When investing it is wise to remember that business cycles wax and wane. Recessions come and go and so do depressions. An often quoted fact is that if you had purchased a range of stocks on the New York Stock Exchange the day before the 1929 market crash and held them for years you would have made a fair amount of money. The point is not to run out and purchase stocks as the market sinks further. The point is that life and investment will continue during a prolonged economic downturn and eventually things will get better. Now is the time to develop a workable investment strategy to not only survive the possible depression ahead but to make money.
Severe recession, abnormally high levels of unemployment, scarce credit, bankruptcies, reduced trade and investment, and currency devaluation are all characteristics of an economic depression. What we have not already seen we may still see.
How long will the coming depression last and how will it end? The depression of the 1930’s lasted a decade until the United States entered World War II. The Great Depression ended with massive government investment and spending for the war effort. The previous “Great Depression” lasted from the 1870’s to the 1890’s. During the depression of the later 19th century life and investment did not stop. Immigrants created farms and cities in the American West. Investment in cattle created the trail drives. Investment in railroads populated the American West. Investment in research by Edison, Bell, and others created the groundwork for today’s electronic world.
The investment question on the eve of depression is what are the trail drives, railroads, telephones and light bulbs of the first years of the 21st century? What investment strategy will work during a depression?
An investment strategy from the California Gold Rush days comes to mind. “When everyone is digging for gold it is time sell picks and shovels.” What are the picks and shovels to sell during the next depression?
An obvious area of investment is medical research. The coming administration will ease up on the current restrictions on stem cell research. With prolonged life and cures for diabetes, Parkinson’s disease, Alzheimer’s disease, congestive heart failure, and degenerative joint disease as holy grails investment in stem cell research will continue despite an economic depression.
The arms industry will probably not be a hot area of investment. You need money to project military power and with problems at home the USA will likely pull back from war in the Middle East and avoid troop deployment overseas at all costs. With the Great Depression as a backdrop the “America First” movement almost kept the USA out of World War II.
What to Expect
The current chairman of the Federal Reserve, Ben Bernanke, has written extensively about the causes of the Great Depression. His research seems to have convinced people that the recession of the early 1930’s was converted into the Great Depression by tightening of credit by the Federal Reserve and by the Smoot Hawley Tariff Act that reduced global trade. Investment withered with credit tightening and retaliation for America’s tariffs cut off America’s export markets.
Thus it should come as no surprise that the government’s response to the current credit crisis is to throw money in the pot hoping to improve the credit situation. If this strategy works investment will renew and a global depression will be averted. The problem is that no one knows if throwing more and more money at the problem will help.
Let’s say that the bailouts of financial institutions avert a global depression but leave tax payers world wide with huge budget deficits. Where does investment capital come from then? Perhaps instead of a global depression we are in for a very prolonged period of economic stagnation. If that is the case the same strategy applies. Sell picks and shovels instead of looking for gold. Learn about medical research investments, especially regarding stem cells. Be very wary of high tech armament companies in a poorer world.