I'm very scared of what is going on. I have decent savings (about a year's worth) and a good job with Cisco (company got acquired recently) but I'm afraid of what is going to happen.
What can I do to protect myself?
Haven't lived through a recession before?
The most important things to remember: Reduce debt at all costs, make your objective to be debt free. Cash is king. With cash you can bargain. Live frugally while you have debt. If you have a job, train for the next one. If you have a job stick with it. If you are finding progression at work slow and thinking of another job, think before you leap. Probably the most important thing to remember is like booms, recessions end.
"... What can I do to protect myself? ..."
Don't spend what you can't pay in cash. As for protection, you can try but sometimes individuals are swept about like leaves on a stormy winters day. Adapt.
While I agree with your sentiment that you should only buy what you can pay for today, I wouldn't put too much trust in your (US) cash being worth tomorrow what it is today.
Investing in foreign currencies can build a nice hedge in times like these.
I think prices for all sorts of things will collapse, but your grocery bill will continue to rise.
edit: I've talked with somebody born in Germany in 1931. According to him there was no visible inflation during the war. Prices were dictated by the government. But money was basically worthless because people additionally needed government issued vouchers in order to be allowed to buy stuff and they got these only for what the government regarded as people's basic needs.
(My mom was also a refugee, but she has an entirely different set of stories. My mom's side of the family is actually from North Korea.)
go on ..
(im a sucker for a good tale :) )
If you are part of a small company, or if you have a growing small startup/business, this is the time to grow. The big guys are going to be hurting by the downturn in the economy. Get your product out there, stabilize it, and use these years to get a level of safety for it.
As for your assets. Like others said, reduce your debts, keep saving as you are now and you will be fine. If most of your assets are in ACTUAL CASH (i.e: money stored in a savings account) then you will be fine.
1. Don't stick (too much) cash under a mattress. Avoid long-term bonds (which get killed by inflation).
2. Gold is a great inflation hedge, but is a terrible long-term investment. Other commodities are similar.
3. TIPS (e.g. VISPX) make excellent inflation hedges AND long-term investments.
4. Short-term investments, like money market funds, short-term bonds, and short-term CDs, also generally do well. If people expect 4% inflation, these investments need to pay more than 4% in order to get people's money.
5. Stocks and real estate protect against inflation over long time periods (5-10 years), but not over short periods.
In my words, the economy is heading for a long-drawn recession due to a much needed deleveraging, albeit a drastic one. The world was too flush with credit in the past decade. The financial system is currently fubar with the credit market virtually frozen at this moment. Banks don't trust each other. The Chinese government has instructed their banks to stop lending to US financial institutions. The Feds are currently keeping the financial system on life support. Expect the side effects of the credit contraction to trickle down to the real economy very soon. More company failures, more layoffs, higher unemployment rate etc. Buffett wasn't exaggerating when he said this is an economic pearl harbor. Which is why the Paulson bailout plan will prove to be very crucial.
A bailout will just postpone the inevitable and cause long-term pain.
What do you want him to say? "The fundamentals are crap! Don't invest in USA!". There are several states in the country, right now, that are booming. If you don't think so, visit Austin and see how "depressed" it is.
In the intermediate term, asset deflation will probably be the dominant force, even if consumer staples continue to inflate somewhat. The very high general inflation is in store for later.
Despite what the media say (their job is to tell doom stories, after all), it's not the end of the world as you know it. If you don't know anything particular about finance, just follow your guts, keep your savings account and listen to the experts telling you to invest in whatever with a grain of salt. Don't try to act differently. We're not always rational economic actors in the first place, and panic only makes things much worse. Simply follow the prices, as you would usually (e.g. if you see a bargain at the supermarket, go for it if it's something you would usually do).
this is just a part of the business cycle. we're just seeing an extra big down because some jerks love money more than ethics. it will go back up, and by investing in your retirement still, you'll be buying some good deals on stocks while they're down.
That is true in the absolute sense, but wrong in the relative.
What I mean is that we are today much richer then people were just before the great depression.
If the economy dives deeper and stays down longer we would still be much better of then people were during the great depression.
That's not my opinion, that's fact, because it is what happened in Japan.
Japan had a cheap money, stock and real estate fueled boom and then a true depression which was deeper and longer then the great depression.
But because they were much, much, much better of to start with, their bottom was still far above the great depression's bottom.
The same principle would apply to America.
As other people have mentioned cash is king in a recession/depression.
