Recession proof investments

Recession proof investments

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Discussion

DonkeyApple

34,417 posts

114 months

Friday 23rd August
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Gandahar said:
Currently there is no recent recession, that is yet to happen yet and when it does house prices, which are over inflated currently, will lead to negative equity. As has happened over time.

I'd keep the 200k in the bank. Even asking this with Brexit still 2 months away is odd. Just wait.

There are no bargains currently and there is a lot of risk matched up to that.
This is the nub of the very important detail that today we must contend with and that is that in 2008 we transitioned into a new global economic policy and this has fundamentally changed the way certain recessions work.

Recessions happen all the time, whether they are geographically specific or industry specific there is always a recession happening somewhere.

And interestingly no one gives a flying fk about them! Why? Because they don’t impact us at all partly because they are happening in a location or sector that doesn’t effect us partly also because most recessions are totally irrelevant.

A fall in GDP over two quarters. So what. Why is that even important? Because today we must keep GDP expanding so as to keep the mountain of insane global debt from imploding.

And that brings me to the big one, Global Recession!!! The one where we all die and the DM goes into over drive about manshun prices and how it’s all the fault of yellow or brown people and that backstreet Turkish tit jobs are now too costly for dumb slags from Croydon, while the Express tell us it’s all the fault of the Jews.

Most of us are haunted by the 80s recession and that is the only reason why the media can whip up a frenzy over the word recession. The reason that event sticks in our collective, cultural psyche is because domestic money supply reduced and that meant a fall in domestic asset values to rebase to the lower level of money. In other words, lending stopped because rates went up and the funding of existing lending soaked up all spare household cash and the housing market collapsed. We fear the word recession because in 1989 the price of houses fell.

What we saw in 2008 was a rather significant change to global economic policy. They couldn’t let interest rates rise and money supply fall because the amount of debt in the market was too big and absolutely everything would have collapsed. Everything. So they did the exact opposite which was to drop interest rates and to create new money. So instead of asset values rebasing it was the currency they were priced in that rebased.

That debt problem hasn’t gone away. It’s arguably worse ten years on. So it is probably fair to hold the view that the days of a global recession triggering asset devaluations is over and that the new norm is for global recessions to trigger currency deflations.

So the most simplistic action in the new world economy is that to be smart it’s nonlonger about cashing in assets ahead of a recession and going to cash but rather, its about getting rid of cash into the right assets, the proxies. The trick is guessing what those will be. Will it be old cars and watches like last time or will people shun cars and and man bangles and maybe the new wealth status goods will be enormous old oak linen cupboards because you have to have a massive house to fit one. Maybe now they are going to hit gangsters with Unexplained Wealth Orders the whole culture of overt bling will change and bling will be about cruising around town in an Allegro and sporting a Smiggle watch?

Property would be equally as complex as will any asset that generates its yield from a 1:1 relationship as you need to select the property type, the area and the customer intelligently or skilfully enough to select an asset that is either not going to fall because local money supply is fixed and flat (such as by the State) or where money supply will rise as a result of money printing or an influx of external capital, while trying to avoid areas where the values are not underpinned by the welfare state nor will the local area benefit from money printing or external investment and so asset values are at risk of contracting.


rockin

6,795 posts

190 months

Friday 23rd August
quotequote all
DonkeyApple said:
So the most simplistic action in the new world economy is that to be smart it’s no longer about cashing in assets ahead of a recession and going to cash but rather, its about getting rid of cash into the right assets, the proxies.
Exactly this. 10 years ago I formed the view that government/central bank policies in UK and elsewhere were set to destroy the value of "money" as an asset class. Yes, it's still useful for barter but to hold cash as an asset is to accept a return that's negative to inflation.

I've never been a fan of bonds although they do at least provide an alternative to equities (and property).

As an equity investor my focus is mainly on the practical things people really need. For instance,
  • If shares in Ladbrokes, Swiss watches or French perfume collapsed it wouldn't make much difference to daily life.
  • If shares in Nestle and Tesco collapsed the question wouldn't be "what are your investments worth today?" but "is there anything to eat this week?"

Groat

3,949 posts

56 months

Friday 23rd August
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Condi said:
Groat said:
But plain and simple economic downturns (also very closely linked to government stupidity) don't really bother landlords. Strangely enough, it's when the economy is booming that the landlord wonders whether the capital wouldn't be better deployed elsewhere.
All very well, but with house prices at record (any many would say unaffordable) highs are you not worried about the underlying asset decreasing in value, given any downturn or increase in house building?
Well not really. Obviously it's nice to hear that your asset has risen in price, but if it falls in price it's no big deal because the point of buying a buy to let is to gain income from its letting. So whatever its price is is of little consequence as the perceived value from the outset is in its income potential.

