Much of this week’s notes came from an interview with Felix Zulauf by Global Macro Update. I recommend the watching the full video. It got me thinking about two things: Value and Risk.
"What does this have to do with me?" you might ask. First off it'll be a rough ride with your 401k as market flucate to digest all of this. It's possible your funds will underperform, so I recommend you talk to your fiancial advisor.
Second, if/when we have a recession it will be mild in the US. Labor demand is still high so hopefully we can avoid massive layoffs. But longer term things do not look good for prices and real estate. Interest could become very high and borrowing to pay for things will become very difficult. Reduce your debt, and if you must borrow lock into lower interest rates while you can.
I didn't write this to scare people, and these predictions are not certain. But if you knew things would get bad in the future, wouldn't you want to prepare today?
So what were the key takeaways from Zulauf's interview:
"What does this have to do with me?" you might ask. First off it'll be a rough ride with your 401k as market flucate to digest all of this. It's possible your funds will underperform, so I recommend you talk to your fiancial advisor.
Second, if/when we have a recession it will be mild in the US. Labor demand is still high so hopefully we can avoid massive layoffs. But longer term things do not look good for prices and real estate. Interest could become very high and borrowing to pay for things will become very difficult. Reduce your debt, and if you must borrow lock into lower interest rates while you can.
I didn't write this to scare people, and these predictions are not certain. But if you knew things would get bad in the future, wouldn't you want to prepare today?
So what were the key takeaways from Zulauf's interview:
Value
It's hard to argue that long term gold is your best store of value historically speaking. The value of gold has been challenged several times over the years and is a more reliable store of value that everything else. But you don't buy gold to make money.
Commodities is expected to become a store of value, particuarlly for BRICs countries that want to avoid the US meddling in it's affiars. They can be purchased from China and stored domestically, making them virtually untouchable. Added to this a nearly 12 year commodities bear market and underinvestment.
Equities, but only really good ones, can also store value. Theoretically if the currency they are priced in goes away the equity will be repriced in another currency. Key is that business needs to be a market necessity, fiscally healthy, and well run. Winners only, as noted most funds and passive investments fail to beat the S&P 500 long term.
Commodities is expected to become a store of value, particuarlly for BRICs countries that want to avoid the US meddling in it's affiars. They can be purchased from China and stored domestically, making them virtually untouchable. Added to this a nearly 12 year commodities bear market and underinvestment.
Equities, but only really good ones, can also store value. Theoretically if the currency they are priced in goes away the equity will be repriced in another currency. Key is that business needs to be a market necessity, fiscally healthy, and well run. Winners only, as noted most funds and passive investments fail to beat the S&P 500 long term.
Risk
Economist have long warned that the US Dollar's status as the world's reserve currency is at risk. Recent developments, rather deployment of economic sanctions may have hastened this. By using the SWIFT banking system against Russia we may have incentized Russia and China to set up a rival banking system. It's not beyond the realm of possibility that they create a new common reserve currency. This would have impact on the US's borrowing cost.
The other major risk is what is shaking out now in the US with the Federal Reserve. Raising rates will destroy demand, but it won't fix supply. It'll take a while for this to shake out, and the chances that we enter a more sever recession several years is very likely. In one scenario, Zulauf sees oil at $200 a barrel, which could crash everything including the real estate market.''
The other major risk is what is shaking out now in the US with the Federal Reserve. Raising rates will destroy demand, but it won't fix supply. It'll take a while for this to shake out, and the chances that we enter a more sever recession several years is very likely. In one scenario, Zulauf sees oil at $200 a barrel, which could crash everything including the real estate market.''