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Are You Prepared?

Are You Prepared?

Thirty years ago, Steven Spielberg and Harrison Ford teamed up to give us one of the most epically awesome films of all time. Lodged in between the horrific Temple of Doom and an aging Ford’s quest for more money in the Crystal Skull snooze fest was Indiana Jones and the Last Crusade.

I loved the film when I first saw it in theaters, every time I’ve seen it since and will likely do so for the rest of my life. A relic of an action flick of a simpler time when people were not perpetually offended by trivial things but we could all agree that Indiana Jones kicked ass and Nazis were assholes. Plus, it had Sean Connery.

My brother and I have since found cause to quote the film in nearly every possible setting. Yes, it’s nerdy, but so is pretty much everything on this blog.

I’m particularly fond of one particular scene:

My Soul Is Prepared, How’s Yours?

A mysterious guardian of the Holy Grail is about to be mincemeated by a ship propeller while Indy threatens imminent death:

Mysterious dude: “My soul is prepared, how is yours?” Indy: “This is your last chance!” Mysterious dude: “No, Dr. Jones. It’s yours.”

Substitute “portfolio” for “soul” and you get an idea of where I’m going with all of this.

The Economic Ramifications Of An Indiana Jones Flick
I’m not in the doom and gloom business, at least I try not to be. However, there is enough bad juju out there that is important to question whether or not you are prepared.

The Bad Stuff:

Long rates globally seem hellbent on finding out how low they can go, and they aren’t going to let something as silly as the number “zero” get in their way
Today’s PMI number suggests manufacturing output in the US contracted for the first time since 2009
The 10/2 continues to flirt with full inversion
Yield spreads of shorter maturity appear far more comparable to past recessions than to ‘mid cycle events’
Apparently 501,000 jobs less were created than previously believed
The President is stuck in a narcissistic Chinese finger trap (both figuratively and possibly literally with trade talks). If the economy is strong, it does not need tax cuts. If it needs tax cuts, it is an admission of weakness. The daily gymnastics he now performs to rationalize this rock and hard place balance are making for an unnerving climate.
It now seems pretty clear that the Eurozone is entering recession. Trade growth is next to non-existent. Asian growth sucks too.
The Good Stuff:

Still no structural weakness in initial unemployment claims.
Consumer sentiment remains strong
Consumer spending remains strong
Housing likely remaining strong on the heels of aforementioned zero rates.
It’s a mixed bag. Enough for permabears or permabulls to see whatever they normally want to perma-see. Enough that we see a lot of chest thumping from pundits about why the yield curve doesn’t matter this time, even though the same pundits said the same things last few times and were wrong then.

My read on the current environment is, much like our national politics, everyone is nervously looking around trying to find like minded individuals who align with their view.

Is This A Recession?
I don’t know. No one can know.

Sure, we can look at history and try to draw parallels but here is the thing few pundits consider: it’s unknowable because everything here is perpetually in a dynamic state. There is no certain fate which says that a recession will begin at 3 PM on March 22nd, 2020. The future is changing in response to the present, and the present is also changing in response to the expected future.

The more executives read about recession recession recession, the more they will pause in their own plans and cause a slowdown. The more of a slowdown which occurs, the more the Fed will try to avert crisis. Trump may declare a unilateral victory in the trade war tomorrow and lift all tariffs, or he might fire a few tweets from the shitter which trigger global trade contraction. No one knows.

To use another epic movie metaphor from my childhood, “A butterfly flaps its wings in Beijing and the weather changes in New York.” It’s chaos theory. Unknowable. That’s Jurassic Park, and not the shitty remakes, for all of you really young ones out there.

I believe we are likely to have a recession at some point in the next few years. I don’t know whether or not this is it; indeed yield curve inversions precede recessions (on average) by 14 months. Since we might be anywhere from zero months to 5 months into this particular inversion (depending on what part of the curve you look at), it is possible a recession might occur anywhere from the end of this year through to 2021.

Or, maybe this time it breaks the trend and nothing happens.

Are You Prepared?
I say all of this because the lack of certainty of outcome does not mean no action should be taken. This is a time for reflection and introspection about how much risk you actually have.

In the past, I’ve highlighted that the best returns in the stock market occur immediately in the aftermath following a recession.

Why? If it is knowable and this easy, shouldn’t the market correctly price such opportunities? Why does the market become over-euphoric during booms and over-pessimistic during crises?

It is because it is one thing to imagine your risk tolerance in isolation during boom times. Solid job, manageable mortgage, decent savings reserve. Sure, you can conceptualize what a 40-50% hit looks like numerically, but you’ll trumpet some tired shit about “time in the market, not timing the market,” “in it for the longhaul,” blah blah blah.

It’s another entirely to get shitcanned with no notice only to find every single job out there has hundreds of applicants lined up for it and it might take YEARS to find a new position. How will the mortgage get paid? How will you pay for healthcare? How will you eat?

It’s those moments of panic which cause the massive exodus. Desperate, scared people who suddenly see financial risk popping up in all areas of their lives where before there existed only placid monetary bliss need money and are scared to lose more. They hit the blinking red “panic” button and freak the F out before hitting whatever bids remain in the market.

As the saying goes, it’s those moments when the tide goes out you find out who was swimming naked.

I’m not advocating anyone to buy or sell securities or to otherwise do anything not comfortable to them. I’m instead asking you to ask yourself how comfortable you are with what positions you’ve got.

Consider how much risk you truly have in totality, and then consider whether you’ll be OK with it if the rest of your financial world immolates along with the rest of the economy. If you are suddenly forced to take a 30% pay cut to land your next opportunity after an 8 month layoff, will you still be comfortable with your portfolio?

No one is going to remember or care about your internet badassery from sitting with a 100/0 allocation. Indeed, there is inherently nothing special about a 100/0 allocation itself. Try to find an allocation you are truly comfortable with that does not just use recency bias of the last decade to guide your decisions.

So, take lesson from Indiana Jones. Prepare yourselves and ask yourself the hard questions.

My portfolio is prepared. How’s yours?

For More:

On the leverage fallacy and the housing risk lurking on your balance sheet

On why the yield curve matters

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Categories: Market Updates
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View Comments (1)
RC says: August 23, 2019 at 8:05 am
Planning to (early) retire @ 55 in 2.4 years. Timing is interesting. I’m basically 63/37 allocation with my post tax nest egg that will carry me through until I can take withdrawals from 401k (which is on a Vanguard glidepath to 2030 target date). I’m shoring up the savings account now (Betterment has 2.4% interest savings) instead of investing more at the top. Let’s see what happens…

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