There’s a lot of talk about recession these days, as if it were the first time we’d ever faced one.
No, their not great, but we’ve been down this road before, 13 times since 1937 in the U.S. They last about a year, give or take.
A recession is a PHASE of the business (or economic) CYCLE. In egghead terms, a recession is a period of decline in gross domestic product (GDP) for two successive quarters.
GDP is the combined value of all the goods and services produced in the U.S. It’s the sum of our combined output of domestic labor and manufacturing. A country’s GDP is a measure of it’s economy’s growth and strength over a period of time.
Output moves through a CYCLE, the phases of which are something quite predictable and repeatable. Output moves down (recession) and it moves up (recovery), so recessions are not one time, the-sky-is-falling catastrophic events. That’s why it’s called a business CYCLE
Nobody likes recessions, since they bring wage declines, unemployment, stock market corrections and a feeling of malaise and worry. Right, not pretty. Poop happens, and so do recessions. But like spring follows winter, recessions are eventually followed by another phase of the CYCLE called recovery. Thats why its called a 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?
Did you ever notice how your local news stations squeeze every last bit of airtime they can out of routine snowstorms?
“From the Armageddon Weather Center on Channel 12 Action News…!” Scenes of toilet-paper hoarding shoppers, and the weather dude outside freezing his ass off, to add further proof that it’s… what? Snowing? Gimme a break. Get some road salt and move on.
We don’t control the weather, we can’t prevent snow, and it’s the same with recessions. The press comes alive with doomsday forecasts, looking for someone to blame. Sometimes we would really like to assign blame to the politicians we really hate, but individual politicians and bureaucrats are rarely capable of wrecking things on their own, and can’t do much to prevent a recession.
The fact is, recessions are part of the normal business CYCLE and the product of our collective and cumulative laws, regulations, policies, deeds and actions in government, business and life, as they play out on an increasingly interconnected socio-economic world stage.
Our country’s leadership can exercise monetary policy and lessen the intensity of a recession by cutting interest rates which can encourage spending and borrowing. Right now, interest rates are already low, so we’ll see. Either way, you and I don’t really have a say.
So what now?
So here’s what now: Don’t panic. 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, it’s called a business CYCLE because these things happen over and over and over again. When they begin or how long they last, who knows? But prepare for this coming recession and build smart, solid habits that will prepare you for the next half dozen coming your way.
Originally posted August 26, 2019, this perspective is just as relevant today, as we face the economic uncertainty and health fears brought on by the COVID-19 pandemic.