Loading summary
Transcript1 lines
- [00:01]
A
Welcome to Money for the Rest of Us. This is a personal finance show on money. How it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. Today is episode 553. It's titled Is Another Great Financial Crisis Coming? Five Ways to Prepare. After I released episode 552 of the podcast two weeks ago, I got an email from Chris the Listener who said, I'm shocked. No words on the economy today. Now, that was released on March 11, two weeks after, or not even two weeks after the US and Israel attacked Iran. I had just spent the prior week composing our monthly strategy report for PLUS Members and assetcamp. I had dug deep into potential consequences of what was going on with Iran and I just, I wanted it to go away. And I was hoping it, it would go away. But now it's been almost four weeks. Oil prices remain over $90 per barrel, up 40%. And there are potential longer term consequences of what is happening there. So we're gonna talk about it, but more importantly, we're gonna talk about what can we do if indeed another great financial crisis is coming. So just to catch you up, on February 28, 2026, President Trump made an announcement. He said a short time military began major combat operations in Iran. Our objective is to defend the American people by eliminating imminent threats from the Iranian regime. Later in that statement said, that's very simple. Iran will never have a nuclear weapon. That's the objective. He said they tried to repeatedly make a deal and at times Iran wanted to, other times they didn't, they went back and forth. He said they rejected every opportunity to renounce their nuclear ambitions. And Trump said, we can't take it anymore. And so the US military is undertaking, in his words, a massive and ongoing operation to prevent this very wicked radical dictatorship from threatening America and our core national security interest. He also reached out to members of the Islamic Revolutionary Guard, the armed forces and all the police and says, lay down your weapons and you'll have complete immunity. Or the alternative is you'll face certain death. So lay down your arms, Trump said, and you'll be treated fairly with total immunity. Finally, he said, to the great proud people of Iran, I say tonight that the hour of your freedom is at hand. Stay sheltered, don't leave your homes dangerous outside. But when we are finished, take over your government. It'll be yours to take. This will be probably your only chance for generations. So then the next week I spent time, as I mentioned, writing the report and I said, despite the initial sell offs in stocks following the start of the Iran conflict. Historical evidence shows that wars are not necessarily bad for stock markets. In many cases, the uncertainty about whether the war will happen has proven worse for markets than the war itself. But I wrote the key exception is when global supply chains are significantly disrupted or when commodity prices remain extremely elevated for an extended period. In this case, the duration and severity of any disruption to oil shipments through the Strait of Hormuz is the key variable that will determine whether this conflict follows the more typical pattern of a short term sell off and recovery or evolves into something more damaging for the global economy. I wrote that several weeks ago. Now the Strait of Hormuz, just off the coast of Iran remains closed. Very few ships are going past and early this week I saw this headline for a New York Times editorial. I thought it was clickbait. It said, I predicted the 2008 financial crisis. What is coming may be worse. I typically wouldn't have read a piece like that. I mean, sometimes I do. But then I saw it was by Richard Bookstaber. He is an economist and an author of one of my favorite books on economic theory and it's called the End of Theory. I I've quoted him numerous times. Bookstaber is an economist, but he recognizes that economists often get things wrong. He writes, economists think they have things figured out, but our economic behavior as humans is so complex, our interactions are so profound, that there is no mathematical shortcut for determining how things will evolve, including during a war. I added that last part. The rest of his quote the only way to know what the results of these interactions will be is to trace out the path over time. We essentially must live out our lives to see where they will go. There's no formula that allows us to fast forward to find out what the result will be. The world cannot be solved. It has to be lived. The world, the outcomes can't be accurately predicted consistently. Federal Reserve Chair Powell admitted that in his press conference last week. After the Federal Reserve Open Market Committee announced that they were keeping their policy rate on hold. Powell said, the thing I really want to emphasize is that nobody knows. We don't know how this is going to evolve. We don't know if this is going to be another great financial crisis. We'll take a look at why bookstaver thinks that's a risk. Before we continue, let me pause and share some words from one of this Week's sponsors. DeleteMe. DeleteMe makes it easy, quick and safe to remove your personal data online at a time when surveillance and Data breaches are common enough to make everyone vulnerable. Data brokers make a profit off your data. Your data is just a commodity, and anyone on the web can buy your private details. And that can lead to identity theft, phishing attempts, and harassment. That's why I use Delete Me. Delete Me is an online service. It's always working to protect your privacy, your data. I'm someone that has an active online presence, so privacy is really important to me. And that's why I get a quarterly