I have no fear of recessions. They are a normal part of the business cycle. They come and they go. If anything, they are good for the economy and the stock market in the long run. Still, it is good news that there is little economic data suggesting a recession is approaching us any time in the near future.
However, I have great fear of a financial crisis, like 2008/9. They happen quicker and do far more damage than a recession. Normally, it comes from banks holding worthless loans or other assets. There is no indication that is about to happen in the United States, especially since our banks have been required to increase their capital ratios. (It is possible that Chinese banks may have this problem, but that is still unclear.)
It doesn't happen often, but a financial crisis can also be caused by currency issues. In August, China began devaluing its currency, the yuan, about 6%. An unintended consequence of the Fed raising interest rates in December was to put upward pressure on the dollar, forcing further depreciation in the yuan. Knowing the Obama Administration was getting increasingly irate about this devaluation, the Chinese spent over $100 billion trying to support the yuan from depreciating further, but it didn't work. I expect the yuan will continue to depreciate, as their economy slows and the Chinese move their money abroad.
The currency market is the largest market in the world. Trading is dominated by hedge funds and large money-center banks. Their trades/bets tend to be very large indeed. My concern about a financial crisis has increased. This is separate and distinct from the geopolitical gyrations we have seen over the past week in worldwide stock markets. That will pass!
If I learn about some hedge fund getting wiped-out over the next few weeks or if some large bank is forced to increase their reserves, I will seriously consider selling some stock to increase cash levels.
However, I have great fear of a financial crisis, like 2008/9. They happen quicker and do far more damage than a recession. Normally, it comes from banks holding worthless loans or other assets. There is no indication that is about to happen in the United States, especially since our banks have been required to increase their capital ratios. (It is possible that Chinese banks may have this problem, but that is still unclear.)
It doesn't happen often, but a financial crisis can also be caused by currency issues. In August, China began devaluing its currency, the yuan, about 6%. An unintended consequence of the Fed raising interest rates in December was to put upward pressure on the dollar, forcing further depreciation in the yuan. Knowing the Obama Administration was getting increasingly irate about this devaluation, the Chinese spent over $100 billion trying to support the yuan from depreciating further, but it didn't work. I expect the yuan will continue to depreciate, as their economy slows and the Chinese move their money abroad.
The currency market is the largest market in the world. Trading is dominated by hedge funds and large money-center banks. Their trades/bets tend to be very large indeed. My concern about a financial crisis has increased. This is separate and distinct from the geopolitical gyrations we have seen over the past week in worldwide stock markets. That will pass!
If I learn about some hedge fund getting wiped-out over the next few weeks or if some large bank is forced to increase their reserves, I will seriously consider selling some stock to increase cash levels.
