Here’s What A Recession Ready Portfolio Looks Like

A recession is coming at some point, it always does. A bear market follows a bull market just like winter follows autumn.  Before the bull run ends, it’s a good idea to alter your overall investment strategy as the landscape changes. For those who have been riding the wave for the last decade, this transition is tough, but necessary.

Because of the rampant US dollar inflation, and the trade war with China it’s probably best to keep your  investments largely outside of the US. It’s very possible that the US will be the hardest hit by the upcoming recession, and while ripples will be felt throughout the globe, they will likely not be as devastating abroad.

Gold (40%) 

Gold acts as a good inflation hedge, as it moves in the same direction as CPI. Because gold seems to be a useful portfolio and inflation hedge, government policies to curb the import of gold may be futile.

Policies that directly address the causes of inflation and provide alternative investment opportunities for retail investors may better serve the objective of bringing down gold imports.

The major source of financial risk in the financial markets today is currency risk. So the reason that gold is so unique as an investment is it hedges this currency risk and acts as a currency against which all the other currencies are compared. So it is considered to be the most sustainable currency. Paradoxically, the largest holders of gold today as a group are the central banks themselves.

According to a recent Bloomberg report, China increased its gold reserves for the sixth straight month by over 74 tonnes and at its current pace is on track to add over 150 tonnes this year. Russia too has been buying, adding more than 96 tonnes this year, according to the World Gold Council’s data. Global gold reserves among central banks have recently seen their biggest month of gains in over three years as governments add to positions on heightened uncertainty. Therefore, we think there could be some risk to pricing should these countries slow their purchases or even start to reduce them.

Over the last 6 economic downturns gold has done well 83% of the time.

1976-1978

In the 1976 recession the market dropped by 20%, in the same period of time gold increased 54% as an asset inflation hedge.

1980 – 1982

In the 1980 recession the market dropped by 27%, in the same period of time gold dropped 46%.

1987

Black Monday, the market crashed 33% between August and September, while gold increased by 6% during the same period of time.

1990’s bear market

Stocks dropped 20% while gold increased 7%.

2000 – 2001

During the dot-com bubble the market dropped 50% while gold increased by 12% over the same period of time.

2007-2009

During the great recession from 2007-2009 the stock market dropped 50%, while gold increased 25% over those 2 years.

 

Alcohol & cannabis stocks (15%)

In 2008 we saw alcohol stocks do fairly well compared to other sectors.

In 2008 alcohol sales expanded more than 9%, when the average unemployment rate was 5.8%. There was a slight dip in 2008, but in 2010, sales increased more than 9% while unemployment grew to 9.6%, showing a positive correlation between alcohol consumption and unemployment on a macro scale.

“These numbers grew almost in spite of the recession,” said Sageworks analyst Sam Zippin, noting health care was the only other industry to maintain growth through the recession. “Other than going to the doctor, alcohol is another need to have.”

Sageworks also found that other categories of the alcohol industry maintained growth throughout the recession, including retailers, wholesalers and bars. If we look to mirror the cannabis industry this could be: logistics, hardware manufacturers & tech, extraction and retail.

Wine and spirits experienced uninterrupted growth, as did the high-end craft beers. The loser appears to be the so-called “legacy beers,” including iconic brands such as Budweiser.

The middle zone of any sector always feels the safest. It feels like the least amount of risk, turn on any episode of Kitchen Nightmares and one of the common problems businesses have is they exist in the middle. They play it safe and try to offer everyone everything as they believe this lowers the risk of customer dissatisfaction.

Coors Light, from Molson Coors Brewing, managed to carve out a sales gain of 1.1% in 2010, according to statistics from Standard & Poor’s and the industry publication Beer Marketer’s Insights. But sales for Miller High Life, also from Molson Coors, dropped more than 4% last year.

