Defense, Defense
Many people are lulled into complacency when the markets turn green. Of course, the latest optimistic story is that the U.S. and China are “moving closer to a deal.” David Stockman, Former OMB Director under Ronald Reagan painted this picture on December 4, 2019, “No human with discernible brainwave activity is buying this bullshit. It’s an algo-driven snap back.”
A day earlier Stockman wrote to subscribers, “Just keep in mind that the ‘phase one’ trade deal, if consummated, will, in effect, be Chinese President Xi Jinping successfully getting the Donald’s boot off his neck. The U.S., as Beijing has demanded, will not just need to cancel future tariffs. It will also have to roll back tariffs in place.”
It may be that China’s leadership is pretty confident they can string along a distracted U.S. president until after the 2020 election, in hopes of dealing with someone else. One thing that is clear is markets are making gains in response to the rumors of a trade deal. What is even more important, however, is that markets have not priced in the possibility of no trade deal. Which is why savvy investors will take this opportunity to enjoy the melt-up as they prepare for a slow-down, followed by a melt-down.
I have gotten to know Jeffrey Gundlach, CEO, of $150 billion DoubleLine Capital who believes a downturn is more a question of “when” than “if,” in his Yahoo Finance interview December 4, 2019. Gundlach went on to say, even though recession risks have fallen, now is the time for investors to be “playing defense.” Gundlach said, “The Fed has done, and the central banks, everything they can to avert the next recession. But a recession will come.”
In the late 1920s a serious recession evolved into the Great Depression. One of the triggers may have been the Smoot-Hawley Tariff Act (June 17, 1930) that raised import duties to protect businesses and farmers in the U.S., which added considerable strain to the international economic climate of the Great Depression. The Tariff Act of 1930 increased 900 import tariffs by an average of 40% to 48% and most economists blame it for worsening the Depression, as well as contributing to the start of World War II, according to thebalance.com. Did we learn anything or must we simply repeat history?
Here’s what we all know about American football. Every team has 11 players on offense and 11 players on defense. As a team owner, you simply fill in the blanks with names to do the job so that you increase your odds of winning every game, no matter the weather or the competition.
Today investors have taken on more risk than they imagine. Since you cannot plan when a catastrophe strikes, let me suggest this is the best time to determine in advance your exit strategy.
4 Steps to Take Today
1. How much portfolio loss can you accept?
2. Is it possible to design your portfolio in a way that may perform within your loss/gain parameters?
3. Have you looked at active management strategies that can move your money out of risk assets to cash, for example, in a bad market and move your money from safety to risk assets in a good market?
4. Have you looked to see how you might be able to limit your losses by virtue of owning more asset classes than you owned in 2008?
Take the same time to focus on your finances as you spend planning vacations and weddings. So you won’t be sorry.