Hi Zebe,
I agree with you that this is a good time to be thinking about an economic downturn. You ask, does this country ever have any recessions anymore? Most people no longer worry about that, which is why they are willing to save so little and take on so much debt. And that leverage could easily turn what otherwise would have been a mild downturn into a steep recession. Lack of worry about a recession increases the chances of it happening, and/or the severity of it when it does show up.
One obvious beneficiary of a recession is gold. No central banker wants to be blamed for an economic catastrophe, so at the first signs of trouble, Chairman Bernanke and his counterparts at other central banks will take to their helicopters, slash interest rates and pump up the money supply as fast as they can. Each currency block will want their unit to be weak versus the others, to help exports and employment. By definition, they can’t all succeed in weakening their currencies against each other, but they can be wildly successful in weakening them versus the one (unofficial, but universally accepted) currency that doesn’t have a central bank, or a printing press: gold. The total value of all the gold in existence is so minuscule versus the value of all the paper assets in the world, that even the slightest shift from depreciating paper to gold could send it into the thousands per ounce, and all the gold mines in the world expanding like mad still couldn’t provide enough extra supply to make a difference.
Another macro play that, however, could turn out to be a terrible mistake, depending upon how things evolve, is long dated zero coupon treasury bonds. This idea seems to contradict the currency collapse scenario in the previous paragraph, and maybe the long bond market will collapse along with everything else. But there were two clear examples in history—the US in the 1930-40s and Japan in the 1990s until recently--when a very weak economy resulted in long term government bonds priced to yield under 1%. In a bad recession there isn’t much demand for cash other than from people who won’t pay you back; at least with government bonds you know they own a printing press and you’ll be repaid. Long dated zeros are selling as little as 24 cents on the dollar, and they could triple or more in a severe and prolonged recession. So I think it is worth a bet. Obviously, you buy them in your IRA so you don’t have to pay cash taxes on the imputed interest.
As far as individual stocks go, obviously shorts would pay off in a bad recession more than longs. But I think there are various niche businesses affected much more strongly by social or technological changes than by the economy. Your suggestion of generic drugs makes sense, as does any company that can cut health care costs, or any other costs for that matter.
For one tiny example, Media Sciences (GFX), makes discount replacement cartridges for office type color printers. The price of color laser printers has been plummeting, demand is zooming, and pretty soon monochrome printers will vanish. The printer companies love color because the replacement cartridges are complex and have high margins. It is very hard for an outside company to create a cartridge that will work in brand name printers without violating patents, but GFX has a lot of engineers who do just that. I see GFX as a five bagger over the next several years regardless of the economy, but a recession would help, because companies looking to slash costs would want to give GFX’s cartridges, typically priced 30% below the name brand, a try. The prices name brand companies charge for their cartridges are so high that GFX can undercut their prices and still get over 50% gross margins. |
