Last week was the worse week for the Dow since November of 2011. Is it time to panic? No, of course not!
However, it might be a good time to review the differences between an economic recession and a financial crisis. For example, an economic recession normally comes on relatively slowly, while a financial crisis can appear quite quickly.
An economic recession is normally relatively mild, compared to a financial crisis which is normally severe.
There have been many economic recessions but relatively few financial crises.
Recovery from economic recessions is quicker and more predictable than recovery from financial crises.
Economic recessions are healthy for long-term economic growth, as it purges inefficiencies and re-allocates resources. Financial crises are not! Therefore, I embrace economic recessions but fear another financial crisis.
"Buy and Hold" portfolio management is appropriate for an economic recession, but increasing cash relatively quickly is appropriate for a financial crisis.
Currently, economic data indicates the U.S. economy is relatively strong and getting stronger. However, there is a great deal of concern about the emerging markets, which were only 37% of world GDP in 2000 but are now about 50%. Could the emerging markets pull us into a recession? Of course, anything is possible, but this is not likely.
The important question is this: could a currency crisis in the emerging markets cause a financial crisis here, like the Thai baht crisis in 1997 did when Long-Term Capital Management nearly took us down? While possible, it is not as likely, because almost all currencies now float, permitting slower adjustments to value instead of sudden, dramatic devaluations.
The world is not ending . . . but we are indeed extremely fortunate to be living in this country!
However, it might be a good time to review the differences between an economic recession and a financial crisis. For example, an economic recession normally comes on relatively slowly, while a financial crisis can appear quite quickly.
An economic recession is normally relatively mild, compared to a financial crisis which is normally severe.
There have been many economic recessions but relatively few financial crises.
Recovery from economic recessions is quicker and more predictable than recovery from financial crises.
Economic recessions are healthy for long-term economic growth, as it purges inefficiencies and re-allocates resources. Financial crises are not! Therefore, I embrace economic recessions but fear another financial crisis.
"Buy and Hold" portfolio management is appropriate for an economic recession, but increasing cash relatively quickly is appropriate for a financial crisis.
Currently, economic data indicates the U.S. economy is relatively strong and getting stronger. However, there is a great deal of concern about the emerging markets, which were only 37% of world GDP in 2000 but are now about 50%. Could the emerging markets pull us into a recession? Of course, anything is possible, but this is not likely.
The important question is this: could a currency crisis in the emerging markets cause a financial crisis here, like the Thai baht crisis in 1997 did when Long-Term Capital Management nearly took us down? While possible, it is not as likely, because almost all currencies now float, permitting slower adjustments to value instead of sudden, dramatic devaluations.
The world is not ending . . . but we are indeed extremely fortunate to be living in this country!
