REVISED JUL 28 2022: Yes, Biden Administration, we are in a recession. We are negative GDP for two consecutive quarters. That’s called the “definition of recession,” no matter how you try to spin your way out of it.
There’s a lot of talk about recession these days.
As of today, June 30, 2022, we are probably in a recession, based on the technical definition, which is two consecutive quarters where GDP growth is negative.
- 1Q22 Gross Domestic Product was just revised downward. It did not grow at all. Instead, it declined at a 1.6% annualized rate.
- 2Q22 GDP number will be out very shortly, and its not looking very promising.
More importantly, it feels like we are in a recession.
With inflation at a forty year high (and still rising), mortgage rates on the rise, regular gas over $5 a gallon, homes selling at record highs, car prices through the roof, and food prices skyrocketing, it’s no wonder that a recent Associated Press-NORC Center for Public Affairs survey finds that 85% of Americans believe we are on the wrong track.
Yeah, you don’t have to wait for the numbers to feel like we are in a recession.
Nobody likes recessions, since they bring wage declines, unemployment, stock market corrections and a feeling of malaise and worry. Right, not pretty. Stuff happens, and so do recessions. But like spring follows winter, recessions are eventually followed by another phase of the CYCLE called recovery. That’s why its called a business CYCLE.
Business CYCLE phases include boom, slowdown, recession and recovery.
Boom times are marked by expansion of GDP. The workforce is growing, production is high, sales are soaring and paychecks are getting bigger.
But all good things come to their natural end, and soon we will slow down and then peak, and inflation (rising prices, weaker dollar) creeps in like a thief. GDP slows, sales drop off, demand wanes and pretty soon, we are in a recession, a period of economic decline that lasts at least two successive quarters. This can have long-lasting effect on wages, the stock market, and the population as a whole.
If things worsen from there, then we face a full on depression. Depression is to recession what a migraine is to a headache. If you are “analogy challenged,” a depression is a really, really bad recession. The Great Depression was the worst economic decline in the modern, industrialized world. A real character builder. It started with the 1929 stock market crash and lasted for ten years. Millions of people were wiped out. Depressions are not a frequent part of the CYCLE. Thank God.
How can we prevent recessions?
We don’t control the weather, we can’t prevent snow, and it’s the same with recessions.
However, even though recessions are part of the normal business CYCLE, the effects can be minimized. At times like this, our country’s leadership must exercise intelligent fiscal, monetary and energy policies for us to have a chance to make it to the other side unscathed. Today, 85% of American’s don’t believe that our current fiscal, monetary and energy policies forecast a bright future.
But now is not the time to panic. Instead, take the time to prepare.
They say that in a recession, “cash is king.” No, it’s queen. Having a PLAN is king, just as you should for every phase of the CYCLE.
But to prepare for the recession phase, here are two handfuls of tips:
- Tune up your financial plan to anticipate and prepare for all phases of the business CYCLE. Financial planning is an all weather process, and must include short- and long-term solutions, including how to deal with eventual economic downturns. You should always have a plan, but if you don’t, getting a plan together now is the smart move.
- Reduce risk in your portfolio. No, don’t dump everything. Look at your holdings and see where you can trim off some market risk. Allocating away from growth stocks and toward dividend stocks is one way to stay invested and reduce risk. Remember, you don’t go broke taking profits, so when markets are at historic highs, take them! And what if the market goes higher after you sell? Who cares? We aren’t fortune tellers, take the profit, and live to reinvest another day.
- Reduce your return expectations. Interest rates will probably go down, so returns on cash accounts will suck. That’s okay. You will not lose principal, and you will be protecting liquid assets that can be reinvested into the market at lower prices after its eventual correction. It’s about winning by not losing.
- Increase cash in the bank. Cash means covering emergencies. Cash means capitalizing on opportunities that will appear as the markets decline. Be in a good cash position. Sure, the rates will suck, but cash is queen in a recession.
- Short term treasury bond rates suck, but they are safe. Consider short maturities if you don’t need all that cash laying around.
- Consider hard assets. Precious metals like gold and silver tend to do well in recessionary times. They can provide a good hedge to the rest of your financial assets in declining markets. Gold and silver coins, rounds and bars are easy to buy, easy to store, and easy to sell.
- Cut dumb spending. You will live without Starbucks. As God as my witness, you will live! Better: McDonald’s, any size for a buck. Best: travel mug. Get it? Every dumb spend has a series of smart alternative solutions. Cut dumb spending habits before a recession. Make a habit of your new smart habits in all phases of the CYCLE.
- Cut dumb debt. That means credit cards. Revolving credit is dumb. Khakis on credit is a dumb idea.
- Reduce or eliminate leveraged debt like a mortgage which helps you finance an appreciating asset, like your home. Khakis don’t appreciate in value. Target adjustable rate loans for refinancing, whose rates seem to climb even when rates are falling. How do they do that? Refinance old leveraged debt (mortgages and credit lines) to new lower fixed-rate debt.
- Work more hours, save more money. Get some differential OT coming your way, or start a side hustle. Employers get very choosy in a recession, so unless you are continually “employee of the month,” or playing squash with the boss, watch your backside. Trade your TV time for a side hustle, and be your own boss.
So, in summary, we are either in, or headed into a recession. The facts and clues are too persistent and too many to deny. But armed with this intelligence, talk with your advisor or planner and take the necessary steps to build a fortress around your finances.