report from Deleteme. It shows me what data they had removed or requested to have removed that they found online. So take control of your data and keep your private life private by signing up for Delete Me now at a special discount for our listeners. Get 20% off your delete me plan when you go to JoinDeleteMe.com David20 and use promo code David David20 at checkout. The only way to get 20% off is to go to JoinDeleteMe.com david20 and enter code David20 at checkout. That's JoinDeleteMe.com David20 code David20. As I was thinking about this episode and I was doing some other writing, I went back to a book I read many years ago by Karl Popper. He's an Australian British philosopher. The book was the Poverty of Historicism. And the page I happen to turn to, there were three statements that really apply here because they're principles when it comes to trying to make big changes, like overthrow a government, bombing it in order to decimate their military capacity and end their leadership to encourage a revolution by its citizens. The first statement is, you cannot make a revolution without causing a reaction. The opening strikes of the Iran war was There were over 900 strikes in 12 hours. It targeted Iran's missile arsenal, its air defenses, its military infrastructure, its leadership. The Supreme Leader, Ali Khamenei was killed. Other senior Iranian leadership has been killed. Yet what has the reaction been? Iran has sent out more than 500 ballistic and naval missiles, over 2,000 drones to 11 different countries. They continue to fight back. Cannot make a revolution without causing a reaction. Here's Popper's second point. You cannot introduce a political reform without causing some repercussions which are undesirable from the point of view of the ends aimed at. Therefore, look out for them. What are the potential consequences or unintended consequences? What are the risks of invading Iran? Well, the biggest risk, and analysts have pointed this out for maybe a century or at least decades, is the close proximity of Iran to the Strait of Hormuz, their ability to shut it down, which they have effectively. Oil prices have soared over 50%. They have not been at these levels since 2022 when Russia invaded Ukraine. Threats by Iran have essentially closed that Strait of Hormuz used to get roughly 140 ships that went through there every day. 20% of the oil and natural gas in the world would flow through there. 20 commercial vessels have been attacked, sending insurance rates to $5 million a ship. Now only maybe single digits ships are going through. Thomas Friedman, I would qualify him as an expert in the Middle East. He's been following it for decades, wrote in the New York Times. Because in the totally hyperconnected world we live in, a weak Iran, and they have been weakened, no doubt, but a weaker man needs to launch only one drone a day from the back of a vegetable truck to choke off the oil passing through the Strait of Hormuz and send the price of oil, gas and fertilizer soaring worldwide. These drones, they're incredibly disruptive. They cost only $20,000 and yet, as the Atlantic pointed out, they're disrupting hundreds of millions of dollars in cargo through that strait. Fatih Biro, who is the executive director of the International Energy Agency, told the Financial Times the Iran war has caused the gravest energy shock of all time and that it could take six months or longer to fully restore oil and gas flows from the Gulf. He said, people understand that this is a major challenge, but I'm not sure that the depth and consequences of the situation are well understood now. I don't know if he meant that they understand and nobody else does or nobody really knows, as we've pointed out. The third statement by Popper is you cannot introduce a political reform without strengthening the opposing forces to a degree roughly in ratio to the scope of the reform. Iran appointed a new supreme Leader, Motaba Khamenei, who is the son of the former leader. The forces or the leadership is still there. And turning back to Thomas Friedman, he said rule number one when it comes to the Middle east is the most dangerous. Four words are once and for all, at this time, we're going to take them out. And he gives the example of Gaza today, where most Palestinians live and in that region outside of the zone controlled by Israel. He points out that Hamas controls it. Generation four of Hamas. He writes, Israel has killed the entire Hamas leadership right next door in Gaza three times over. But it has not been able to eliminate Hamas's control there once and for all. Think about how hard that would be to do with the Leadership in Iran from the air, roughly 1,000 miles away. You cannot introduce a political reform without strengthening the opposing forces. And we've seen that. Now the financial markets have reacted. Global stocks have fallen 7% since the conflict began. They're down 3% year to date. The global stocks ex u s have done worse this month, down 11% including emerging markets which is down 12%. US has held up a little better, down 5%. But US is underperforming much of the rest of the world. Year to date they're down 5% whereas WorldX US is down only 0.6% year to date. There are other areas that have been impacted like India for example. Their stock market is down 14% in the month, 16% year to date because they they import 90% of their energy. Half of it comes from the Gulf. And so they've seen their currency fall close to 3%. And a big sell off is that they're very much at risk because of this big jump in oil prices. There is fear of greater inflation and that's being reflected in higher bond yields. U.S. aggregate a measure of the U.S. bond market. Broad U.S. bond market has seen its interest rate, its yield of maturity