1980vs2016, asset allocation, election risk?

[Blackout736]

I am a sound money guy.  Think Steve Forbes.  I agree with Peter Schiff on what we should do for our economy, but I disagree with how he applies this to investments- I think he underestimates the effect everyone going to US investments when the economy gets dicey.

I am working with the following theory:
A recession is a necessary and desirable event in a free market economy.  It reduces the misallocation of resources to allow the economy to reset and expand again.

We are near recession or possibly recessionary already.



The italicized part is long winded, optional reading, but further explains my assumptions.

In 2007/8, we should not have intervened to prop up the financial markets.  Furthermore, the intent of the fed (a bunch of bankers) in their decision to bring interest rates to zero and to go through multiple rounds of QE was to save their friends (a bunch of bankers) rear ends by creating asset bubbles.  (Had we not intervened, we would have seen a short, hard recession, strong banks would have been able to buy the assets (loans, performing and non performing) of weaker banks at a large discount, weaker banks would have gone out of business, and we would have experienced strong economic growth for the past 6 years instead of the weakest recovery ever.

Keeping interest rates low for so long has actually discouraged investment by companies.  Instead they loaded up on debt for share buybacks, which are almost always poorly timed and hurt the company in the long run.

The economy is going to be in a recession soon, if not already.

Just as in 1980, the best thing that we could do now is to increase interest rates by 4 or 5 (or 7?) %, trigger a recession now, let the free market sort everything out.

The fed will do everything in its power to keep the stock market moving up between now and the election, they want Hillary to win.

If Hillary is elected, she will keep Janet Yellen, or someone similar.  Fed will continue zero to negative interest rate policies.  To counter recession, it will resort to additional quantitative easing.  Think Jimmy Carter 3.0 (Obama was 2.0).  She understands that our debts (and social security obligations) are unsustainable, and plans on defaulting on them through inflation.

If Trump is elected, who knows what the heck will happen.  As a debtor (real estate investor) he likes interest rates to be low.  It inflates the asset value of his holding while reducing the burden of paying down the debt.  As a business man, I think he understands that the low interest rates are harming our economy.  I think that he would consider normalizing interest rates, causing a recession, to enjoy the recovery after, in order to be recognized as a great- ie Regan.  This would require a default on our debts and obligations.  Bond holders (including the fed) would all get paid back a portion of the value of their bonds.  Social security benefits will be cut / reduced.  Medicare benefits will be reduced- either by raising age to receive them, or reducing amount paid to doctors and hospitals, or covering less procedures than before.



Finally the question
Currently I have about 2/3 of my 401k investments in a privately held company that I am not all that concerned about its ability to weather a recession.  We did just fine in 2007-9.

The remaining 1/3 I have as follows- 50% large cap, 30% emerging markets, 20% small cap. (I was 1/3 1/3 1/3 last year, but shifted from small cap to large cap as I felt the market was getting frothy.  I want to take 1/3 to 1/2 of this off the table now.  I am trying to decide what portion to take off the table.

I feel that if the stock market experiences a significant decline, emerging markets will be hit hard as institutional investors sell those assets rather than selling their US assets, to cover withdrawals from their funds?  There is also the currency risk- if the recession is triggered by the fed normalizing interest rates, this would further decrease the value of the holdings in an emerging market fund?  (and flight to safety by foreign investors would push the dollar up further.)  Also, if we buy less raw materials and finished goods from emerging markets due to the recession, this will further negatively impact their valuations.


I am thinking that my best bet is to sell my emerging market stocks, followed by my small cap stocks, whenever the market has an uptick between now and the election, then sit on a 50/50 large cap / cash allocation and monitor the situation for the next 6 months?  Do you disagree with my assessment of how emerging markets would perform during a recession in the US?

Sorry for long post.
Thank you very much,
Brian

[Scandium]

I am a sound money guy.  Think Steve Forbes [who?].  I agree with Peter Schiff [who?]on what we should do for our economy, but I disagree with how he applies this to investments- I think he underestimates the effect everyone going to US investments when the economy gets dicey.

In 2007/8, we should not have intervened to prop up the financial markets.  Furthermore, the intent of the fed (a bunch of bankers) in their decision to bring interest rates to zero and to go through multiple rounds of QE was to save their friends (a bunch of bankers) rear ends by creating asset bubbles.  (Had we not intervened, we would have seen a short, hard recession, strong banks would have been able to buy the assets (loans, performing and non performing) of weaker banks at a large discount, weaker banks would have gone out of business, and we would have experienced strong economic growth for the past 6 years instead of the weakest recovery ever.