Funnily enough a link on another thread was an "expert" from Pure Commercial Finance explaining that most residential landlords were really in it for the capital gain and that the rental income was the icing on the cake. I thought that was really weird. I mean how, when you're contemplating a purchase, can you predict with any certainty whether or not it'll rise or fall in price or by how much over any given period of time?? On the other hand, you can know very accurately how much it will generate in rent. I have bought properties to sell for a profit. And I have bought property to let which has at a later date sold for a profit. But I have never bought a property to LET with the aim of profiting from its sale. Indeed I own a couple of properties which would sell for less than I bought them for. But I am happy to own them and have no intention to sell them because they generate very satisfactory levels of income.

Anyway the point is that when the economy goes wrong it does not affect landlords' incomes very much if at all. Not so far at least. Which makes a btl a kind of recession proof investment.

Edited by Groat on Friday 23 August 11:07

btdk5

1,590 posts

135 months

Friday 23rd August
quotequote all
digger_R said:
A significant amount of my savings are in cash at the moment (we're talking around 200k) - I'd like to find some investments where I can drop it in and leave it for 3-5 years minimum that are recession proof and still offering a decent level of return.

Could the resident financial bods please offer some decent advice - obviously this is very general but broad groupings of investment types (even specific recommendations would be great).
Anything that can use the power of compounding over a long period would be especially welcome - even more so if I don't have to actively manage it.

I'm still UK tax resident, not employed for UK purposes and have a small house as an investment. I earn less than 10k per year in the UK.
Have you thought about looking at structured products? Can be a good choice if you’re worried about volatility.

They won’t compound but they do give you a known or guaranteed bonus. You can get pretty defensive structures providing yields of 6-8% up to aggressive structures giving double digit returns.

DonkeyApple

34,417 posts

114 months

Friday 23rd August
quotequote all
Only if money supply remains constant. Rents are generally linked to wages so in areas where wages decline then rents will (without increased access to debt to synthesise wage inflation) but in areas where wages are defined by the welfare state and so long as the welfare state does not reduce those wages then rents will be stable and predictable on that front.

rockin

6,795 posts

190 months

Friday 23rd August
quotequote all
Groat said:
the point of buying a buy to let is to gain income from its letting.
I don't think that's universally the case.

Some people have done very well from buying properties with the intention of using the rent to cover expenses while anticipating a substantial capital gain on sale.

As with other forms of investment, any preference between "income" and "capital gain" is driven to a large extent by tax considerations.

DonkeyApple

34,417 posts

114 months

Friday 23rd August
quotequote all
rockin said:
I don't think that's universally the case.

Some people have done very well from buying properties with the intention of using the rent to cover expenses while anticipating a substantial capital gain on sale.

As with other forms of investment, any preference between "income" and "capital gain" is driven to a large extent by tax considerations.
What didn’t help was all the get rich quick schemes that were based around massive leverage and the speculators not having additional wealth to replicate yield if there were issues. Expecting a capital gain in investment property over the long term is not erroneous, as you say, if it were then it wouldn’t be taxed for starters but if you don’t have quality foundations from which to run the investments then you might struggle to handle shorter term value changes or income changes.

Groat

3,949 posts

56 months

Friday 23rd August
quotequote all
rockin said:
Groat said:
the point of buying a buy to let is to gain income from its letting.
I don't think that's universally the case.

Some people have done very well from buying properties with the intention of using the rent to cover expenses while hoping for a substantial capital gain on sale.

As with other forms of investment, any preference between "income" and "capital gain" is driven to a large extent by tax considerations.
It may not be the case UNIVERSALLY but - its kind of obvious really - people buy property to LET in order to LET it.

Often - and I mean really often - the property with great potential as a letting concern is not at all suitable for flipping. The two can and often are completely different animals. And also, other than at the smallest scale, buying and selling doesn't involve capital gain (as I have recently pointed out to a pretty senior person at HMRC) and is, in fact, income gain and taxed accordingly.

Not that there aren't people who buy a letting concern to sell it for a profit. But that isn't btl. Btl is buying a property to let and letting it as a landlord. It's not complicated, and its profit isn't affected by recessions/downturns (see thread title).

DonkeyApple

34,417 posts

114 months

Friday 23rd August
quotequote all
Short dated lease properties being the near perfect example. With the bonus of a guaranteed capital loss?

rockin

6,795 posts

190 months

Friday 23rd August
quotequote all
Groat said:
Often - and I mean really often - the property with great potential as a letting concern is not at all suitable for flipping.
Not everyone is using your business model. If my recollection is correct you have previously said you buy cheap properties and never sell.