Keep in mind cash can lose its value if the fed is trying to stimulate spending by inflating the currency.
Gold is a good hedge but gold is taxed at very high rates (22%, not sure) but government bonds are tax free.
It's probably a good idea to hold both.
And if the fed is attempting to save us by printing money, debt IS a good thing to have.
Inflation is the debtor's friend.
I expect tough times ahead, but I'm not too concerned. I have real, technical skills that should keep me working through whatever may come. One thing that I'm doing is brushing up on my DBA abilities, because I figure that no matter how bad things get, maintaining databases will not be an option: They're part of the infrastructure now.
Call me RMS, but now is the time to make sure that your skills with open source software are top-notch. If things go down the toilet, you can bet that businesses will be hesitant to use expensive Microsoft products when free alternatives are around. Now, Microsoft would hopefully adjust to the decrease in demand, but I'll take the almost guaranteed increase in demand any day over that gamble.
Just listen to what these gobshites are saying: it is the end of america, it is the end of the super power. I have heard this crap quite a few times over the last while, gimmie a break. Listen stop being part of the problem: 1. Start looking for a profit in this. 2. Start looking at how America can change to be better from this. 3. The crinimals that currently run the country should be held accountable if they actually manage to rob the taxpayer of this 700B. 4. The fed should be nationalized.
America is the greatest country in the world, I truly, truly believe this all we need is a bit of leadershio to guide us out of this crises. The unfortunate thing right now is that both parties have tried to politicise this crises.
FUCK them all no matter what happens tomorrow we will still be american and we will be stronger better and harder.
Stop listening to the fags and start working on solutions to the problem.
That is what america is about, somewhere we lost a bit of this, it is time for some new ideas some hard work and some real leadership.
Believe me the problems we are facing are big but if we work togehter as a nation we will dispatch this problem in a quater, turn this nation around regain our pride and show the world why America is the only super power.
Ernan
Your savings is protected by the FDIC up to 100k per acct.
I honestly don't believe that the tech/info sector is going to lose that many jobs. If Cisco does consolidate, it (hopefully) will be non-core resources, such as HR, and internal operations.
If you have a 401k, you're screwed either way since you have very few options on where to invest.
If you have an IRA, you can hedge risk by selling calls against your assets... but that's as far as I will go in terms of specific advice.
Supposing my bank goes under (which I sure as hell hope it won't, cuz it's Bank of America), I'm guessing it'll take some time for them to get their act together and I might not be able to access money in the short term. Is this correct? Or can they swing into action immediately to keep the money coming out of the ATMs?
In that case it might make sense to have stashes of cash in multiple banks, just in case (and hell, a thousand bucks under your pillow).
Also - pasta salad is apparently a lifesaver. It serves like 10, can be eaten cold, and doesn't go bad all that easily.
It's not the perfect response to every crisis, but it can't hurt. If one day you can't get your money out of the bank, for whatever reason, you have enough to pay for your immediate needs for a while. And it's only a thousand, so at most you're missing out on fifty bucks a year in interest.
NB. Not that I'm doing it myself, but I already have my money split across two different countries anyway.
If a few more large banks fail the treasury will have to come up with the money to cover. Odds are low that the usual customers for treasury debt will want to help (China, et al), so the Treasury will have to collude with the Fed to print up the money to cover. Which means inflation.
Another thing to keep in mind is that in the event of bank failure you have no legal guarantees of a timely refund from the FDIC. They may take many months to reimburse you.
In any case, there are much safer ways to store your money than at a bank. Directly own equities, such as GLD and currency ETFs. Directly own treasury bills and notes. If your brokerage goes under, or even if the ETF management goes under, you still own the underlying assets outright, regardless of any $100K cut-off.
Not in this case. If the Fed prints up money to cover a failed bank, it's only replacing the dollars that were destroyed when the bank went under. (When a bank fails and nobody buys it, the money in deposits doesn't flow to a different party: instead, it just vanishes.) The net effect on the money supply is zero.
Usually, they arrange the sale of a bank to another financial institution over the weekend. When branches reopen on Monday, they're owned by a different company. Customers don't notice any difference except the logo on the statement.
The WaMu failure is a textbook example, except it happened on a Thursday instead of a Friday.
I believe that if the FDIC can't find a buyer, then it assumes the deposits itself and pays them out of its $45B slush fund (now somewhat depleted after IndyMac). Cash flows from ATMs as usual, but it's provided by the FDIC instead of the bank.
http://www.fdic.gov/deposit/deposits/insuringdeposits/
"The basic insurance amount is $100,000 per depositor per insured bank."
