earnings

In stage 2, bad earnings didn’t happen for all companies, but most reported bad earnings during Q1-Q2 of 2022. This was during the beginning of our significant drop, and the amount of money these companies were losing in market cap was OBSERD! $META lost about 250 BILLION DOLLARS IN A SINGLE DAY! After the Federal Funds rates are hiked, inflation goes down into a disinflationary stage. Novice investors believe the storm has left. But it's just the beginning.

Stage Three: Inflationary Panic

Banks begin to collapse due to bank runs because Americans have lost faith in the bank’s ability to honor withdrawals. Bank runs forces banks to liquidate assets to account for all the withdrawal requests from Americans to receive their money. The Federal Reserve prints money, saves banks on Wall Street, and inflates the currency to cover the deficit. Covering the debt causes inflation to go up, and America panics.

Stage Four: Deflationary Depression

Although the Fed covered the deficits of the early bank collapses, more are to come. More Banks collapse without anyone to pay back their debt, which begins the deflationary stage. With all the defaults, GDP growth, and CPI going negative, equity markets go down, causing havoc in the economy. But, the fed saves the day and prints more money to cover the unaccounted-for defects. The inflationary levers cancel out some of the deflationary effects. As we know, the economy has a lag effect, so it takes time for the stimulus of the Fed to take effect. The sooner the print, the sooner we get out of this recession. The economy returns to normal over time, depending on how fast the Fed prints money.

Where are we now?

We are currently in stage 3 (Inflationary panic). In March, the Fed bailed out the failed banks and started a new program called the Bank Term Funding Program (BTFP). Oil is rising, inflation is going back up, and credit spreads are breaking out and making higher highs. Remember, inflation is much more sticky this time. Stick inflation forces the Fed to hike more. Inflation will start to go down again, but this time, the Fed overhiked, causing a credit event. Inflation will continue to decrease its negative, and the market will tank.

Our portfolio allocation

During stage 3, commodities are king. During stage 4, Cash is king. The deflation causes the currency to gain a lot of value, and after the crash, it’s time to return to assets.