Plenty of people made a killing in London by,
  • Buying with a hefty mortgage
  • Offsetting interest cost against taxable rent
  • Avoiding a heavily taxed net income
  • Selling with a big capital gain at modest tax rate.
It extends over several years and is BTL with the objective of capital gain.



Jon39

6,169 posts

88 months

Friday 23rd August
quotequote all

rockin said:
As an equity investor my focus is mainly on the practical things people really need. For instance.
  • If shares in Nestle and Tesco collapsed the question wouldn't be "what are your investments worth today?" but "is there anything to eat this week?"

I certainly agree with you, that constant customer demand is a good yardstick for long-term stock selection, but you selected an unfortunate example.

Tesco did collapse. Think the share price was over 400p and with a higher dividend. It caught Warren Buffett out.
We obviously need to eat, but there seems to be considerable competition in food retailing, Even a player with about 30% of the market can be shaken.



Groat

3,949 posts

56 months

Friday 23rd August
quotequote all
rockin said:
Groat said:
Often - and I mean really often - the property with great potential as a letting concern is not at all suitable for flipping.
Not everyone is using your business model. If my recollection is correct you have previously said you buy cheap properties and never sell.

Plenty of people made a killing in London by,
  • Buying with a hefty mortgage
  • Offsetting interest cost against taxable rent
  • Avoiding a heavily taxed net income
  • Selling with a big capital gain at modest tax rate.
It extends over several years and is BTL with the objective of capital gain.

I don't really have a "business model". I certainly have a btl portfolio (the keepers) and used to, though no longer, have a buy-to-sell portfolio(the flippers). I PREFER cheap for several reasons, but - esp. with commercials - can be tempted by some dearer stuff too (although it never ever makes the same level of profit when let).

To be honest, ESPECIALLY in London, and ESPECIALLY over a period of several years, I do not know how anyone can even predict any gain at all on a property never mind how much, with any accuracy, that gain will be. Unfortunately that's a talent I've never been blessed with. My much more mundane "skill" involves knowing what something will rent for. Often enough this "skill" involves looking up the LHA rent for the area. And after the 2nd or 3rd time its easy to remember so you don't even have to bother looking it up again, except to note the annual rise.

However I do remember in 2007 whilst coming to an end of a long and successful run of dealing in letting concerns (many of which I agreed to sell before they were even bought) there were certain individuals who leveraged themselves beyond 100% and who were fully confident that property would continue to inflate in price by at least 10% per annum. They appeared to have no scientific basis for this insight. And they would not be convinced otherwise. We called them "silly people" (although it never stopped us selling to them). I am sure London was (and still is) packed out with them.

Now if you really want to go bust in the property business there is probably no easier way than to buy speculatively with a recession coming up. Personally I don't advise it. It may be "btl" to some, but it's not "btl" as we know it.

Again, property bought to let - and let - will, conversely, not really suffer much if at all in an economic downturn. You could therefore call btl "recession proof" which in the past it certainly has been.


mikeiow

1,568 posts

75 months

Friday 23rd August
quotequote all
I don’t disagree with much of Groat’s statements....but for someone it’s NO experience in BTL, I’m pretty sure it isn’t as simple as saying “hey, go buy a BTL, get a tenant, & you cannot lose!”.

Clearly you have a wealth of experience, and that clearly goes a long way.

Some people have day jobs, & as soon as you start to involve management agents or trades to “do up”, your returns will rapidly diminish, I would say.

I like the idea of getting into it....& maybe will in the next year or two, but as many have said, it does sound like the returns are being rapidly eroded.

putonghua73

476 posts

73 months

Friday 23rd August
quotequote all
DonkeyApple said:
A fall in GDP over two quarters. So what. Why is that even important? Because today we must keep GDP expanding so as to keep the mountain of insane global debt from imploding.

That debt problem hasn’t gone away. It’s arguably worse ten years on. So it is probably fair to hold the view that the days of a global recession triggering asset devaluations is over and that the new norm is for global recessions to trigger currency deflations.

So the most simplistic action in the new world economy is that to be smart it’s nonlonger about cashing in assets ahead of a recession and going to cash but rather, its about getting rid of cash into the right assets, the proxies. The trick is guessing what those will be.
Good post, DA. I would venture no-one, and I mean outside of Jeff Gundlach, Ray Dalio, Charlie Munger, etc - certainly very few in the political classes - give a flying fk about debt levels, which is a concern when debt levels for certain countries (iinc US) are at or have surpassed susaintable levels, and show no sign of abating.

Ray Dalio has been discussing for quite some time that he believes that there are troubling parallels with the 20s / 30s both economically and politically. We are seeing the rise of nationalism in politics (withdrawing from agreements, implementing tatiffs - not just solely in the domain of the US and China) and beggar thy neighbour tactics that will exacerbate any economic slowdown that may tip a technical recession into something more prolonged and painfaul - especially that Central Banks have very little ammunition left.