Wow. Ok fine if you want to yak on about this conspiracy, naive nonsense about the economy at a Bernie rally or in Yahoo comments. But if you're going to do this "market/economic analysis" to change your allocation (which I think is a terrible idea, but anyway) you should have  a proper understanding of the economy, how the crash happened, why the fed/treasury did what they did, the consequences had they not etc. I only have a passing interest in economics or the crisis, but I still see that what you're saying here is pure garbage.

Short hard recession? eeh, that's what we had. Big banks did buy up other banks, after a push/guarantee from the government. Due to halting of credit they couldn't otherwise. And on and on.

and BTW; 67% of your 401k in one (privately held!) company? holyshit..

[Fireball]

"In 2007/8, we should not have intervened to prop up the financial markets.  Furthermore, the intent of the fed (a bunch of bankers) in their decision to bring interest rates to zero and to go through multiple rounds of QE was to save their friends (a bunch of bankers) rear ends by creating asset bubbles.  (Had we not intervened, we would have seen a short, hard recession, strong banks would have been able to buy the assets (loans, performing and non performing) of weaker banks at a large discount, weaker banks would have gone out of business, and we would have experienced strong economic growth for the past 6 years instead of the weakest recovery ever."

Yeeeaaahhhh. Anyone that believes this stuff already loses credibility.  Look, rates are going to go up, the market will adapt and we'll move on. Develop an IPS and stick to it.  No one here knows what's going to happen in the next 6 months either.

[Fireball]

Belief that private organizations should be subject to market forces means that I do not have credibility?

Start another thread if you want to discuss it.  No need in hijacking the OP.

[Blackout736]

I suppose I should have asked differently- as in "if a recession were to occur to in the us today, how would you expect emerging markets equities to fair relative to US equities?" 

I do not expect the fed to increase interest rates significantly.  I think they should have been kept in a 5 to 8 % range from the 90's to present, but that is water under the bridge, and a different discussion which I do not have time to go into in my one day off this week.  I think if Clinton wins the election there is 0% chance of significant rate hikes (I define significant as > 5% over 1 year or less.  I understand that many investors and most economists would consider this financial suicide by the Fed- not to mention significantly increasing the carrying cost of our national debt), if Trump wins, I would call it a 5-10% chance of it happening.


Ideally (excepting the money in the private company) I would like to work towards a 401k allocation of approx 15% large cap, 15% small cap, 20% reit (no reits offered in my 401k), 20% short term bonds/cash, 10% europe, 10% pacific, 10% emerging.  Rebalance if any one holding gets >7 or 8 % away from this.  Post crisis, I saw good valuations in emerging market stocks, but ignored currency risk, and those stocks have returned a giant goose egg (not nest egg) as a result.  I fear they are becoming riskier by the day?  In non 401k money I am struggling to decide if a similar asset allocation is best, or if I should purchase rental properties.

I am early career (I would say mid career, except that every time I take a week off, I decide I cannot handle early retirement), in my early 30's.  (Perhaps part time work will be an option when FI?  again not pertinent to this thread.)

The monies in the private company represent employer contributions based off of profitability of the company.  Company is evaluated annually by an outside firm.  They look at our profitability and growth prospects, and use publicly traded companies in our industry as a benchmark for comparison, and then apply a discount based on the illiquid nature of our stock.


I struggle, especially when I have conflicting thoughts, to get them down on paper in a clear, concise manner.

[Scandium]

I suppose I should have asked differently- as in "if a recession were to occur to in the us today, how would you expect emerging markets equities to fair relative to US equities?" 

Sorry, I didn't answer your question:

I have no fucking clue. Neither do you. Or anyone else.

[MustacheAndaHalf]

OP claims in 2007-2008 the Fed should not have provided a massive influx of cash to financial institutions.  Isn't that what happened in the great depression?

A credit default swap pays when a certain company experiences certain significant events, like bankruptcy.  The problem is when one large company goes under, and there's 20x or so leverage on that event, nobody can pay the billions that suddenly are due on credit default swaps.  It's like an insurance where every financial company is obligated to pay up, but none of them have enough money.

[arebelspy]

If Trump is elected ...  As a business man, I think he understands that the low interest rates are harming our economy.  I think that he would consider normalizing interest rates

How, exactly, would he do this?  You realize the Federal Reserve, despite the name, is not a part of the federal government?

[waltworks]

I suppose I should have asked differently- as in "if a recession were to occur to in the us today, how would you expect emerging markets equities to fair relative to US equities?" 

I don't know. Neither does anyone else. You are wasting your time trying to figure it out, because like almost all humans, your brain is programmed to find patterns in meaningless, random data.

There's no pattern, there's no grand conspiracy, the world is just weird as shit and totally unpredictable.

-W