How to Prepare for a Recession
awealthofcommonsense.com
awealthofcommonsense.com
I get that thinking medium and long term, and ignoring the possibility of a six month recession, is sound advice. However, given the state of the world (for instance, with Russia bringing up nuclear weapons) there are perfectly reasonable people thinking it would be prudent to expect a not-routine financial hit.
So it is at the least a very misleading headline.
> The same is true of recessions.
> How do you prepare for one? The same way you prepare your finances for anything else.
> Instead of changing your portfolio because you think a recession is coming, create an investment plan that is durable enough to withstand a wide range of environments (one of which includes economic contractions).
> Give yourself a margin of safety with a high savings rate and an emergency fund not because it will help you survive a recession but because it will help you survive any number of curveballs life will inevitably throw at you.
> Pay your bills on time and create a good credit score not because it will help you during a recession but because it will help you anytime you need to borrow money.
If everyone does this, it creates a recession.
https://en.m.wikipedia.org/wiki/Paradox_of_thrift
Better to purchase durable goods (save real value, not shared delusion of money) (edit: or shelf-stable consumables), and invest in future productive capacity (backyard farm, work on your health and strength and education).
It is a fun hobby and you can grow tastier food than the stuff at the grocery store but the people with kickass farms in their backyard that actually grow meaningful amounts of food have been doing it for years and years and spent lots of money on it.
I also have an LLC for honey. It's generally low labor (compared to other livestock), but tends to have expensive equipment and replacement costs. It's possible to break even in 3 years on a small scale with cheap equipment.
So it can be productive and a net positive. During the season we can get 50-75% of our fruit and veggies from the garden with the remaining percentage being the desire for varieties I don't grow or can't be grown around here. Plus some canning, freezing, hot sauce, etc for later.. We can also get all the honey we desire, including to make mead, and still make a net profit on the bee operation of $100+ per year (can vary wildly based on the circumstances). I think this is a meaningful amount. Obviously this isn't something that you could scale to turn your 401k into.
Now I do some stuff for fun. This year I'm planning to malt my own wheat and barley that I will grow. Even if grain prices double, that's not going to help me financially since wheat will still be relatively cheap compared to other produce.
This is highly presumptuous. We don't all make over $100k.
On top of that, you're assuming that you could offset the cost of the produce by working a few more hours. Many of us are salaried, not hourly, and have restrictions that we aren't allowed to work for other companies. The option to work more hours in that scenario is not a valid one. Trying to account for opportunity cost doesn't work when there's no opportunity being lost.
That's not really an option for me due to various family constraints, remote not being the best option for me, and my location being less than ideal.
"it might improve your chances of a raise/promotion in the next year, but that's uncertain."
It won't. Been there, done that, doesn't work.
The majority of folks employed doing tech (day to day work is technical) aren't employed by tech (i.e. for a tech firm shipping product). And those that are (HN-wise) tend to be employed at more targeted enterprises.
Both of which are to say... there are likely a lot of clients you could consult for after hours, fully disclosing to your employer, that your employer wouldn't have any competitive concerns about.
And critically, consulting is almost always hourly. Which vastly simplifies the expectations and transactions.
At the end of the day I'm not trying to convince you growing vegetables isn't worth it, it is! Just that justifying in terms of saving costs probably isn't that great of an argument. Most hobbies are not cost effective. But life would be pretty awful without them.
I'd have to quit my current job. Most places around me (Philly area) pay below average and less than I currently make.
I have more modest ambitions. I like to grow lots of sprouts and fresh herbs for cooking. No real calories but makes simple meals made without processed foods (e.g., with brown rice, beans, homemade pasta, tiny amounts of animal protein, etc.) much tastier.
What I mean here is that the huge majority of people who attempt to plant potatoes in their backyard are going to pull up like $20 worth of potatoes a year after a couple years of failed attempts. That's not really meaningfully understood as an investment.
Home gardens are fun. They are great for things like herbs (as you say) where you only need a small amount in a dish and the little clamshells at the store are both low quality and $5. But they aren't a "productive investment" except in very extreme circumstances.
Grow potatoes. My grandad did, and it seemed to keep his family doing pretty well.
You don't get this stuff with lettuce.
I was always told that salad leaves are by far the best thing to grow for amateurs - relatively easy to grow, but very expensive in the supermarket.