The debt levels are troubling for potentially making any economic slowdown a lot more painful, and for borrowing against future growth i.e. implies that future growth rates are going to be a lot lower than expected. This negatively affects pension liabilities, health and social care, etc i.e. further fuelling generational inequality conflicts.

I've been ruminating for some time now whether holding cash [cash fund] is a wise decision, and if there is a better asset class / place (not equities or bonds - the latter especially S&P500 way, way overpriced and I've missed the bond rally) to not only hedge against a recession but against the very real and current threat of currency devaluation. Three asset classes come to mind:
1. Cryptocurrency
2. Gold
3. Collectables e.g. comics, MTG cards, etc (in fact, I'm selling my reserved list Mirage era 'LED' because certain cards / card types are extremely frothy)

I do not understand 1 or 3, and 1 in particular has more risks than merely price swings (regulated exchanges, account protection). Gold is similar in some ways to collectables in that neither pay interest, both subject to price swings and fads, and storage. I'm thinking of a Gold ETF and normally I would never remotely consider myself a gold-bug. However, those harping on about the collapse of fiat currencies and the like, actually have a point to an extent, when everyone is plunging headlong to negative rates and a big f**k you to their neighbours

I was so focused on a recession / depression that I missed the blindingly obvious risk of massive currency devaluation.

More to the point, I still haven't converted my company DC fund to a SIPP fund - which means I'm massively massively limited at present, to a handful - and I mean a handful - of largely similar funds!

Edited by putonghua73 on Friday 23 August 16:32

Sheepshanks

17,864 posts

64 months

Friday 23rd August
quotequote all
Gandahar said:
Currently there is no recent recession, that is yet to happen yet and when it does house prices, which are over inflated currently, will lead to negative equity. As has happened over time.

I'd keep the 200k in the bank. Even asking this with Brexit still 2 months away is odd. Just wait.

There are no bargains currently and there is a lot of risk matched up to that.

Having said that there is a good bet on one US share I am looking at for October. That's more of a hobby though.
To be fair, people have been suggesting a downturn was coming for years. Meanwhile the markets have boomed.

rossub

2,252 posts

135 months

Friday 23rd August
quotequote all
Edible Roadkill said:
When the £ drops 10% minimum upon brexit happening that may be a regret
Isn’t it already priced into the market? I wouldn’t be surprised if the £ goes up when brexit actually happens!

DE1975

56 posts

51 months

Friday 23rd August
quotequote all

In times of recession, gold is your friend.

Towards the end of 2008 when the banking crisis was in full swing, I flippantly commented to a friend " I guess we should sell our houses, buy some gold and go live in a cave for a couple of years (ok, renting would have been a more realistic option, haha). At the time the gold price was about $800/oz and it subsequently rose to over $1700 while at the same time the GBP/USD exchange rate dropped from 1.9ish to 1.6. If I'd followed my own advice £1000 invested in gold would've been worth £2500 by mid 2011.

I'm firmly in the camp that believes the economic problems that raised their ugly head in 2008 have not been dealt with but the can has been kicked down the road with central banks printing money, and low interest rates (even negative in many countries). Whilst the massed have been temporarily appeased by the apparent "recovery" I think they've just built up an even bigger bubble ready to burst.

DonkeyApple

34,417 posts

114 months

Friday 23rd August
quotequote all
The problem with gold is how do you know it has gone up in value or the currency it is priced against has gone down? wink

Priced in USD it peaked in 2011 and has been falling since but the USD has continued to devalue as more has been printed every year so gold has actually been an absolute shocker for protecting against currency devaluation. It’s only just broken out of a 5 year range in the last few months on the back of the China/US trade war and the associated fears.

Best use for gold is for helping to offload an ugly daughter if you want to keep hold of your favourite goats or as a mean of taking some attention away from a very ugly wife’s face. biggrin

digger_R

Original Poster:

1,619 posts

151 months

Saturday 24th August
quotequote all
btdk5 said:
Have you thought about looking at structured products? Can be a good choice if you’re worried about volatility.

They won’t compound but they do give you a known or guaranteed bonus. You can get pretty defensive structures providing yields of 6-8% up to aggressive structures giving double digit returns.
would be very interested to hear more about this.

Some really valuable discussion here - I'm also in the camp that believes we are in a different economic paradigm with significantly more money being printed.

As someone who is not thinking over this day and night - I'm looking for a way to invest in a meaningful way for my long term future without losing too much sleep!

mikiec

73 posts

31 months

Saturday 24th August
quotequote all
Edible Roadkill said:
When the £ drops 10% minimum upon brexit happening that may be a regret
Not if you are buying British shares/property