I received this email from a respected friend:
I’ll try to make this short and simple, but you know better. I really hope some of you argue with me, because if we all agree I’m more likely wrong.
THERE’S A STORM COMING!!!!! AND WE NEED TO PREPARE.
Is it Katrina, or a polar vortex, an average winter storm, or the perfect storm?
Don’t know. I don’t need to predict or know what winter will be like in detail to believe that winter is coming.
Why do I think this? And plan to get prepared.
First, history. Bear markets ALWAYS follow bull markets. Are we in the 1st or 2nd inning of the current bull? Seems unlikely. Are we in the 7th or 8th? Don’t know, but I’m pretty sure the game will end – in 9 innings, or extra innings, or due to rain.
Second, look around, at geopolitics, at valuations, at rate spreads and bond covenants, at the omnipotence of central bankers (the Fed is leveraged almost 80 to one), at IPO’s, and on and on. Do you see an environment of bottoms or tops?
Do you see an environment of sustainability, or an environment of complacency?
Third, the world has not de-leveraged in the last five years. Debt to GDP has grown. It has been shifted around with some sectors reducing debt and others increasing, but the world’s debt load is greater today than it was before the ’08/’09 crisis, and the cost to carry that debt has probably never been lower. Crisis and bear markets tend to clean out the previous excesses and produce a more robust, sound, and conservative economic environment. I suspect that has not happened.
Fourth, I think the theory that “economic and financial stability creates instability, and instability creates stability” has merit. The financial markets have been remarkably stable for more than two years. This could go on and on, but you get the point.
This is NOT a panic call to sell everything and get short, or run to gold, or cash. This is a call to get PREPARED; professionally and personally. (My wife) and I plan to review our budget and balance sheet over the next few weeks. (My assistant) and I will continue our strategies and disciplines, but with additional attention to preparation for what will eventually come next; what are the best and most secure places to store cash, what asset classes may be diverging from the markets, are we seeing a deflationary or inflationary environment developing. If one wishes to plan for the inevitable, whenever it comes, there are only three time periods one has available; before, during, or after. “After” is not terribly useful or effective. “During” is quite difficult. Now is “before”.
(My wife) asked me, “What brought this on?” Why today and not a week ago? The best answer I have is the culmination of many, many pieces of input that have finally tipped the scale to say PREPARE. Maybe it was the “alerts”, or the chart on world debt levels, or the Fed’s leverage ratio, or continued reading of “The Fourth Turning”, or the complacency of both investors and voters, or Ben Hunt’s call for a peak in central bank influence and credibility, or watching Putin play his game, or a hundred other things. It might be that I see so much benefit to preparation, and very little downside – or so much downside to not preparing. For now, that’s my story, and I’m sticking to it.
Four final thoughts:
1. I learned long ago that governments and large institutions can delay seemingly huge problems almost indefinitely. They may never fix it, but they can delay for what seems like forever. Theirs is a long game, but our game is the markets – and they do cycle.
2. When things go wrong, they often go wrong fast, but the inflection point may be long in coming. Hemmingway’s quote about going bankrupt two ways comes to mind.
3. The last few weeks seems likely to be setting up for a typical excellent buying opportunity in October, or the next bear market. I’m completely open to both possibilities.
4. Over thousands of years we humans have evolved primarily to react immediately to threats to our survival. If we didn’t act immediately we were often dead. These hard wired reactions are more often than not quite unhelpful in the markets. If one plans and prepares when there is no immediate threat, the prepared reaction is likely to be more useful – not always right, but it has a better chance of being appropriate.
Please heed my friend’s message. He takes longer than I do to reach a conclusion such as this, but his thinking is well thought out and he is risk averse.
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