Assuming you have a job to work at. Or that (food) supply chains have not gone sideways.
What you grow in your garden depends on (a) whether you're just doing it for fun, and/or (b) if you're offsetting certain risks you're worried about. E.g., how hard is it (for Ukrainians) go get potatoes with a war on? How hard is it to get groceries after an earthquake (or hurricane)?
If you want to mitigate that I still suspect it's cheaper to buy rice and beans, then stockpiling that, than it is to operate a vegetable garden every year. Not to mention, a stockpile works any time of the year. A vegetable garden only produces food during harvest time.
>E.g., how hard is it (for Ukrainians) go get potatoes with a war on?
how easy it is for ukranians to get potatoes when the ground has only recently thawed?
>How hard is it to get groceries after an earthquake (or hurricane)?
How useful is your vegetable garden when everything has been blown away and/or is rotting in the ground from all the water?
There's a huge amount of produce out there that we simply never see, because it's inhospitable for ship-to-grocery. Or that we don't eat at its best, even if we're able to get it.
E.g. banana varieties, fresh figs, most things green and/or leafy
And basically everybody I know who has attempted potatoes (and sweet potatoes) has pulled up a failed harvest for at least the first year.
There exist people who have highly productive backyard farms. Almost nobody who starts a backyard farm will achieve that within five years.
If everyone suddenly switches from low-savings to high-savings, yes, that may happen. But if everyone consistently has a not-low savings rate, then that is the 'baseline' that the economy will base its production on. It's the sudden changes that can cause problems and not necessarily the/a steady state.
Even sudden changes up can cause problems, as we've learn with supply chains when everyone switched from buying services (going out) to buying goods during the lockdown(s).
Of course 'just save more' isn't an answer for some people, as the author's coworker observed:
* https://ofdollarsanddata.com/the-biggest-lie-in-personal-fin...
then...
Inflation.
Eventually most people will retire and draw down their savings. Eventually one's child will grow old and go to some kind of post-secondary school and need money for tuition, books, etc.
You don't. Saving = not-spending = not getting goods and services. At least not at the present moment.
You save now to protect against future income risk (e.g., emergency fund) and future income needs (e.g., retirement). You convert savings to cash flow when non-savings (e.g., employment income) dries up.
Everything you described works at an individual level, but fails at a societal level, which is what the GP was talking about. If society as a whole saved a bunch of money, and a few years later there were some sort of society-wide income risk (eg. war), those dollars won't do you much good.
I don't understand what you mean by it being better to purchase durable goods. Do you mean things like appliances and vehicles? Those things depreciate.
Saving, and investing in stocks (diversified) has been a better move historically than just about anything else you could passively do with your money.
> Saving
Not cash, because inflation.
> and investing in stocks (diversified)
Creates a bubble if people aren't consuming. "diversified" is load bearing there. Invest in a range of companies that are creating persistent value, sure. Not consumable or rapidly depreciating luxuries.
So, no, investing in future productive capacity is exactly the kind of thing that triggers that paradox.
Anyway, everybody seems to severely overrate their understanding of those things. I would advise people to not use macroeconomic theories to plan their own lives.
Theoretically, at least during the transition period. In reality I don't think there's any real danger of that given that the majority of people in the US don't even have $1k in a bank account. I don't think culture and circumstances are going to change fast enough to make that happen.
If you have a mortgage and it is below property price rates (most likely), keep it or refinance for lower rates if you can. If you buy with mortgage, don't get over leveraged. Even if the property doesn't lose value, if you fail to pay your mortgage the bank will fire-sell it for lower to recoup their money leaving you in the red. And beware of bills piling up with inflation! Buy the smallest possible you can afford in a recession.
Now for savings. You can't compete with Goldman Sachs, JP Morgan, the bots, professionals. But you can take the other side of the bet of very short-sighted investors. Just do plain old and boring Sector Rotation. Pick large and liquid ETFs and REITs. Pick them very diverse.
https://www.investopedia.com/search?q=sector+rotation
https://www.investopedia.com/search?q=etfs+for+sector+rotati...
https://www.investopedia.com/search?q=recession+proof+invest...
Also mind there is likely a scenario of new and higher taxes, price controls, and a lot of other fun things to cover the upcoming Unfunded Liabilities Crisis, the Pension Crisis, public and private debt, etc.
