Can you profit from a likely coming recession?

The Thinker by Rodin

There are a lot of wags predicting a recession in 2020. There are wonky predictors of recession, like sustained inverted yield curves, which have accurately predicted most recessions in the past. This happens when short-term treasury bonds earn more interest than long-term bonds, which has been the case for a while now. Historically, it’s a great predictor of a recession and gives you about a year of warning.

Much of the world’s investors are already paying for negative yields, basically paying governments to take their money in the form of negative interest bonds. This sounds crazy. They do this as a hedge against currency deflation. During deflation, there is no incentive to spend money because the same dollar will buy more in the future. Fear of deflation often predicts recession too. We saw a little of this in the Great Recession when some money market accounts actually lost money, at least until new rules were created to place the full faith and credit of the U.S. government behind these accounts.

Naturally, Trump is not helping things. By initiating trade wars, principally with China, Mexico and Canada, he is injecting even more uncertainty into the markets, not to mention reducing international trade. Making willy-nilly decisions, like his recent threat to impose new tariffs on Mexico, feeds this pessimistic narrative.

It seems paradoxical that the stock market is rallying. But it’s rallying only because the Federal Reserve is suggesting it will lower interest rates. If it does, it’s only to try on the hopes of stopping a recession from happening, a recession that appears to be likely largely due to Trump’s trade policies. The Fed though doesn’t have a whole lot of flexibility as interest rates were only modestly raised since the last recession, so there’s not much room for them to fall. No wonder that so many investors are scared of the specter of deflation.

It’s been a good stretch of growth – one of the longest ever – ten years pulling out of the Great Recession. Good times never last forever anyhow, but Trump has certainly been pulling the wrong levers. We should be investing in clean technologies because that’s where future growth will come from. We should be improving our infrastructure, which is decaying around us because the economy needs a robust infrastructure to keep humming. We should be promoting higher wages so people have more money to spend, not throwing more money at millionaires and billionaires who can’t spend much of it.

Recession is coming at some point; it’s just a question of when. Most economists think the likelihood of a recession in 2020 is sixty percent. Should you be buckling down for the next recession? Given that personal credit card debt levels are as high as right before the Great Recession, it looks like many of us are not well prepared, a situation made worse by income inequality. Those who could hopefully pared down debt and created an emergency fund. But since 40% of Americans can’t afford an unexpected $400 expense, we can only hope that when the next recession comes it not as severe as the last one. Since many of the factors that got us in trouble last time are back again, largely because Republicans insist on deregulation, that doesn’t seem likely. Most Americans will simply hunker down and pray.

Looking back on my experience from the Great Recession, my takeaway is that it inadvertently made me, if not rich, a lot richer. I was blessed with a steady job that paid well and a 401K I kept contributing toward regularly. I was surprised in 2014 to discover that recovering markets made it not only possible to retire, but to retire comfortably, and I haven’t looked back. Inadvertently, I bought a lot of cheap stocks through my 401K and in just five years this was more than enough time to greatly increase my wealth.

So if you are 10-20 years away from a retirement and in a comfy job that’s unlikely to go away, then perversely you might welcome another recession because you can profit from it the way I did. If you have the nerve (something I don’t have), like a short-seller, you might want to bet against America. By this I mean, count on recession and try to profit from it.

How? If you take the bet that markets are likely at record peaks, then sell. I’m not recommending selling your entire portfolio, but it might make sense to sell a good portion of those stocks, ETFs and mutual funds and park them in U.S. treasuries, which is what a lot of investors are doing. Or you could take them as cash. You can do this with your IRA or 401K without a tax penalty. Then you just have to wait until the inevitable happens. No one can predict how much markets will decline, but if they are down 25% or more, that would be an excellent time to buy some cheap(er) stocks, ETFs and mutual funds. During the Great Recession, there was a huge sale as which discounted Grade A stocks as much as 50% from highs. After all, those who need the money to buy stuff will sell it for any price they can get, which is when bargain hunters like you swoop in. Then, like me, wait for the inevitable appreciation as stocks recover.

Will I take my own advice? Of course not! I’m retired, in my sixties, and although reasonably well off, almost all of our saving are in retirement assets. I could up my percentage of bonds and then later move them back to stocks when the market is at its low. But at my stage of my life, I want to maintain my standard of living, not necessarily gamble on some prospect ten years from now of a much larger net worth which would also be harder to enjoy before I die. Also, I pay a financial adviser to make sure we stay on plan.

But if I were a younger person like I was at the start of the last recession, then I might be taking some joy in the misfortune of others, knowing that when markets recover I would reap substantial rewards.