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