041: Recession Playbook

Ownership Disclosure: Danielle Town owns shares in Berkshire Hathaway (BRK).

Recession Playbook

The Invested Practice is taking its summer break after this, and the next issue will arrive on September 12. I hope you get (or have already gotten) a little time in the sun, some sleep, and a few moments to breathe and focus on yourself this summer. Remember your investing practice is your respite from the craziness whenever you need one.

Table of Contents

1. Rolling With It
2. Dalio’s Recession Playbook
3. Recession Stocks

1. Rolling With It

No audio color commentary on this issue due to summer travel and production issues, so I shall merely say Happy Summer! I hope we all get a break. The news about the virus continues to not be so good, and mental health issues are rising higher and higher – understandably. I feel anxiety that I did not feel six months ago, and I can’t pinpoint exactly the cause, which is a new experience for me. From talking to friends, many people are feeling anxious, stressed, or on edge, in a way that they can’t quite pinpoint. I don’t have a solution, but sometimes simply calling something out is helpful. I don’t know who needs to hear this, but you’re not alone.

My solutions for myself so far are to stay off social media, stop drinking that 4pm quarantine glass of wine and start eating more spinach and kale, focus a lot on getting good sleep (not very successfully so far, but I’m really trying), and keep my investing practice light and fun when I need it to be instead of adhering to my preset research goals. These measures have helped a lot. The last one is challenging because I feel guilty about not getting investing tasks and skills checked off as quickly as I had planned, and that adds to the stress I’m feeling, but I have consciously decided that my investing practice is a lifelong pursuit, and to keep it that way, it has to roll with my needs. If it doesn’t, I’ll stop at some point when it gets too hard. I don’t ever want my investing practice to feel too hard. It’s like trying to adhere to a diet when a special occasion rolls around: if you can’t enjoy the special occasion and have the drink and the cake and the pasta salad and then get back on the diet the next day, it won’t be a sustainable long-term success – and if it’s not sustainable, you’ll keep losing and gaining that same ten pounds over and over again. I want to lose the ten pounds and keep them off because the diet fits well with my life. I want to love my investing practice and never not love it because it fits well into my life. To do so, I have to keep is sustainable, by keeping it flexible. So, I’ve chosen to relax on it when I need to.

There are other good stress reducing ideas I haven’t really implemented yet, such as taking a walk around the block when the stress starts rising, not as exercise but just to shake things up by moving the body in a grounding way. I don’t know if it’s an amazing cure or anything, but all of us working at home can use a change of scenery. I tried it once. It took fifteen minutes from the time I stood up to the time I sat back down – well, it was twenty minutes because I changed the laundry as well, but that doesn’t count – and that’s a good amount of time for a break. I shall continue trying it out.

Last issue we talked a lot about the doom and gloom of what I’m calling our Suspended Animation Recession. When the United Kingdom put France on its quarantine blacklist the other day, markets dipped. I was convinced Switzerland would not put any EU countries on its quarantine list, but it put Spain on the list last week. Travel between Europe and the US is still curtailed for non-citizens/non-residents, and I hadn’t realized how much Europe depends on American tourists every summer. Nuno and I went to Lake Como for a few days to celebrate our anniversary, and I kept hearing, much to my surprise, “You’re American? How are you here!? We miss having Americans here!” We American tourists are accustomed to not always getting the most polite welcome from Europeans, so that reaction, once, then twice, then three times, was a real shock. They said business was surviving, thanks to European tourists, but the loss from not having American tourists around was serious. If you’re American and you travel to Europe once the world opens up again, I expect you’ll be welcome in a way you’ve never experienced.

Also, if you go to Lake Como, go to this wine cave in Bellagio. It was highly recommended by multiple friends, and it lived up to expectations, which never happens. Great food, great wine, great prices, great people, great afternoon.

2. Dalio’s Recession Playbook

“We’re in a defining moment.” Ray Dalio was interviewed back on April 9 by the TED channel. It was well worth watching, and interesting to hear his thoughts now, a few months later. He thought the time we’re in is most similar to the 1930s. Back in April, that was a huge headline pronouncement. Now, it seems obvious. What a huge shift we’ve gone through in only a few months. What will it be like in December to look back on August?

He views cycles in terms of credit. With this one, he said some people will get the benefit of credit being created, and many others will NOT get the benefit. That disparity will create even worse income inequality.

So far, I’d say he’s been right on the money.

Further points about the economic machine, as he likes to call it:

  1. Productivity: Grows slowly. Not volatile because knowledge isn’t volatile. Raises our living standards.
  2. Short-term debt cycle: 8-10 years.
  3. Long-term debt cycle: 50-75 years. Begins when you begin a new type of money and new type of credit. Ours began in 1945, with new money due to the Bretton Woods monetary system. (But did not a new one also begin when the major monetary powers went off the gold standard in the 1970s? Perhaps Dalio doesn’t consider that enough of a change to be a new type of money and credit.3 year process of depression, then rebuilding

He expects a 3-year process of depression, then rebuilding. Now that is the prediction I find most intriguing to view with a few months of hindsight. He expects a real depression/recession, and I do too, and so does pretty much every finance person I know. Governments are trying their darndest to invent money to keep it from happening, and so far, on a large scale, it has worked. (There are a lot of people really hurting, I know, and it’s not working in many real lives, but in the markets and for general credit availability, it is working.) Looking back on this prediction in December will be illuminating because I think that by then, the US election will be done, markets will have reacted, perhaps we’ll have a vaccine close to being approved, and we’ll have a much clearer view on which way the economy will go.

On this issue’s theme of what to invest in through a recession, Dalio thinks two kinds of companies will thrive:

  1. Stable meat and potatoes, not leveraged, sort of companies.
  2. Innovators. Don’t have balance sheet problems, so they can play the game. They’ll innovate their way through it.

Innovators will innovate their way through. Frankly, I understand companies that innovate better than companies that have been doing the same thing for a long time – which is totally opposite from the way Warren Buffett thinks about potential investments. He wants to see proven concepts done well over a long period of time.

But are the two concepts really so different? A company that rolls over and creates something new to respond to demand – sometimes even before demand exists, like the classic example of Steve Jobs creating a touchscreen phone before anyone knew they wanted one – is actually doing what it has proven it has done well over a long period of time. What a company like that provides is innovation. As long as we know that going in, I don’t see a discrepancy.

Buffett might even agree with me. He owns Apple now.

3. Recession Stocks

I found this article on the top ten Great Depression stocks really good food for thought.

Here are more ideas to spark your own thought processes – obviously, use these as ideas from internet strangers, some of which may be totally wrong:

To state the obvious, the virus doesn’t affect everyone equally. Inequality was a major topic before the world locked down, and is now getting worse. In a recession, that’s going to affect which companies do well and which don’t. Two great articles I’ve read over the last few months have stuck with me. They’re long, but they’re worth reading as background.

Two Pandemics, by Joe Pinsker for The Atlantic

The Two Middle Classes, by Joel Kotkin


Reminder: The 13-F filings with the SEC, in which funds with more than $100 million in American equities must file their ownership publicly with the SEC, are all due today. I’ll be looking at them and talk to you next in September!

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