rise a half a percent this month. And the bond market has fallen 2%. We've not seen a big jump in credit spreads. The incremental yield that investors pay to invest in corporate bonds, both investment grade and non investment grade. You've only seen Those rise about 10 basis points. And they the spreads remain well below average. And so at this point the bond market is not pricing in a recession or worried about it as reflected in credit spreads. They, they're worried about higher inflation and that has led to rising bond yields. I mentioned the Federal Reserve Open Market Committee met last week and they did their financial projections. The members of the committee sometimes it's called the dot plot. And Powell, this is an aside mentioned that several policy members said that if there was ever a meeting to skip releasing quarterly economic projections, this would be a good one because we just don't know. They don't know what's going to happen. Their economic projections weren't that different from the ones from December. In fact, they actually expect the economy to grow a little faster in 2026 than they expected in December. Their expectation for the unemployment rate's the same at 4.4%. They do expect higher inflation, the core PCE inflation 2.7% versus 2.4% in December. And their expectation for the policy rate is it's going to kind of stay where it's at but they, they don't know. What is Richard Bookstable worried about when it comes to the potential for another great financial crisis? Well, he points out things that I have certainly mentioned in our monthly strategy report on the on the podcast. Private credit is a concern for him as traditional banks have pulled away and you've had a lot of these private lenders lending to companies so there's less scrutiny. There's not necessarily accurate pricing because you might only have a few lenders involved with any one company. Private credit has struggled. There's been some fear in some of these private credit funds because of the impact of AI potentially to disrupt many of the businesses that private lenders have lent to, particularly in the software space. And the private credit market's about $2 trillion in size. And so and you're seeing certain funds are gating, they're not letting investors out because a lot of these funds are interval funds. They're private REITs where they'll only redeem 5% of the assets each quarter. And you're seeing redemption requests from mostly individual investors, retail investors, 15% of the fund's assets. It's fear driven. Not that these companies aren't going to be impacted by AI, but the public credit market doesn't seem overly concerned in terms of credit spreads. But retail investors are demanding liquidity. They want money back. Brooks Taber also points out what we've pointed out for several years now, the high valuations of US Stock market, particularly hyperscalers, and the concentration there and those stocks have fallen off over the past six months. Book Staber is worried about the energy shock from Iran because there's all this AI build out and that means higher power cost for data centers and AI production. And he mentions this China invades Taiwan, that could impact disrupt the flow of semiconductors that are funding this AI buildout. So his key argument is that the great financial crisis that was started with the housing bubble where there was a great deal of speculation, but it was the financial engineering, it was the complex financial instruments behind the housing bubble that cascaded when there was concern regarding the valuations of those financial instruments. And there was essentially a run on the banks then within some of these alternative financial structures and it cascaded through the system and then you had to have the central banks come in and save the day. He says now it's not financial engineering. The vulnerabilities are actually in the physical world in power grids, water, land, supply chains and that there isn't really a framework to analyze that. He already said models aren't very good at figuring this stuff out. We actually have to live through it to see what happens, he says. We have models for detecting risk, looking at prices, volatility and correlations. But we don't have instruments for reading a grid failure, a drought or a severed supply chain. And by the time warning signs show up in market data, the damage will already have been done. And so he thinks it's the physical risk of Iran. I mean, obviously the straight of Hormuz. It's a physical risk, the inability of oil to flow freely because insurance rates are so high and how easy it is for Iran to essentially control it with cheap drones. Bookstaber concludes, financial risk moves prices. Physical risks move the world. Now, he's not predicting when or how, he just believes, and it's just his point of view in terms of his view of the world that we can't predict it even though he says he predicted it. He's not giving specific predictions. He's just saying that due to all the interlinkages in the complex adaptive system which is the world that we're seeing, these linkages related to AI, private credit, energy cost, the physical grid, water and geopolitics. These are physical things. So what do we do? Before we continue, let me pause and share some words from this week's sponsors. Hey, it's David and I have a special announcement for you. For the first time in 12 years, I will work directly with a group of investors in real time, walking them through the process of building and rebalancing their investment portfolios. This isn't a course, nor will it be personalized investment advice. Rather, it's a results driven live cohort where I guide the group as you build or rebalance your portfolios. By the end of three