Articles

	How to make money on crises

The attitude to state obligations, which are presented by money, during a crisis, is changed sharply. The cost of money decreases and that happens really fast. There are certain stable periods when the money stock is growing without strongly exceeding the amount of goods, services and natural resources. However, there are other periods when emission is beyond control and the value of money drops sharply over a short time. You’d better be prepared for such situations and we can warn our clients of their coming.

This bold statement is based on the fact that one of our analysts in the summer 1998 warned of the threat of a strong devaluation of the ruble. He declared that in several discussion boards and thus saved money for major investors.

All world crises (and the Russian crisis is not an exception) develop according to a general scenario. The stock market crises are also a part of the market system as well as growth, stagnation and long variations within a narrow range. There is a number of rules, which warn thereof. For instance, what happened during the crisis of the American stock market in 2000 when the so-called bubble of the new economy burst? There happened an inadequate exponential growth of the assets value. The dotcom shares increased by dozens of times without any reasons. Linuz company grew 10 times within the first few days of being in the market – from 25 to 250$ per share and during the crisis it dropped lower that the allotment price. At the same time new shares appeared in the stock market and all of them just soared upon allocation. A strange thing was happening – both old and new shares were growing on the exponent. Basically, IPO and the stock market are ways of accumulation of excessive money stock, but going one over the other, these processes result in lack of money as the amount of high growing shares is increasing and correspondingly they drop in value.

Crisis situations in the stock market are usually preceded by certain circumstances and we can forecast such crises with a high probability and low risk. That happened in 1998. Having our own technical indicators, we realized that the artificial holding of the ruble in the currency corridor was not caused by market conditions.  That means that in case the ruble leaves such corridor, the process will be avalanche-like and uncontrollable and the dollar will rise much higher than 6 rubles.  That is exactly what happened.  It is interesting to note that already in June 1998 Americans were selling October futures on the Chicago stock market at 12 rubles per dollar. As we remember, we had some stability in September. The dollar was at the level of 6.5 rubles. The Russian stock market was rising to new heights. T-bills were actively traded. There is no need to say what happened in August.

In spite of the seeming spontaneity, this process was controllable as are all world crises.  There is not such thing as stock market spontaneity.  This is an illusion. In addition to the actual capital, invested in the stock market and actual business, there exists the so-called speculative capital, which activates the world stock markets, and then after achieving a certain saturation point, it brings the market to default, creating a chain reaction. The speculative capital has a high profitability as it brings profits both on growth and decrease.

There is an opportunity to understand when the speculative capital begins to activate a certain stock exchange and when this capital is going to leave the market. Investing at this time is reasonable and can bring significant profits. This is of course risky, but the risk is worth it, for the scenario in the pre-crisis situation is always the same – strong, stable growth, optimism due to the stock market boom with no thought about the crisis.  Exactly at this time when no one is talking about a crisis, you should start to gradually take the money from the stock market, wait for critical remarks and "enter the short". At the same time you should be ready to suffer losses for a certain period. This is reasonable. When the signal is confirmed, just increase your position buying options and futures and use all other means for bringing the stock market down.