Recession Risk Higher Than You ThinkTrevor Gerszt
It’s an absolute certainty that there will be another recession in the future. That’s a virtual guarantee. What exactly kicks it off, or when precisely that event is going to happen, no one really knows, but it will happen again because we keep making the same mistakes both as investors and business leaders. The history of the stock market is littered with crashes and recessions and the causes are depressingly similar.
In some ways the world economy is always on the verge of a recession, even during good times, so it’s not exactly straining credibility to talk about recession at a time when employers are having a hard time finding enough qualified applicants. This is, in fact, the very time smart investors are getting both their investments and personal finances in shape to survive the next crash.
It Starts With the Debt Bomb
There are a number of factors that could trigger the next recession and, near the top of every list, will be oil prices. It seems ironic that when we were growing up every oil disaster scenario was a shortage of oil and runaway prices, while the real lance in the side of the global economy turns out to be too much oil and low prices. The price of oil has recovered recently but by every indication this price support isn’t going to hold. Even if it did, $40 a barrel is not a sustainable price for oil. Low oil prices are setting up a potential time bomb of debt among big banks that financed oil and gas extraction projects when oil was a hundred dollars a barrel. Both the Great Recession and Great Depression started with a debt bomb: In 2008 it was the bottomed-out housing market and in 1929 it was margin debt on the stock market. If you look through the history of recessions, they all start with a debt bubble of some type.
Corporate Profits on the Critical List
Another recession indicator is corporate profit health. Many analysts believe that a significant slump in corporate profits, like the one we’ve been experiencing since 2014, is a near-perfect predictor of recession. 2016 is on track to be the sixth consecutive period of year over year profit declines. Take a guess at when the last time that happened? If you guessed 2009, give yourself a gold star.
Layoffs Sure to Follow
When profits get squeezed, corporate boards look for ways to raise profits and the first agenda item is layoffs. Right now the labor market is tight, which paradoxically puts even more pressure on executives to find ways to cut costs. When the pink slips start flowing is when the downward spiral really begins to pick up speed. Right now the labor market is still healthy but reversals are fast and hit hard.
Don’t Look for Help from the Fed
The Federal Reserve insists this is just a temporary dip and we’re not headed into recession. So the question every small investor should ask themselves is, “When has the Federal Reserve ever been right about anything?” It didn’t stop the Great Depression and the Greenspan-era Fed actually precipitated the dot-com crash. For all their supposed expertise, the Federal Reserve sleep-walked us into the greatest recession in a generation in 2009. Our central bank has proven over and over that it’s no barrier to a disaster and sometimes the willing catalyst.
Smart small investors will realize that now is the time to prepare for the next recession, which will happen as surely as night follows day. If you’re following a diversified investment strategy then you periodically align your asset mix to your age. Now is a great time to do that realignment if it’s been awhile since the last one. Sell off some of those high flying stocks and mutual funds and shift some of that cash into bonds and liquid hard assets. Make sure you have enough cash to pay the bills for at least three months, six is better.
By periodically aligning your asset mix with your age and time to retirement, a process called rebalancing; you can be in pretty good shape when the next recession strikes. But don’t wait until the layoffs start to pay down debt and bank cash ahead, do that right now.