By John L. Grace
About four years before the 2000-02 “tech wreck” where the NASDAQ dropped 80 percent, according to Yahoo Finance, former Federal Reserve chairman Alan Greenspan warned of “irrational exuberance” at a dinner speech.
In an interview with CNN Dec. 17, Greenspan said, “It would be very surprising to see [markets] sort of stabilize here and then take off.”
Greenspan went on to say leading stock indexes may have a little upside left. But that’s only going to make the inevitable drop more painful. So, “at the end of that run, run for cover,” he said.
Now I don’t know if Greenspan is correct, nor do I offer an opinion as to how much time there might be before a major downturn. But I do know that no one needs to foresee the future to prepare for it.
Who told us in 2007 that credit default swaps and sub-prime mortgages could ruin the world as we knew it? So if no one told you about the last crisis, who do you think will alert you in advance of the next one?
Nearly half (48.6 percent) of chief financial officers in the U.S. believe this country will be in recession by the end of next year, according to the Duke University/CFO Global Business Outlook survey released on Dec. 12. The Duke survey also found that 82 percent of CFOs believe that a recession will begin by the end of 2020.
It seems like just a minute ago the CFOs were embracing the mistaken notion that this country could enjoy 4 percent gross domestic product growth. We’ve been saying for some time now what former Fed Reserve Chair Janet Yellen said that, “quite high” levels of corporate debt are “a danger.”
Yellen is absolutely correct with her observation, “High levels of corporate leverage could prolong the downturn and lead to lots of bankruptcies,” she said on CNBC, Dec. 10.
According to me, it’s not about the prediction, it’s all about the preparation. We put far more emphasis on the work necessary to keep client assets intact than attempting to predict what might happen or when it might happen.
I was asked to speak to 100 of my peers recently. I started by asking, how do you think that two-story white house in Mexico Beach, Florida survived Hurricane Michael?
The first answer was, “It was God,” and the second answer offered was, “It’s a miracle.”
I said you can believe what you want to believe, but the third response is the correct answer, “They built it for the big one.”
The point I was making is that just as most houses are built in the same pattern, most portfolios are going to do the same thing at the same time. Like ordinary houses after a Category 4 hurricane, assets could be devastated.
As we see one of the few houses left standing after Hurricane Michael, I did everything I could to inspire my colleagues to approach the task as those homeowners did.
“It’s the first house that either one of us had ever built,” said Dr. Lebron Lackey, one of the homeowners.
The house was built with concrete walls. The foundation included 40-foot pilings. Rebar was placed through all of the walls to increase stability. The additions added about 15 to 20 percent more expense than usual.
In the investment world, cost is king. The lower the cost the better. But that answer addresses a different question. To “run for cover” by keeping your assets intact begin by determining how much loss you can accept. Followed by how active management strategies can be applied on behalf of your personalized goals.
Then look to see what asset classes outside of cash, bonds and stocks can be added to your portfolio. I count eight asset classes at Yale Endowment, for example. A stool with eight legs is simply stronger than a two- or three-legged stool to hold up the weight. Even in a hurricane.
When it comes to cost, it is often the case that you get what you pay for.
Suppose the CFOs are wrong about the severity and the timing. Just suppose it’s not another recession around the corner, because it could turn out to be a worldwide Great Depression II.
Something astrophysicist Michio Kaku said at a 2014 conference I attended should have happened 10 years ago. Act as if another depression is in the cards. If it doesn’t happen, who cares? If it does happen, prepared investors may be able to take advantage of opportunities they never saw coming.
It’s worth noting that on a per capita basis, more Americans became millionaires after the Great Depression than any other time in history. As I wrote just before Thanksgiving: Be thankful for cash. And get ready. Winter is coming.
John L. Grace is president of Investor’s Advantage Corp, a Los Angeles-area financial planning firm that has been helping investors manage wealth and prepare for a more prosperous future since 1979.
His On the Money column runs monthly in The Wave.