An 'Oh My God Moment'
From Canada.com Business Center
A major Canadian brokerage firm has added its voice to those warning of the potential global impact of an influenza pandemic, suggesting it could trigger a crisis similar to that of the Great Depression...."I think that this particular report really signifies the first time that anyone from within the financial world, when looking at this issue, kind of had one of those 'Oh my God' moments," said Michael Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota.
...Sherry Cooper, chief economist of the firm and executive vice-president of the BMO Financial Group said in an interview Tuesday: "It is a big, big issue. I mean, it's almost imponderable," she said. "I have to admit: the more research I did, the more frightened I became."
Conundrum: Do nothing, risk everything. Or, over-react, panic and douse the fire with gasoline. Truly, I do not know where to find the reasonable, prudent middle ground here. All along, it has been the world-economic consequences of this possible pandemic that has loomed in my mind as the largest issue beyond the very many individual deaths.
This is an exercise. This is only an exercise: if you knew with certainty that we faced a future of global economic collapse; knew that it would come on suddenly; knew that it would happen in six to eight months: what concrete steps would you take financially right now? Is anyone asking this kind of forecasting of your financial advisors? Most blew sunshine over anything that discourages investors from business as usual. Just hold tight; keep doing what you've always done, they say. Surely, there are some(at least at BMO Financial Group in Canada) who will be advising their clients toward a different kind of investment for the uncertain months ahead. What would that advice say? Any ideas?
It could very well be that business will not be at all as usual. What is the prudent thing to do to shelter one's assets, one's nestegg, the children's college fund, a retirement from the shock wave of the first quarantine of a major US city? Once something of that magnitude should happen, should it happen, it's possible we'll see just how brittle our economic veneer really is.
There's an elephant in the room. He is unwell and nobody wants to talk about him.
Comments
If it were really that dire, I think I'd move all my money to the Mason Jar Savings Bank, conveniently located under the bed.
What the SHTF, I think I want to be fully invested in cash.
Posted by: COD | August 17, 2005 9:51 PM
I guess the smart financial move would be to short the market, either with individual stocks that would suffer the greatest or in a hedge fund. Your condition was if we knew "with certainty". Profiting from catastrophe gives me the creeps somehow, but if it were absolutely certain and time period was known, I would short with all the borrowed money I could find.
Posted by: fletch | August 17, 2005 11:34 PM
My initial thought was also to short the market. However, if the situation was really that dire I question whether you could get your cash out when you needed it.
Posted by: Chris | August 18, 2005 10:43 AM
It's sort of like asking what would you do if you could go back to 1928 and know with perfect info the Great Depression was coming. Given that info then Fletch is correct: short equity or junk bond markets by borrowing today's price and replacing it with tomorrow's lower price and you get to keep the difference. Why equity or junk? Because these assets will fall harder because they are not secured by any underlying assets (i.e. corporations have no obligation to pay).
But this raises another question, assuming you don't know how long or how severe the economic meltdown will be, when do you remove your short bet? Example: You short the market and are successful after the market falls 30%. Are you done? Do you take profits now? Or do you try for further gains? Do you think the worst is over and reverse your bet hoping to further profit on a recovery? This is the market timing question/problem that you could hedge by applying a moving stop order that tells a computer to take your profits if the market moves against you by some pre-defined amount (e.g. 1%-2%), so you end up with 28% profit instead of 30% if the market reverses. Now re-allocate based on new outlook.
Now let's leave fantasy land and come back to your version of reality. What should you do if you expect the avian flu to bring about an economic meltdown but you don't know for sure when or for how long or how severe. You may want to keep an ultra-conservatively balanced portfolio, which means that you would put more of your assets in Treasury bonds.
Treasuries performed the best during the Great Depression and during many other downturns. Still keep money in stocks because they will eventually turn around and exceed Treasuries for a period. Watch closely and re-allocate at least annually based on your expectations and goals. (Note that all prior info is simply me thinking aloud and should not be conceived as solicited financial advice as I am not a licensed broker/planner.)
Posted by: Jim | August 18, 2005 11:49 AM
You could buy 50 yr French Treasury bonds...BUWHAHAHAHAHA!
Posted by: BJ | August 19, 2005 10:13 AM