If you are above 500k, I'd start looking for a second passport and offshore accounts. Have plan B and C.
You can either own part of the industry that produces stuff. Or you can own money with which you can place bids on the stuff the industry produces.
During a recession, the industry produces less. Now at first you might say: That is the answer. The industry produces less. So it has less value.
But if the amount of money is the same, the bids per piece of stuff should go up. Because there is the same amount of money bidding on fewer things. So the industry should still make the same amount of money.
Any easy answer to this, why stocks tank during recessions?
Since the value of a stock is it's future cash flows discounted to the present and it's had it's current cash flows impacted, usually that makes forecasts revise those future earnings downward lowering the valuation of the company.
Other reasons are assets are sold to make up for lost income needed to pay for expenses, and stocks being liquid often get sold first.
The "money" in the economy is actually mostly credit,
and during a recession it contracts
From a look at the M2 and M3 money supply, there never seems to have been a contraction:
https://fred.stlouisfed.org/series/M2
https://fred.stlouisfed.org/series/MABMM301USM189S
That seems to be a pretty strong argument against the money contraction theory.
If I am purchasing using $100k of margin and my collateral drops to the point that I no longer have the margin. That 100k is gone. It wasn't a real 100k in the first place, it was leveraged and backed by a volatile asset.
Also, recession causes people to spend less and save more. Further reducing demand.
So they park it in something which is believed to be incredibly safe like money market funds or a savings/checking account because a 0% to 1% rate of return beats the risk of a 20%/50%/100% haircut by investing in anything else which gets hammered by the unwinding of the recession.
But how can you borrow money to somebody if you don't physically have those money?
Before "somebody" lost their job and sold their stock, there were X people holding Y dollars. Afterwards, there are still X people holding Y dollars. Nothing changed. The amount of money available to bid on stuff is still the same. Both, the sum of money and also the average amount per person.
Maybe it's better to think of it as X-1 people holding Y+1 dollars :P
But really, I think the above poster answered your question with this bit:
> This adds downward pressure on the market since people must sell
Prices go up when you bid higher than the current price for something, and conversely they go down when you bid lower than the current price.
When someone sells in these situations, it means the current average price has dropped.
Also sometimes, when people are desperate to sell, they can really lowball the value of something causing its overall value to depreciate significantly.
That's the basics of how a credit bubble works.
That’s not how it works, so your premise is flawed.
Even if it is how it works, that’s not directly related to the stock market, because stock market valuations are speculative based on future earnings, not present earnings. Earning less money is not a prerequisite to a reduced stock valuation; often, growing slower than previously anticipated is enough.
But the reason there are fewer things is because producers are responding to less demand for things. It's not like a recession just knocks out production leaving demand untouched, causing the price to move along the demand/supply curve. You won't have the same amount of money as before being bid on the fewer things.
Wouldn't those savings go into the stock market, making stocks more expensive?
For a stock price to fall someone has to sell, and someone has to buy, so someone is taking the long position in said company.
Additionally, the stock price is the belief on future profits so if the horizon looks worse then the past, then people may want to shift investments.
This is why the government measure of recession-resistance is called "consumer confidence", not "consider spending" ("aggregate demand").
As the parent comment said, the only explanation that really adds up would be that the amount of "available money" in the economy must be going down as a result of defaults on credit.
fewer people buying stocks than selling
If one day there are 100 people that want to buy the stock, and the next day there are 10 people interested, the prices will fall.
If you're an individual with some spare cash, buying stocks during a recession is probably a good idea, even if they falling.*
If you're a population, you probably don't have much spare cash.
There's some time lag stuff going on in there too.
*Blah blah 1990s Japan blah blah global diversification.
Because of the way the math works relatively small changes in future earnings and risk can have a large impact on asset sizes.
Because stocks are just the right to a stream of earnings
If companies produce less, money should also be worth less. As your money is your share of bidding power on those fewer things.
The price of a stock is the ratio of the value of a company and the value of money. And should therefore stay the same if the industy overall produces less stuff.
