From cheery old Lubenovic: "What kind of financial strategies/tactics would you recommend for a worldwide recession or … depression?"

This would be so easy if you knew for sure a recession/depression were coming. It’s a possibility, of course, but by no means something you can "count on."

If you could, you would sell all your stocks and real estate and buy puts. (Puts leverage your pessimism much more than selling stocks short directly — and have the virtue of limiting your loss to 100% rather than leave it open-ended if you are wrong.) And/or you would put a good chunk of your money into U.S. Treasury securities. And you might put a few bucks into silver dimes, just to have some walking around money if the value of paper currency were ever called into question.

And then, when things seemed worst and most hopeless … when stocks were being given away at prices that would look good unless the world ended altogether … you would trade most of your profits in those puts and Treasuries and buy like a bandit. Because I can say with the confidence of a man who knows you will not be around to rebuke me if I am wrong: the world will not end.

But here’s the catch with a disaster strategy: We may already be a good deal of the way into that disaster. Just ask that sliver of the globe that lives East of Prague all the way on out to the Pacific and Hawaii. So it may be that the world is poised to reinflate and grow, that interest rates will rise, puts expire worthless, and Treasury bonds (at least those of the long-term variety) sink like a stone.

My guess is that the true path lies someplace in between those two scenarios. We will not have a worldwide depression, but the easy years are behind us for a while. A quarter-point drop in the fed funds rate — swell surprise though it was — may not be enough to turn the world economy around.

Hence it makes sense, I think, to spread your money — if you’re fortunate enough to have enough to spread — over the "four prongs" I have written about from time to time: some cash/liquid money first (money-market funds, T-bills, whatever); an inflation hedge in case the world reflates (your home, stocks over the long run, though inflation would kill most stocks at first); a deflation hedge (long-term Treasuries); and a "prosperity hedge" in case we really have already hit bottom (stocks). How you best weight these prongs depends on your own circumstances (80-year-old widows and 29-year-old eye surgeons are not the same) and your own view of what might happen (or at least your own view of how unhappy you would be if certain things happened, so you can try to stay within your tolerance for pain).

What will happen?

All I know for sure is that no one knows. If things get bad enough, prudence could even come back into fashion. That, no doubt, will be the bottom.

 

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