Every major disaster starts with a danger signal. There’s some sign, usually something minor, indicating much bigger problems are on the way. That “Check Engine” light on your dashboard doesn’t look very threatening, but it’s what’s happening behind the scenes that can turn that simple yellow light into a dangerous and expensive reality. Right now, according to an increasing number of financial experts, the global economy is showing warning signs that something’s very wrong. Our next stop, recession.
Analysts at Citigroup are now describing the global economic situation as a “highly precarious environment” going forward; pointing out that the global economy doesn’t actually have to contract to be considered in recession. Even a very low value of positive growth can have disastrous consequences in the real world.
You’d think in the current economic climate companies squeezed for profits would be cutting down on stock buybacks but that’s not the case. Stock buybacks are running at levels we haven’t seen since 2007. Most of us can remember how fast equity prices collapsed when the recession struck with full force in 2008. That’s the dark side to the Fed’s cheap money policy. Instead of borrowing to build new business opportunities and create jobs, executives used that cheap money to buy back their own stock. This inflated their share prices, which increased their sky-high bonuses, without adding any actual value to the economy. What’s more, since these high-level executives are paid bonuses in the form of stock, it’s a doubled incentive to inflate share prices.
But when stock buybacks stop working, companies switch to cost-cutting and layoffs, which is also what we’re seeing now. Instead of growth, the Fed’s cheap money is buying us only price inflation. For anyone who had money in the stock market in 2007 what we’re seeing today is déjà vu all over again. Is that enough of a warning for you?
Central Bank Madness
Instead of letting genuine business growth lead the world economy to greater heights, central banks have become the key players. But what the world is discovering is that central banks are run by crazy people. Okay, perhaps that overstates the reality just a bit, but it’s positively fair to say central banks are taking a role in the global economy they were never intended to occupy. In business there’s at least some accountability for results, but not with central banks. That’s how truly loony ideas, like negative interest rates, go from being unthinkable to an everyday thing.
Emerging Markets Taking a Beating
Emerging markets, already battered by low commodity prices, are in for more pain ahead. Previously booming along with China’s economy, many emerging market countries now have the commodities that are their livelihood piling up on the docks with no buyers. Countries that are oil-dependent are being hardest hit and there’s no simple solution or quick relief on the horizon. Small nation defaults will start to pile up in 2016.
Can We Outrun a Recession?
Since most of us are far from the levers of power, how we got here is less relevant than what we do now we’re at the edge of the cliff. The triage for your personal investments is pretty straightforward. Step one: Trim the percentage of your investments in stocks and making sure your asset mix is appropriate to your age and the current global risk climate.
Bonds are one defensive asset, particularly municipal bonds – if you can find a city that’s experiencing growth. Bond funds pay you cash every month, which you can then roll back, or take that cash and convert it into Gold and Silver Eagles.
Since your cash is also not safe from central bank follies, this shift toward high quality hard assets, like income producing property and liquid hard assets such as physical gold and silver (not futures or ETFs, which are still just market-based paper), will preserve the buying power of your cash wealth.
You may not get rich lightning-quick with a defensive investment plan, but you won’t become poor in a day, and you’ll sleep much better.
Will Granderson is a regular columnist for Goldco Precious Metals writing on finance, precious metals, and gold as an investment and in popular culture.