Always be prepared for the risks

I've been optimistic about the economy and markets during the rebound from the pandemic. I wish the economy were growing faster. But for now, employers are still looking for workers, inflation is trending lower, and the race to embrace artificial intelligence is reminiscent of earlier tech-led booms. AI may well be the Next Big Thing.

Yet there is no shortage of well-known risks and underappreciated vulnerabilities that could unexpectedly upend the economy and markets. As the 5th century B.C. Athenian statesman Pericles said, "The key is not to predict the future but to prepare for it," an insight appropriate to our turbulent times.

Preparing for systemic and uncertain risks is the topic in commentaries by two savvy experts I follow. Ian Bremmer is a political scientist and founder of Eurasia Group, the political risk research and consulting firm. James Monitor is a member of the asset allocation team at money manager GMO. Bremmer in his commentary deals with how managements should prepare for the risk that rising global geopolitical tensions could batter their business. Montier confronts the need for institutional investors to smartly hedge portfolios against a major financial crisis.

Bremmer argues that the big risk senior management face is the prospect of domestic and international conflict. The war in Ukraine is an obvious example. So is rising tensions between China and the U.S. Among his suggestions, Bremmer calls for management to set aside more cash and resources to hedge against downside scenarios. Montier notes that we are "in an era of rolling financial crisis." The timing of the next major financial crisis—aptly called "tail risk"—is unknown. He too has a has a number of sophisticated hedging suggestions for institutional investors, but he also echoes Bremmer in highlighting the value of holding cash. "The oldest, easiest, and perhaps the most underrated form of tail risk hedge," he writes.

Thing is, cash is a practical hedging choice for households. Holding cash is a simple way to hedge against market turmoil (a concern for many retirees) or the risk of losing a job during an economic downturn (a worry for employees). The personal finance theme that emerges from these two commentaries aimed at a professional audience on managing downside risk is this: The importance of building a robust financial buffer during good times to minimize the odds that bad times will devastate household finances. (The same holds for government finances, too, but that's another column.)

Chris Farrell is senior economics contributor, "Marketplace"; commentator, Minnesota Public Radio.