E. Finding The Opportunities In Two Types Of Financial Crises
(Much more information is available in the full workshop brochure linked here.)
A potential new financial crisis over the next several years is not at all a certainty. It is, however, a distinct and growing possibility.
Multiple events in March and April of 2018 have increased the chances of another financial crisis over the coming months and years. These events include:
1) The Federal Reserve potentially intensifying the interest rate increase cycle;
2) the imposition of tariffs and counter-tariffs between the United States and China;
3)the recent reversal in fortunes for the large tech FAANG stocks which were responsible for so much of the increase in stock market; and
4) all of this occurring in the context of the most toxic political situation in Washington D.C. in many decades, with the potential for a political or constitutional crisis at any time.
Those four risks are all hitting at the same time, and what they are impacting is a situation that is very different than what it has been for most of the time since the financial crisis of 2008.
As covered in the analysis "The ABCs Of Popping A Third Asset Bubble" (linked here), we have seen the "movie plot line" of A-B-C-D occur in the economy and markets twice in the last 20 years, each of which has led to asset bubbles popping and widespread economic damage. For most of the time since 2008, we didn't have A-B-C in combination, so the "movie" clearly wasn't playing out again.
However, we now do have A-B-C together again even as the acceleration in risks is occurring, and while these in combination do not mean certain crisis - the odds are higher than they were. This is a comparatively recent development and quite different from where we were for many years.
Red Zone Crisis vs Black Zone Crisis
If there is a crisis and we want to be prepared, there is another very important question that needs to be asked: what type of crisis will it be?
Will it be an "old-fashioned" crisis in the red zone above, with a new monetary crisis, potentially high rates of inflation, widespread defaults on the massive amounts of debt that corporations, households and governments have taken on, and a resulting plunge in the real values of investments?
Or will it be a 21st century crisis as seen in the black zone? Where vast new sums of money are created by central banks to buy assets and contain the damage, even while interest rates are pushed to their lowest levels yet? With another crippled stock market, economic stagnation and another long-term recession, that increases still further the gap between tax revenues and what has been promised for Social Security and Medicare?
Or can that strategy even work a second time? As covered in the video analysis linked here, those tools have already been used once, and many are not available to be used again. That doesn't mean it won't be another black zone kind of crisis, but the path that is followed the 2nd time around could be quite different, and impact savers and investors in different ways than the first time.
The Risk
If another round of financial crisis hits it could be the single most important financial event in their lifetimes for tens of millions of people - and this likely to be particularly true for the Boomers. There are two major issues, with one being retirement benefits and the other being "sequence of returns risk" for retirement investments.
What is routinely ignored is that nobody knows with certainty the financial future of Social Security, Medicare - and government sponsored pension plans. Everything is built on assumptions about future economic growth. And if that works out differently than planned - then everything else necessarily changes as well.
The ironic part is that we just saw this "movie" happen in practice as well, and the unquestioned norm is to forget about it and pretend it never happened. The financial crisis of 2008 fundamentally reduced the future solvency of Social Security and Medicare. Looking at financial competition with the national debt by itself, a full 26 years of financial security for Social Security and Medicare were lost as a direct result of that crisis, as explored in the analysis linked here.
We are currently in a much more dangerous place just because of demographics. The peak years of paying for Boomer benefits aren't here yet - but they are about to be. As explored in the economic "race" discussion in the link above, the past crisis already makes this much more difficult. If there is another recession and another decrease in economic growth rates that hits right as the peak in benefit payments is still rapidly building - the damage is worse than almost anyone is taking into account.
If benefits are reduced, that increases the need for savings and investments. However, particularly for someone within a ten year range of either side of age 65, then sequence of returns risk means that there is not the ability to recover from a major asset loss like there is for someone younger. If stock market prices fall by half, and then slowly rebuild over the next ten years, there will be a substantial reduction in financial security and lifestyle that likely will be non-recoverable over the remaining lifespan.
Identifying Red & Black Zone Investment Opportunities - Workshop Modification
Hopefully there will not be a next round of financial crisis. Indeed identifying multiple ways of preventing such an outcome - and examining the investment implications of each - will remain a key part of the upcoming workshop.
However, as past attendees know, the workshops are always intended to be current at the time they are presented. If something major occurs during the week before the presentation - every effort is made to include the event and its implications.
As a result of recent events, there will be a significant modification of the "Risk of Crisis" cells in the Investment Implications Matrix.
A "red zone" financial crisis potentially changes every aspect of financial performance across all the major categories of stocks, bonds, real estate and precious metals.
A "black zone" financial crisis also potentially changes every aspect of financial performance across all four major investment categories.
However, there is a fundamental problem - the two types of crisis can sometimes produce investment results that are the direct opposite of each other.
At the workshop, we will "war game" possible asset price changes for a red zone crisis, including timing and sequence, trying to identify some of the best potential opportunities.
We will "war game" possible asset price changes for a black zone crisis, including timing and sequence, trying to identify some of the best potential opportunities.
We will carefully consider possible asset prices, sequences, and opportunities if a red zone crisis develops, but is ultimately contained within a black zone crisis.
We will carefully consider possible asset prices, sequences, and opportunities if containment is attempted in a black zone crisis, but ultimately fails, and is followed by a full-on red zone crisis.
Again, financial crisis is not inevitable, particularly in the short term - but the chances of crisis have been rising recently.
If it does happen, it could happen fast, and investors may have just one shot to do it right - to at least survive with savings intact, and to hopefully come through in better shape than ever. For that situation, there is no substitute for having thoroughly thought through the possibilities, opportunities and risks in advance.