From cheery old Lubenovic: "What
kind of financial strategies/tactics would
you recommend for a worldwide recession or ...
depression?"
This would be so easy if you knew for sure
a recession/depression were coming. It's a
possibility, of course, but by no means something
you can "count on."
If you could, you would sell all your stocks
and real estate and buy puts. (Puts leverage
your pessimism much more than selling stocks
short directly — and have the virtue of
limiting your loss to 100% rather than leave
it open-ended if you are wrong.) And/or you
would put a good chunk of your money into U.S.
Treasury securities. And you might put a few
bucks into silver dimes, just to have some
walking around money if the value of paper
currency were ever called into question.
And then, when things seemed worst and most
hopeless ... when stocks were being given away at
prices that would look good unless the world ended
altogether ... you would trade most of your profits
in those puts and Treasuries and buy like a bandit.
Because I can say with the confidence of a man who
knows you will not be around to rebuke me if I am
wrong: the world will not end.
But here's the catch with a disaster strategy: We
may already be a good deal of the way into that
disaster. Just ask that sliver of the globe that
lives East of Prague all the way on out to the
Pacific and Hawaii. So it may be that the world is
poised to reinflate and grow, that interest rates
will rise, puts expire worthless, and Treasury bonds
(at least those of the long-term variety) sink like
a stone.
My guess is that the true path lies someplace in
between those two scenarios. We will not have a
worldwide depression, but the easy years are behind
us for a while. A quarter-point drop in the fed
funds rate — swell surprise though it was —
may not be enough to turn the world economy around.
Hence it makes sense, I think, to spread your money
— if you're fortunate enough to have enough to
spread — over the "four prongs" I have
written about from time to time: some cash/liquid
money first (money-market funds, T-bills, whatever);
an inflation hedge in case the world reflates
(your home, stocks over the long run, though inflation
would kill most stocks at first); a deflation
hedge (long-term Treasuries); and a "prosperity
hedge" in case we really have already hit bottom
(stocks). How you best weight these prongs depends
on your own circumstances (80-year-old widows and
29-year-old eye surgeons are not the same) and your
own view of what might happen (or at least your own
view of how unhappy you would be if certain things
happened, so you can try to stay within your tolerance
for pain).
What will happen?
All I know for sure is that no one knows. If things
get bad enough, prudence could even come back
into fashion. That, no doubt, will be the bottom.
