Back in 2006 a client walked into my office with an impossible mortgage. Countrywide Bank gave a 70 year old a 30 year mortgage for more than 100% the value of her house. She was underwater the day she closed, with no possible way to ever sell that house. I was aghast, and wondered what was going on that Countrywide was willing to take on risk like that. I didn’t quite understand the whole securitization of debt, the way they were selling housing derivatives at that time. Later I learned about it, particularly from the fantastic book (and also fantastic movie) “The Big Short”. But back then I didn’t know what was wrong, just that SOMETHING was wrong. It got my attention. I’ve got the same feeling right now, watching the 10 year treasury approach the 2 year treasury bond rates, creating what’s called an “inverted yield curve”. I’m watching factories close under tariffs. I’ve read history, I know what follows trade wars. It’s raising the hairs at the back of my neck.
I blogged through the economic collapse, despairing as I watched small business clients go under, watched home equity plummet, watched people get held hostage by houses they couldn’t sell. It was a fairly depressing time for me. I’m re-reading these old entries and trying to put together something helpful, hopeful, useful to prepare my clients for the Depression that follows when trade wars and too tight a job market lead to a recession. Maybe a depression. I’m calling it, in my own head, the Great Trumpression. Oh crap, what to do now?
So here’s the advice I’ve got. First of all, it’s not all bad news. If you’re already in retirement you are in luck when interest rates rise, trying to attract new investments. Cash is king when deflation hits. That’s also when it’s good to own zero coupon bonds (also called Treasury Strips). I used to always use some Zero coupons in my portfolio construction, but fell away from doing it lately. Time to put them back in, either in the form of a bond ladder for those in or near retirement OR as a portion of the bond portfolio for those still in the accumulation phase.
If you’re still working, batten down the hatches. Pare down your spending, get out of debt, and build up your emergency money. Job loss and wage stagnation are hallmarks of a recession. We’re used to be in an inflationary period most of the time, where the future dollars are used to pay off past dollars: debtors do well in inflationary days. But not when deflation comes calling, and the impoverished future is forced to pay for past spending. Don’t stick Future You with Past You’s bills unless you’re SURE the future is brighter.
What about the stock market? I’ve always expected four year slumps. It’ll happen, I just don’t know when. Not necessarily when you expect it, though: the capital markets are international, and money (and sales) flow around the globe. But it won’t be forever, and all the investment advice I’ve given still stands. A steadily rising middle class in most of the developing world will continue to fuel an overall stock market expansion for years to come, if not mathematically forever. If we weren’t afraid of those four year slumps we’d only ever invest in the stock market. The fact that it DOES sometimes falter and fall is WHY we also use bonds, and REITs, and sometimes other tangibles. But never for everything, it’s still important to be diversified. I actually HAVE a crystal ball you can look in: I suspect you’ll find it’s as muddy for you as it is for me.
My advice works best when it works for all sorts of goals at the same time. Don’t just get out of debt and save some emergency money because I said doom is coming, do it because you’ll be better off no matter WHAT happens, and be particularly glad in case bad stuff DOES happen. I’ve got more advice like this, too: work on your human capital. Get in shape. Take care of your spirit. Get involved with your community. It’s better to light a candle than to curse the darkness.