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Investing For The Next Recession…

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    August 29, 2012

    We recently wrote an article entitled ‘No Recession Now, But When?’ which discussed that recessions are part of the normal economic cycle.  We stated:  ‘It is an indisputable fact that a recession is coming. For economists, and analysts, the R word is as feared and loathed as the plague. A mere mention of the word will send them running in panic, pointing fingers and screaming heresy. The reality, however, is that recessions are part of the normal business cycle where the economy removes the excesses that were built up during the previous expansion’.

    We discussed this idea in more detail on Fox Business News (video below) recently discussing in particular where the related investment risks are and where investors should be looking investment wise to mitigate a recessionary pull on portfolios.   One area in particular where investors need to be paying close attention is in “high yield” funds.  Wall Street used the name “high yield” because it markets to investors much better than the negative connotation of what these funds really hold – “junk bonds.”  In a recent article we discussed the chasing of yield by investors and the excessive risk that is being unwittingly taken on.

    One thing to note in that article was that the spread between junk and AAA rated bonds are now reaching levels that have historically been associated with the onset of recession.


    As we stated in the article: “The problem for those heading into, or in, retirement is the quest for income and safety. After the last decade the “return OF capital” has become much more important than the “return ON capital.” With a sluggish economy affecting wage income, interest rates at historically low levels, and current standard of living costs on the rise – investors have been systematically pushed into chasing yield. The continued artificial supports and interventions by Central Banks, both domestically and globally, have led to a false sense of security that markets will continue to travel upwardly, and “high yield” bonds will continue to pay, indefinitely into the future. That event is as unlikely as subprime loans being “contained.”

    It is important to understand that I am not saying that a recession or market crash is about to happen. The markets, especially when running on “hope”, can remain elevated for far longer than logic would dictate. However, reversals in the economy, and the markets, come very quickly and will blind side investors lulled into a false sense of security.”

    What is important for investors is an understanding that, despite claims to the contrary, a recession will occur in the future. It is simply a function of time. These recessionary drags inflict lasting damage to investment portfolios over time. The average draw down during recessionary periods is 30.76% with an average recovery period of 43 months. For someone close to, or in retirement, this can be devastating.

    While the economy is currently not in a recession the negative trends in the data certainly require monitoring. With very low lead times between non-recession, and recessionary, states it is very easy to get swept up in the mean reversion process as forward expectations are realigned with current earnings and economic growth trends. With a market that is driven more than ever by momentum, low volume and high-frequency trading – this reversion processes will continue to swift, and brutal, leaving invstors little time to react to market changes. This time is NOT “different” – a recession will reassert itself at some point. What is important is whether or not you are prepared to deal with it.


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    Images: via Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of Streettalk Live

    lance robertsAfter having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.