Sales for Budweiser, the flagship brand for Anheuser-Busch InBev Inc., plunged 7.3% in 2010, while Busch sales dropped more than 6%, Bud Light sales slipped nearly 2% and Natural Light fell 3%.

“The economy has been a major driver of declines within the industry,” said Dave Peacock, president of Anheuser-Busch, a subsidiary of Anheuser-Busch InBev (BUD). “The unemployment rate among core blue-collar beer drinkers remains three times that of more affluent, white-collar consumers.”

Peacock said his company “remains focused on things we can control” and that “we feel good about our marketing and the plans we have in place for our brand portfolio.”

But craft brewers have had a different experience. Sales at Boston Beer Co., (SAM) the maker of Samuel Adams and the market share leader in this category, edged up 1.7% in 2010, according to the S&P report.

Other craft brewers fared better as well, with Sierra Nevada Brewing Co. increasing its sales by 7.8%, Magic Hat Brewing Co. gaining 14.8% and New Belgium Brewing Co. soaring 18.3%.

While we have no data on how cannabis stocks would fare in a recession, we believe it would be a similar phenomenon.

20% cannabis/alcohol stocks

 

Commodities stocks (15%)

One of the top performing investment complexes, even during times where the stock market got off to its worst start, has been precious metals.

The fact that we expect gold to increase in value significantly from current levels implies that the “even weaker” silver and platinum prices are setting investors up for even more impressive gains on a percentage basis. For example, gold might go up 50 percent, but over the same time, you’ll probably see both silver and platinum increase by more than 100 percent.

Given the fact that precious metals act as a great form of insulation against global chaos and stock market meltdowns, means they act almost as a form of natural insurance.

Foreign Currencies (15%)

The United States and China are clearly on a collision course.

Chinese companies abscond with intellectual property, and President Trump introduces tariffs on Chinese goods; President Xi Jinping responds with his own levies, so Trump adds more. China allows the value of its currency to fall, and the United States brands it a currency manipulator. We are now on the verge of all-out economic warfare.

Onshore Chinese corporations are cutting exposure to US dollar-denominated debt and ramping up trade settled in yuan as a hedge against the mainland’s depreciating currency, according to a survey by Standard Chartered.

About 30 per cent of the foreign reserves are denominated in currencies other US dollars, causing a significant depreciation in the value of the assets held by the central bank as the US dollar appreciates.

About 22 per cent of the reserves are denominated in euros, a currency that fell 4.4 per cent against the US dollar last month. That alone would have caused the foreign exchange reserves to fall by US$34 billion last month, BBVA calculated.

The Yuan might be a smart thing to invest in. The majority of banks in China are also state-owned, making it easy for the government to generate a surge of cheap credit—and the subsequent investment that boosts growth. The second advantage is the structure of China’s political system, in which dissent is easier to shut down and bad news about the trade war can be filtered out.

 

Crypto (10%)

While crypto isn’t a serious hedge against a crash, we still believe there should be some aggressive risk in a portfolio, no matter what the landscape looks like. 10% is a low number, but a bet on the right coin could lead to huge gains in an economic downturn.

But, unlike gold we have no background data on how crypto may fair in a recession, so that 10% could be gone easily as well. This is why we have kept this number low.

We do believe cryptocurrencies will thrive in an economic downturn, but without solid data we are not as bullish as some are on the future of crypto. Bitcoin has been charging ahead as of late, but we are unsure whether or not that investment is a true hedge against a future recession, or if it’s just another 2017-esque craze.

During a global recession, Bitcoin could come under pressure. Investors who would typically put extra money to work in speculative assets may instead squirrel away cash, and they “might even have to sell the coins they have to put food on the table.”

If the government were to take extreme measures during a global recession, however, like taking over people’s bank accounts, or if it were to at some point eliminate cash to combat crimes like money laundering, only then would people look to bitcoin to protect themselves. Those measures are unlikely anytime soon. But, if they were to eventually come to fruition, bitcoin would be sure to benefit.

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