The yield curve is still heavily inverted. It has been mostly inverted for all of 2023. This indicates there is likely a recession on the horizon. And with how high asset prices have gone – particularly stocks and real estate – there could be a major asset bubble popping.

While this blog tends to focus on monetary policy, politics, and investments, I want to remind people that their investments are not their number one priority, at least for most people. If you are retired and wealthy, then your investment portfolio may be your number one financial priority.

For most people, their investment portfolio is far less important than maintaining their income. For the majority of people, this means a job. For some, it could mean income from a business. Both of these things are vulnerable in a recession.

We have seen falling real wages in recent years with price inflation exceeding any nominal rise in wages. But at least most people still have 90% or so of their income (in real terms) as compared to a couple of years ago. This can make life more stressful and bit less pleasant, but at least you can pay the most important bills.

If you lose your job – or worse, your own business – then virtually your entire income disappears. If you are married, maybe your spouse has a job or some sort of income. But even there, it is a drastic reduction.

So for most people, it would be better to be more productive at work, to network, and to have an updated resume than to worry about their investment portfolio.

Another Priority

Aside from maintaining your main source of income, I believe the next most important financial thing to prioritize is being out of debt.

If you have a low-interest rate mortgage, then this is probably fine. Even here though, it shouldn’t have a high balance. You can have a 2% mortgage rate, but if it is on a million-dollar loan for your house, then you are highly vulnerable.

Perhaps a low-interest rate loan on a car or student loans is fine too. But again, the overall balance matters. There is a difference between a car loan for $10,000 and a car loan for $50,000.

Credit card debt with any interest rate above zero is just bad. If you can’t pay your credit card bills now, it isn’t going to get any better in a recession. You have to do what it takes to eliminate that debt now. It will only get harder if you ignore it or don’t do something to fix it.

The economy can change quite fast. A house that was worth $600,000 could all of a sudden only be selling for $400,000.

Someone making a nice salary of $150,000 could quickly see that go down during a recession. It might be a choice between the job and a significant salary cut.

If you are out of debt, or mostly out of debt, then it is much easier to scrape by when things get tough. If you are already staring at major debt, it will be that much harder.

Investments

After doing what you can to prepare in terms of maintaining your primary source of income and being out of debt, then you can focus on your investments.

This means diversifying and making sure that any scenario will not wipe you out. If the bond market tanks, will you be ok? If gold falls by $500 per ounce, will that set you back a lot? If stocks fall by 78% – as the Nasdaq did in the early 2000s – will that ruin your retirement and financial security?

As I learned from Harry Browne, you can’t predict the future, and you don’t have to predict the future. If you are afraid of some economic scenario happening (where the world doesn’t end), just ask yourself if you will be ok if it does happen.

If you are afraid the market will crash by 80%, then you don’t have to worry if just 20% of your assets are in stocks. 80% of your portfolio should still be in place and doing fine.

This is why I recommend Harry Browne’s advice to have a permanent portfolio. It will not give you the best investment returns, but it will give you some peace of mind.

Not Enough Fear

While I wouldn’t take political advice from Warren Buffett, he has had some great investing advice over the years. He said to be fearful when others are greedy, and greedy when others are fearful.

While many families are struggling, there seems to be way too little fear out there given the conditions. This is why stock prices are still high. It is why people are still buying expensive cars and upgrading their kitchen (using debt).

The recession will hit people hard when it comes. The one upside is that consumer price inflation may ease. The downside is that the Fed may start another round of money creation if it is needed to save the major banks.