How Does Capital Move in a Crisis

When confidence in the economy crashes due to a recession, investors sell stocks, corporate bonds, etc., and move into to government bonds and Treasury Bills. As a rule, a recession brings higher prices for government bonds and lower prices for the stock market. 

When confidence in government bonds crashes due to debt or near defaults, the impact on society is so severe that a depression in the economy is triggered. In these rare circumstances, capital will shift out of government bonds into the stock market, corporate bonds and gold. This is a rare once-in-a-century event. 

The last time this occurred was during the Great Depression after the stock market crash ended.  The loss of confidence in bonds fueled an uptrend in the Dow, and it was early in the Great Depression, so clearly not based on sunny or positive economic developments.  

When you enter these depressed economic periods filled with financial uncertainty, expectations of corporate profits take a back seat. The primary objective is to move money to a safe place where you get your money back, which is not the case when a government defaults on its debt. Whatever the motivation or reason, the results are a substantial profit opportunity. Sell high and buy low still applies, but the difference here is clear- Sell the stock market in recession and buy the the crash low in the stock market in depression.    

Thanks to Martin Armstrong of Armstrong Economics for making this historical observation of how capital moves in a crisis.