How to be prepared for a potential recession (1)

I have been laughed at by someone that I kept talking about the potential of recession. For them, unless you immediately feel it, especially via the stock market, where is the recession and why keep talking about it? Well, for me this is a trend that potentially can be very devastating if not well prepared. While I’m not stupid enough to try to claim that I know exactly when the next recession will occur, I don’t feel shameful to be a crying wolf on it. After all, it will almost always be too late if you simply wait for it to be felt in the stock market. Just think about what happened before the dot.com crash and before 2008. Universally nearly everyone was euphoric about the ever increasing stock market and did not think a market crash would ever be possible, then it hit and hard without pre-warning. I think more and more evidence has emerged that the US may go into a recession in the not too long future but I don’t know exactly when. You see, the US GDP has been declining for 5 quarters executively and more than likely it will become 6 after the current earnings season is over. The financial world around the globe is in a total mess and very chaotic. We would probably have already seen the recession several times over if without the Fed and Central Banks around the world manipulating the interest rates and printing trillions of dollars from the thin air. All of this must have a consequence. It is not if but just when. Actually if we factor in the real inflation rate, we are already in a recession. Now another worrisome development is sending a signal silently. Libor or London Interbank Offered Rate is the most widely used benchmark for short-term interest rates between banks and is considered an accurate indicator for the health of the banking industry. During normal times, the 3-months US$ Libor is generally stable around 0.3% but during a financial crisis, it could shoot up to above 1%. E.g. Libor skyrocketed to 1.4% during the financial crisis in 2008/09 and since then, it has declined and stabled around 0.3%. But lately it is moving up to 0.8% without many people noticing it. It does not mean a deep trouble in the credit markets yet but it certainly suggests a worsening state of the global banking system. Wait to see what will happen when Libor touches 1%.


While I’m not expecting everyone would agree with me and share my worries, I’m glad that some friends with rational thinking are seeing the same thing as I do and are asking me what one may do to be better prepared in case the worst comes. I will share some thoughts next time.