"Inflation was already high and is only going to get worse because of the war". Why? US, French, British military equipment is hot now, nobody buys from Russians anymore as we all see how great is their stuff. Typically after the wars we saw rapid economic development, not stagnation. In fact a little inflation will help, as there will be no more stupid ways of "investing" money (cryptocurrencies are only the most pathological resource, there were many others, less popularized) so maybe there will be time for some real investments not hoarding money only.
"Supply shocks were already bad and are only going to get worse", what actually people were buying from Russia except oil and gas? What other Russian product you've bought in past 5, 10, 15 years?
China is clearly staying away from all this "trouble" that Russian have, in fact, China learned a quick lesson about true power of USA and NATO and their determination to support a country, which is not even NATO member. China also learned how great is post-soviet era military equipment, which both China and Russia still use and base its power on this. All those "innovative" solutions like Russian SU-57, Armata T-14 tank sound so great and fearful, the problem is that they don't really exist, I suspect that China might have the same issue. Maybe that's why we haven't heard about any recent Chinese provocation near Taiwan.
So, the question is, why so many bullshit in this article, as usually, the answer depends on what this guy is selling, and we learn this at the very end of the article:
"I also had Bill Artzerounian on the show to answer questions about the benefits of working with a tax advisor and the tax implications of selling a huge loser in your portfolio."
You personally may not have been buying product from Russia or Ukraine but others will have been. They now have to look for replacement options creating market pressure.
Wheat and crops sourced from other countries still have to be harvested, so the oil prices going up (even if that was a single factor) can risk reduction in harvest and crop yields.
Oil supply is just one of the issues right now. Once you add fertiliser, crops, not to mention unpredicted or unreported factors, this is going to get painful for some.
Here's an example from 2021 where fertilizer shortages within North America caused an expectation of price increases: https://www.theguardian.com/environment/2021/nov/25/fertiliz...
And here is one of the most commonly-used chemical processes used to produce ammonia for fertilizer -- it often uses natural gas as an input: https://en.wikipedia.org/wiki/Haber_process
Food scarcity and food price increases could cause large amounts of human suffering. Despite any ongoing conflicts I think it should be a priority to maintain and improve food supply chains.
"Russia-Ukraine war sends wheat futures to 14-year high"
* https://globalnews.ca/news/8663571/russia-ukraine-war-wheat-...
"Forget Oil. Putin’s War Is Wrecking the Wheat Market."
* https://foreignpolicy.com/2022/03/02/russia-war-wheat-econom...
"The importance of Ukraine and the Russian Federation for global agricultural markets and the risks associated with the current conflict"
* https://www.fao.org/3/cb9013en/cb9013en.pdf
May not be a big deal for rich people / countries, but other places may not be as fortunate and that could lead to turmoil:
"Nigeria’s need for wheat is rising—and so is the price"
* https://finance.yahoo.com/news/nigeria-wheat-rising-price-14...
> Why? US, French, British military equipment is hot now, nobody buys from Russians anymore as we all see how great is their stuff.
Oil, for one. Which has knock-on effects for the transportation of just about every other product out there. Then there's the natural gas that Germany is dependent on, and Germany is a major manufacturer / exporter.
> what actually people were buying from Russia except oil and gas?
Oh, so we have to worry only about the global consequences of oil and gas prices. Is that all? Only oil and gas.
* https://awealthofcommonsense.com
* https://ofdollarsanddata.com
* https://theirrelevantinvestor.com
* https://www.youtube.com/c/TheCompoundRWM
Using the Internet to put out their brand and philosophy out there so like-minded customers come to them instead of trying to chase down leads. And everyone who doesn't need a wealth manager / family office gets interesting content.
https://money.yahoo.com/pandemic-wealth-inequality-180311704...
> Therefore, a recession is now inevitable.
And two paragraphs below:
> Nothing is 100% certain in the markets or the economy.
> There seems to be a growing consensus among smart people I follow right now:
i.e. the conclusion that a recession is inevitable is not the author's own, but just an argument coming from "smart people the author follows."
On a more serious note, the answer really depends on your situation. I.e. what investment products are accessible to you and how much risk you can tolerate.
Answering those question it's enough to start going to the court asking for removal of actual neoliberals in power for a long tail of crimes, the first one for crime against humanity. Otherwise that means Gustave Le Bon and Eduard Bernays was right saying that most humans are just animals in a flock to be led. So Democracy is impossible and abusing human being for profit is a normal activity...