Unless your accounts fall into multiple categories, you'd need to spread your 100k+ over a number of banks in order to be protected in it all. Although, this makes me wonder what happens if you have accounts at bank A and bank B, and then bank B buys bank A, how are you insured then? More information at fdic.gov.
Quittel had both a business checking and business savings accounts at the bank, but because each held less than the $100,000 limit guaranteed by the Federal Deposit Insurance Corp., she figured she would be OK. But because the two accounts together totaled more than $100,000 and shared a single taxpayer ID [...] she lost half of everything she had over the $100,000 limit.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/10/12/...
If you're doing it as an investment, I'd hold off unless you have a lot of money invested already and are looking to diversify. "They" are saying that home prices may slide for another year or two at least. Of course, "they" are often wrong...
Mr. Market suffers from some rather incurable emotional problems; you see, he is very temperamental. When Mr. Market is overcome by boundless optimism or bottomless pessimism, he will quote you a price that seems to you a little short of silly.
Warning: you can only tell if the price of a particular stock is silly if you have some idea of what its price should be (with a margin of safety).
I recommend that you don't panic and ride it out. But if you can't, then permanently decrease your risk exposure (not just for this downturn).
I've been at it for 10 years, half in california, half in boston. Just interviewed at a bunch of startups and one big firm. Offers were all around $95K + post series A equity. I made the same salary 18 months out of college. College senior interns at the last "real job" I had got hired away for $86K starting at Amazon, and I didn't think they were necessarily the cream of the crop. I decided to keep contracting until the end of the year at $95/hr and continue working on my improbable startup, even with the heinous economy. In my experience engineering salaries plateau around $100K. Maybe more if you are doing something hard (VMWare) or heinous ("web scaling expert") or are looking to be an exec (VP Eng / CTO).
Age/Experience doesn't really translate into significantly more money unless you're looking to move up the management chain. Best to make hay while you are young. Although, I haven't had a model career - I usually make lateral moves to work on something new and interesting, and have some employment gaps where I decided to travel the world instead of slogging it out. 'Your mileage may vary'
I'm actually looking at salaried positions that will pay close to what I'm at now and have me one or two notches up the food chain. Wages have stagnated for now at least.
Investment banks and hedge funds offer more than this (some of them are doing quite well, and still hiring).
Hyperinflation almost always leads to political unrest, rioting, the fall of the current political regime, and usually war. There's no defense against that: somebody will break into your house, kill you, and take everything you own anyway. So if you honestly believe hyperinflation is going to occur, get the hell out of dodge and quit worrying about your finances.
This, BTW, is why I don't think hyperinflation will occur. Since it always leads to the toppling of the entrenched power elite, and the entrenched power elite tends to do anything in their power to stay in power, they'll make sure it doesn't happen. Looking at history, every instance of hyperinflation I could find resulted from one of two conditions:
1. There was a large standing army who hadn't been paid in a while and was getting antsy. Or, alternatively, a large rebel group that forcibly appropriated resources from the citizenry and was getting antsy. (Rome 476, Spain 1588, U.S. 1789, Confederate U.S 1865, Hungary 1946, ROC 1949, USSR 1992, Ukraine 1993)
2. There is a large foreign debt, denominated in foreign currency, that the nation can't pay back. (Weimar Germany 1921, Argentina 1989, Argentina 2001.)
In both of these cases, the government is going to fall anyway. If you don't pay the army, they have guns, they come in, and they oust you. If you don't pay your foreign creditors, they have guns, they come in, and they oust you. Printing money is a way to buy time; it never works in the long run, but between dying now and dying later, most elites would rather die later.
The U.S. is not in either of these situations, though the rise of private security forces (Blackstone) is worrying, as is their addiction to debt. If the U.S. doesn't get its spending habits under control, it's just a matter of time before it starts borrowing in RMB or Yen, and then an ordinary garden-variety inflation isn't enough to erase its debt.
As painful as the current situation is for some, it certainly is a better buying opportunity than a few months ago.
Your perceptions of the prevailing market psychology are distorted. Surveys show that retail investors have remained bullish. The general sentiment is extremely far from "never invest in stocks," which is what usually marks the bottom of a big recession.
Believe it or not, most homeowners continue to think they will see appreciation next year.
This recession has barely started and investors have barely even realized we are in a recession.
http://www.businessweek.com/investing/insights/blog/archives...
Now is an excellent time to be an investor.