What If…We Were Months Away From The Next Depression….

By: ispeculatornew
Date posted: 07.20.2012 (5:00 am) | Write a Comment  (7 Comments)

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I sometimes feel like I’m not myself. If you knew me, you would know that I’m this guy who smiles all day long, who loves life and tries to live every minute to its fullest, who always sees the glass as half full, etc. But when I look at the economic outlook or discuss things with friends, I’m simply unable to see how things could not end in a disaster. Give me one reason to think that we will be back near full employment with decent growth in the near future and I’ll have 10 reasons why we won’t. It’s looking very bad.

Depression?…

I didn’t think much about it but when I watched this video discussing the parallels between the current economic crisis in Europe and what happened in the 1930s, it’s difficult to not turn negative.

We all know that major economies such as Spain and Italy are in deep trouble, are unable to finance their debt at sustainable rates and will need a bailout. We also know that if tiny economies like Greece and Cyprus had so many problems getting bailouts, getting one for Spain or Italy seems like mission impossible.

In a more global economy than ever before, a European collapse would be more than enough to bring down everything else too.

Except That Is NOT It…

The US government has more debt than at any time in its history, major deficit problems, an unsustainable health and social security system and a government unable to tackle issues…The housing market continues to look fragile.

The Japanese government has an insane debt level, an aging population and will need to start cutting down on those deficits but how?

The global financial system which is built on confidence and faith continues to become more shaky after collapses from Lehman, Bear Sterns, major losses by JP Morgan, etc. European banks are still carrying sovereign debt as if it was risk-free when we all know that many of those countries will need to default. Since all of those banks are linked together, the collapse of 1 or 2 major players could be enough to create major issues all around.

What To Do?

Honestly, if there is even a decent chance that we are headed for a new depression, shouldn’t we start preparing? Some have been doing it but it’s not easy to prepare a portfolio for a nightmare scenario. I’m certainly one who would say that I hold the secret recipe. I would however stress the following:

Holding cash (cash is king in so many different ways)
Limit leverage (those investment strategies that require borrowing can turn against you in a depression like scenario)
Diversify your portfolio (having different types of assets, multiple companies, international diversification, etc)
Limit your exposure to banks and financial companies (they have incredibly complex balance sheets and seem like a poor risk/reward)
Reduce your debt level
Hold some exposure to hard assets such as gold, etc

I’d love to hear your thoughts on all of this and if you are preparing your portfolio for such a depression. I recognize that it’s far from a probability but it’s not as unlikely as most would think it is…

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7 Comments

  1. Comment by Stephen — July 20, 2012 @ 11:25 am

    Apparently Watsa is worried too. Fairfax is increasing it’s cash holding to 40% of its portfolio.

    Would bonds be a good alternative to gold in a depression? Bonds have been doing really well in the last few years and I just can’t muster the courage to buy gold at current prices.

  2. Comment by IS — July 21, 2012 @ 7:39 am

    @Stephen – They can be part of the solution but rates are already so low, they have limited upside… we’ve been saying that for a while but there’s less and less upside as rates decline

  3. Comment by Hans — July 23, 2012 @ 8:22 pm

    IS, very good advice…

    Liquidate anything that is illiquid …

  4. Comment by IS — July 24, 2012 @ 4:24 am

    @Hans – Or at least, keep such investments only if you’re convinced you won’t need them anytime soon

  5. Pingback by The Weekend Roundup — July 27, 2012 @ 4:00 am

    […] 8. What If…We Were Months Away From The Next Depression? @ IS. […]

  6. Comment by H.M.H — July 27, 2012 @ 8:01 am

    I am retired, former C.E .O, and graduated as an economist.
    I have a good sized portfolio, most in short term corporate bonds, Dividend Stocks,m and blue chips like JNJ,MMM,PFE, ABBT.
    We have sold our over large home, moved to a small home in a small community close to a major city with great Hospitals.
    I am waiting, I will wait for the train to leave the station before I get on board rather than jumping on now and hope it takes the right track.
    Government I.O.U’s are being printed at a staggering pace, all Governments are in huge debt, they need low rates or else they must default.
    We have taken this defensive position to ensure our and our Estate’s needs are protected.
    Scary times, I am amazed at the ignorance out there, and don’t believe Government stats, they hide the truth.

  7. Comment by IS — July 27, 2012 @ 6:07 pm

    @H.M.H – Many thanks for your good perspective, it does seem like you have a good plan and did well enough to live a good life with the smaller returns that are available..do you see any light at the end of the tunnel here?

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