weeks, with full participation, you will have a revised portfolio you can explain and defend, a clear implementation plan, and a repeatable process for every review that follows. Rebalancing or building a portfolio can be complex. You may have different investment accounts, conflicting holdings, uncertainty regarding taxes, or be unsure which assets go in which account type. Second guessing so many choices can lower confidence that the final portfolio is right for your goals. This live cohort is designed to help investors work through that complexity in real time with guidance and feedback by me. The initial cohort is for individual investors who plan to retire in the next five to 10 years and they want to simplify their investments while not reducing return or increasing risk. They want to be more confident in their portfolio strategy and future decisions and have a repeatable process for staying on top of their investments. The cohort starts May 5 and will be limited to only 25 investors. The final pieces are still coming into place and you could be the first to learn more by joining the waitlist@moneyfortherestofus.com cohort joining the waitlist gets you early access to enrollment, $200 off the final price, and an introductory email series on the steps to successfully create and rebal and investment portfolio. So join the wait list now@moneyfortherestofus.com cohort that's moneyfortherestofus.com. Well, one, we have to monitor it. We have to at least be aware of what's going on. We just can't. We can't put our head in the sand. Now that doesn't mean you gotta be reading the news every day. You can use a filter. Maybe there's a trusted source that you could go to. I think a great source is the Economist, published weekly. The articles tend to be short, but you can get a good idea of what's going on. And I can tell you the Economist is very against this war in Iran because of all these unattended consequences. And we weren't there when the Trump administration was discussing with Iran. I don't know what their planning was. I read some of the objectives, but obviously it doesn't appear that things have maybe gone as well as they expected. But I don't know. But we can at least see what's happening and stay at least informed so that we don't overreact. So that's the first thing we do. Just, just monitor. Maybe you listen to this podcast, become a plus member so you can get access to our monthly strategy report. But a trusted source, not every day, but just to stay up to what's going on. Two is is build resilience. I've mentioned the the idea of the capital reservoir. Capital gives us choices. We have financial capital, we have time capital, we have all different types of capital. But we need resilience. We need to have a budget and understand where our money goes. We need to have savings. We need liquidity. I watched a video, listen to a video of Charlie Munger the other day. It seemed like it was. I didn't even see the date of it, but it. Well, obviously he's passed, but this might have been a decade or two old. But he was talking about having access to liquidity and he was specifically talking to retirees and suggesting don't pay off your entire mortgage if you're sacrificing liquidity in cases an emergency because once you're retired. It's, it's much more difficult to get a mortgage if you can get one at all. One way we build resilience, we know that AI is advancing is to use it. I've been using large language models for three years now. And a few weeks ago I installed an agency, Claude's cowork where it, it can actually, it's on your desktop, it can save files, it can do spreadsheets, it can do multi step. It is more comprehensive and better than just a chatbot large language model. And that's kind of where we are on the leading edge of a lot of this AI. And so you got to learn to use it to build your resilience. Third thing we can do is to monitor exposure. We can't predict what's going to happen. We don't know how this is going to evolve. So it's exposure that matters. Back in March 2020, when the COVID pandemic had shut down the economy, people were sheltering in place. I did an episode on this and I quoted Robert Crochet, who's an investment manager with Mellon Investments and he manages risk parity strategies, or he did at the time. And Crochet said, it's very clear what I have to do when risk rises. I have to reduce exposure. And so when we think about, we don't know whether another great financial crisis will come. We don't know if the stock market's going to sell off 50, 60%. It hasn't, but we don't know, we don't know what the probabilities are of how this war is going to take out. We know that there's some risk. And so if we would be harmed by a 60% drawdown in the stock market, then we should have less risk. And this could be somebody that's looking to retire in a couple of years. Maybe you set some money aside for your, your first few years of expenses. We're trying to find that right balance between our safe and our risky assets. Now if we're younger, we can, we can afford some type of big drawdown. But I mean, this is why we have a variety of asset types, an asset garden so that we don't have to predict what's going to happen. We can monitor exposure. And our exposure includes everything in our capital reservoir. I mean these, this is what's in there, is what builds resilience. Our skills, our human capital, our financial resources, our, our network of contacts, our friends and relationships, those are critical. But we can, we can step back and make sure that we're not overexposed and sometimes that exposure is taking on too much debt where we, we are highly levered and so we're not as flexible and adaptable as we could be. The fourth thing we can do is to identify options and