This Has Never Happened Before

Photo Credit: Boston Public Library || Should end the saying “Slower than molasses in January“

Life is somewhat predictable in the short run. That said, there are always surprises that make us say, “This has never happened before.” Here are a few examples:

• The policy response to the current C19 crisis. (Note: the C19 crisis itself is not new — we have had the Spanish Flu and the Black Death, which were far worse.)
• For those in the US, 9-11-2001 was a huge surprise.
• Few expected that the financial crisis in 2008 would be so large.
• No one expected the interest rates would rise so high 1979-82.
• The high inflation era of the ’70s was a total surprise. In one sense, what is more amazing is how much it has made Americans fear inflation. That said, look at the fear the Germans have of inflation.

Personally, I have always taken moderate risk in my financial dealings. My asset allocation has always been between 80/20 and 60/40 (risky/safe). I don’t go “all out,” nor do I cower in fear. I look for opportunity, but I always leave something on the side in case something goes wrong.

Unexpected things go wrong with considerable frequency, particularly when private & public debt levels get high. With little slack in the system, panics have a greater impact. This is a cost of the Fed encouraging higher levels of debt. They create the higher severity of the crises, because high debt levels leave the economy inflexible. People and institutions are relying on debts being paid.

As a result, with the highest debt levels we have ever seen in the US, I am going to improve the already high credit quality of the equities and bonds that I purchase for myself and clients. This is not sustainable, and if the Fed continues its path to becoming the universal bank of the US, we will face other problems, notably no economic growth.

My main point here is own some assets that are safe. I own short-term bonds that pay little, and I don’t care that there is almost no yield. I know that the principal is secure, and that if things get worse, I have buying power. I used the buying power back in March. I will do it again.

Make sure you own a decent amount of safe assets.