How Does Capital Move in a Crisis

When confidence in the economy crashes due to a recession, for example, capital flees from private-sector assets, such as stocks, corporate bonds, etc., to government bonds and Treasury Bills. As a rule, a recession brings higher prices for government bonds and lower prices for private-sector assets. 

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 rare circumstances, capital will shift to the Private Sector, and that means the Dow Jones Industrial Average will increase with Triple-A 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 and gloom, dividends and 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 private sector in recession and buy the private sector in depression.    

Thanks to Martin Armstrong https://www.armstrongeconomics.com for making this historical observation of how capital moves in a crisis.