exercise them. And I was writing about this this week. This is kind of a virtuous cycle. There's a cadence here. We identify options, what are our choices, Then we make a choice, we actually commit to doing something, we get feedback and then we see what other options there are now, and then we choose again. And the type of options that we're looking at are something with an asymmetrical structure where there's limited downside and greater upside so we can stay in the game. And maybe it's learning AI. There is no downside to downloading cowork on your computer and finding ways to use it. There's only upside to that. And so a lot of what we're doing, we pay the premium. We pay our option premium is just our time. And so it takes time to do all the things that I've listed out here. But this constant pattern of looking at options, making choices, getting feedback, that's. That's how we evolve and do what Books Tabor is saying. There's no formula that allows us to fast forward to find out what the result will be of our experiment. This is trial and error. The only way we can do it is to live it and try things, but make sure that we're protected on the downside and there's more upside as we kind of go and trial and error and learn. And that that's exactly what Karl Popper was suggesting. He didn't like wholesale changes. He would not be in favor of invading a country unless you really knew what you don't, the potential consequences as we talked about in those three principles, he was an advocate of being a piecemeal engineer. He says don't try to redesign everything as a whole, try by small adjustments and readjustments. He says the piecemeal engineer, like Socrates, knows how little he knows. He knows that we can learn only from our mistakes. And that's why a lot of our options just doesn't work out. But if we've protected on the downside, then that's okay. We just, we learn, we grow, we from our mistakes, what didn't work and we try again. We make our way step by step. He writes carefully, comparing the results expected with the results achieved. Did this experiment work out or didn't it? If it didn't, what do we learn if it did, how can we double down and try it again? How do we adapt it to little by little always looking out for the unavoidable unwanted consequences of any reform. Not to do things that are so complex that you can't figure out or disentangle the causes and effects, he points out. So that's the fourth thing we can do. Identify and exercise options. And the fifth thing is to be embodied. Book sabers worried about the physical world and the connections there, not financial engineering. I read a report or an article in the Atlantic a couple weeks ago and it mentioned that the player piano is 130 years old. These player pianos are so sophisticated they can play better than humans. There is compositions written just for player pianos because they're so much better at playing than humans. Machines. AI is better at chess than humans. When was the last time you saw a player piano? We pay money to listen to pianist humans, not player pianos. Some people go to tournaments or stream watching chess grandmasters play. Humans. AI is not going to replace humans. It'll replace some of the things humans do. But we need to focus on those things that makes us human. Part of that's being embodied. That's going out in nature. That's. That is doing things that just physically can't be replaced by AI or that AI can't experience. I mean, AI acts like it's human, it talks like it, but it's not. It's not intelligent. So don't forget the physical world be embodied. So we don't know whether a great financial crisis is coming. We just don't. We can monitor it and see how things are evolving. Then we can adjust. We can build resilience, keep adding to our capital reservoir. We, we can monitor our exposure, reduce our exposure. If we're at risk, if there is a major drawdown, or if we lose our job for some reason. We got our our savings or things line lined up. We can practice that, that virtuous cycle of identifying options and committing, not being afraid to commit. We have to choose to exercise options, otherwise they expire worthless. But then we just go through that cycle, make a choice, get feedback, choose again, be an incrementalist, piecemeal engineer and finally be embodied. Lean in to your humanity where you stand out as a human. Connecting with others, relationships, your experience, your story, your narrative. That's what we're trying to do at money for the rest of us. That's what I'm trying to do in my personal life. That's what we need to do as the world continues to evolve in a way, we just don't know how it's going to turn out. That's episode 553. Thanks for listening. Did you know in this age of Substack that we've been writing a weekly email newsletter for over a decade? We use it to introduce the podcast, but we also share information that works best in written and visual formats. Of course, it's on money investing in the economy like the podcast, but some things are just better shared in writing. So if you're not on the list, please sign up and you'll get our free introductory email series on eight essential investment principles that I follow. And if you follow them, it can help make you a better investor. The Insider's Guide email newsletter is the next best step to get the most out of your investment journey. It's absolutely free, so if you're not on the list, go to moneyfor the restofus.com and subscribe right there on the homepage. Everything I've shared with you in this episode has been for general education. I've not considered your specific risk situation. I've not provided investment advice. This is simply general education on money investing in the economy. Have a great week. Sa.