Find Your ‘Safe Haven’ in Today’s Market Frenzy

The “Big One” could devastate the American Northwest any day…

A few years ago, a Pulitzer Prize-winning cover story in the New Yorker magazine showed how vulnerable the coast is to a massive earthquake.

It predicted the biggest-ever American natural disaster… decimating Seattle and Tacoma, Washington, Portland, Oregon, and surrounding cities… followed by a major tsunami. Estimates suggest a million people will be displaced, with tens of thousands injured and killed.

The area is woefully underprepared for a disaster of this magnitude. It’s better to have more frequent earthquakes than a Big One less often…

Take the better-known San Andreas Fault, which runs 800 miles up the California coast. It blasts California with major earthquakes every few decades or so. The 1906 and 1957 San Francisco quakes, the 1989 Loma Prieta quake, and the 2004 Parkfield quake are some of the more recent notable ones.

These quakes do damage – averaging between 6.0 and 7.0 on the Richter scale – but buildings in the affected areas are designed to handle it. More important, each time one of these quakes triggers, it releases the pressure created by the shifting tectonic plates under the Earth’s surface. That prevents future quakes from getting bigger and more destructive.

But that’s not what’s happening further north in Washington…

The Cascadia Subduction Zone runs up the coast of the Pacific Northwest from Cape Mendocino in California, to Vancouver Island, British Columbia. Two plates are pushing against each other there. But the area goes a long time between quakes… The average is 243 years. It’s been 315 years since the last quake.

Scientists fear that if this plate snaps into position, it could unleash a monster quake. From the New Yorker…

The magnitude of the resulting quake will be somewhere between 8.0 and 8.6. That’s the big one. If the entire zone gives way at once, an event that seismologists call a full-margin rupture, the magnitude will be somewhere between 8.7 and 9.2. That’s the very big one.

Remember, the Richter scale is logarithmic. A 7.0 is 10 times as violent as a 6.0, and an 8.0 is 10 times greater than a 7.0. So if a 9.2 gets triggered, it would be 25 times greater than the 7.8 “Great Quake” of 1906 that destroyed 80% of San Francisco and caused thousands of deaths.

This theme of “resetting” a problem before it gets too big is common in nature…

Forest fires used to regularly clear out underbrush. Now that humans intervene to prevent fires, the brush builds up to an unnatural level. When a fire sparks, it’s larger and more destructive.

As investors, we can often take lessons from the natural world. The market follows the natural order of human emotions and reactions.

For far too long, the “fault lines” of the market haven’t released pressure. When it finally happens, we expect the quake will be big.

The market marches on. More unusual, the CBOE Volatility Index (“VIX”) has drifted ever downward to historic lows.

This is a sign that investors have no fear of a correction. They are complacent.

Note that low VIX levels don’t predict a crash. The VIX can go low and stay low for a long time. Indeed, we’re bullish overall for the market over the next year or so. Corporate profits have been rising, and for the first time in a long time that’s thanks to growing sales, not just cutting costs.

But market dips and corrections happen with regularity. And the heightened market valuation and investor complacency means the next correction will be sharp and swift.

When complacent investors get jerked awake, they panic even more.

Mohamed El-Erian, co-chief investment officer of PIMCO and chief economic adviser at insurance giant Allianz, uses another analogy:

The smoother the road, the faster people are likely to drive. The faster they drive, the more excited they are about getting to their destination in good, if not record time; but, also, the greater the risk of an accident that could also harm other drivers, including those driving slower and more carefully.

We’d much prefer to be the investors driving more carefully… And we need to protect against an accident. Here’s how…

Whether it’s an earthquake or a car crash, we can’t predict exactly when it will happen. However, we know that the longer it takes or the faster you drive, the consequences get more extreme.

In Income Intelligence, we found a “safe haven” asset that not only can dodge a correction, but also benefit from this historical market anomaly. It’s an investment that will surge when investors get scared… And we can get paid to wait for a correction to come.

To find out what this safe-haven asset is, you’ll need a subscription to my income-building newsletter, Income Intelligence. Click here to get started today.

What We’re Reading…

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Retirement Millionaire Daily Research Team
August 9, 2017