2020 HINDSIGHT: PREPARATION PAYS.

2020 Hindsight: We asked several regular contributors to write about 2020. Not to review our annus horribilis — most of us hope to forget it as quickly as possible — but to tell us what particularly struck them about it, whether in policy, politics, arts, culture or life as they and we all lived it. Today: Jack M. Mintz and Bruce Pardy.

Every year, when I prepare holiday season cards, I review the ones I received the previous year. This year's review was especially meaningful. Many comments in December 2019 predicted 2020 would be an even better year.

How wrong they were! A year of pandemic illness and deaths, lockdowns, steep economic losses and social stress, 2020 will go down as the worst ever in my lifetime. As we close the year, we face another year of continued uncertainty. We all hope vaccines will establish herd immunity. Yet even that can't be predicted with certainty should the coronavirus mutate.

Imagine if we were back in 1920, having just survived the twin ravages of the First World War and the Spanish influenza. Would we have expected the next 20 years to bring a Great Depression and the start of another world war, this one against Germany, Italy and Japan? On the brighter side, would we have predicted the transportation and consumer goods revolutions that took place after WWII? I doubt it. Even during the war, most predictions were for a return to economic depression once it was over.

So, one lesson to learn from 2020 is that risk can suddenly change our lives. That is why I often take multi-year economic forecasts based on constant growth rates with more than a grain of salt. We need to be prepared for risk and manage it.

For investors, that means not just looking at past returns but also at the risk in our portfolios (using indicators such as the Sharpe ratio, which compares the premium an asset earns over the risk-free rate against the variability of that return). Greater uncertainty ahead should push us to hold fewer risky assets and more that are more secure. For private and public leaders, it means not taking an irreversible bet that could result in fiscal calamity because things do not turn out as hoped.

This lesson is especially important when considering debt. In the expectation of low interest rates and a growing economy, households take on more debt to fund travel and the purchase of consumer durables. Businesses accept greater leverage when acquiring companies or making largescale investments, believing insolvency won't happen. Voters support politicians who promise debt-financed public spending in the belief there is no risk in fiscal and monetary policy.

But — 2020's brutal reminder — economic and political circumstances often do not turn out as expected. Will inflation and interest rates take off as governments pump up the economy with printed money? Could we have another recession sometime before 2030, similar to the Great Depression's second sag in 1937-8? Will some weak economies topple, creating foreign currency crises? Will the political confrontation between the West and China lead to another Cold War or, God forbid, even a “hot” one? These are just a few of many unpleasant surprises the next few years could bring.

Governments that think they can ramp up debt because “interest rates are lower than growth rates” may quickly find international markets turn against their bonds because of rising credit risk. Low interest rates could soon double or triple, pushing up public debt service costs on a much larger stock of borrowed money and with them, eventually, taxes. Then a recession hits, with burgeoning deficits being repeated. That was Canada after the 1981-3 recession that led to our own fiscal crisis by 1994.

We should ignore the euphoria expressed in Rahm Emanuel's line after the 2008 financial crisis: “never let a crisis go to waste.” This line of reasoning has now morphed into politicians ready to ramp up spending with long-term “build back better” plans for social programs and climate-change policies. Somehow these public expenditures have become more affordable today than they were in pre-COVID days — when in fact economies were much stronger. With the world facing considerable risk over this coming decade, getting people back to work with good-paying jobs should be the major challenge, not seeking new heavens on Earth.

This past week, in synagogues throughout the world, the chapter in Genesis focused on Joseph's interpretation of Pharaoh's dream was read. Joseph had the uncanny ability to predict seven boom years to be followed by famine lasting a further seven years. Because of this prediction, Egypt stored grain during the good years to help the population cope with the expected famine. It also led to centralization of political power as the people gave up their cattle and land to the Pharaoh, who also took a fifth of the crop — a tax similar to what we will face as governments try to save the COVID-recessionary economy.

We don't have Josephs today to support these types of economic predictions. Canadians, nevertheless, can practice smart risk management by being prepared for bad outcomes. Preparation pays — the one critical lesson to be learned from 2020 hindsight.