Ask HN: How to best take advantage of the coming recession? | Hacker News Reader

Ask HN: How to best take advantage of the coming recession?

I'm 32 years old and living in Europe and come from a blue-collar worker's family.

I'm pretty good at my job (broader data science) and have been earning US-level income while maintaining Eastern Europe-level expenses for the last 7 years or so. Thus, I've managed to have a decent amount of savings in cash and index funds / ETFs .

During the last recession (2007-8), I was just 16yo and my family was hit pretty hard back then. Now, I do believe that recessions are the only realistic way to achieve real social mobility, and have been planning to really benefit from the next one (whenever it happens).

Any additional thoughts, tips, and personal experiences are welcome.

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I will post again my answer to what someone else asked similarly the other day [0]:

One thing we must make clear is, is there actually a recession? Many companies are firing, but they've fired much fewer than they've hired in the past few years. Many companies are still hiring now. I don't think there is a recession, much as people might be scared that there is.

[0] https://news.ycombinator.com/item?id=34296393

Last time I was on the interstate, there were a god awful number of trucks moving junk. Restaurants nearby are busy. Unemployment is pretty low (U-6). We may have receded from the helicopter-money fueled mania of last year, but there doesn't appear to be widespread pain one usually associates with "recession"...

There is a saying that generals always fight the last war.

With all the talks about recession, IMO people are not appreciating that not all recessions are like the GFC we just went through. Yes, some recessions are really bad. But historically there have been milder recessions which were not as catastrophic.

What made the last recession so bad was due to a problem (lax loan standards causing the housing market to become overpriced, very fragile to macro conditions, and creating riskier-than-expected financial derivatives) that is since addressed. The days of NINJA loans are over, and the financial markets are of course going to be cautious in assessing the risk of financial instruments based on mortgages going forward.

We are in an entirely different situation now where supply/demand and global trade keep getting messed with due to COVID and geopolitics, and where central banks across the world are having to deal with the effects of over-stimulating the economy. This is us finally leaving the status quo of low rates and low inflation (in most developed economies) after over a decade. So yes that will disrupt things, but it doesn’t mean it will be anything like last time.

People also don’t appreciate that a stock market/asset price correction is not the same as a recession. The two often co-occur for obvious reasons, but each can happen independently of the other.

People have been calling for a recession since June and you can see the signs everywhere except where it really matters to people: the labor market

Slow down? Sure. Recession? Eh.

I really dk why you're being downvoted. Seems the only correct option when hysteria starts is to join it.

As they say, the market can stay irrational longer than you can stay solvent

Oh, sweet summer child.

Give this a skim - https://www.oaktreecapital.com/insights/memo/sea-change

You know what they say, economists have predicted nine out of the last five recessions. This has the same energy.

It's counterintuitively a great time to start a business! Lots of poorly-managed startups are going to fold, which increases talent availability and decreases competition. Having a startup that has found product-market fit and is ready for growth coming out of the recession is an interesting opportunity - there was significant discussion of this during the the initial COVID downturn (obviously in a very different interest rate environment re: seeking investor funding)

Recessions are generally good times to start ANY businesses because if you have capital you will have opportunities to capture significant portions of the market, and like you said, getting skilled labor is easier.

The most talked-about coming recession ever... don't go overboard, in case it doesn't happen...

In 2018 several high ranking economists as well as Powell said they know how to prevent recessions.

https://tradingeconomics.com/united-states/gdp-growth

Had 1 in 2020, and 1 in 2022. On average they are 7-10 years between. Split US government control likely going to result in balanced budgets. High cost to debt means less spending.

Reality speaks, the next recession is always coming.

> Split US government control likely going to result in balanced budgets.

I don't see the U.S. getting anywhere close to balanced budgets in the next few years. Deficits are running a trillion dollars a year. Divided government blocks bold new expensive programs, but existing programs and spending just keep growing.

For just one example: last year Congress spent an extra $100 billion on defense alone over and above what was originally budgeted. Anyone who pointed that out was accused of being a Russian shrill or of hating Ukraine, because $26 billion of that went to support Ukraine. But no one discusses the other $74 billion...

> don't see the U.S. getting anywhere close to balanced budgets in the next few years.

This mccarthy as speaker thing was odd to me. From my point of view Gaetz and friends were on team mccarthy. So why would his own team do what they did? Here's what they fought for...

>"We're going to have votes on term limits, balanced budgets, enforcement of our immigration laws, & more."

Basically everything they all wanted to do; there was never any obstruction. This was theatre.

>Deficits are running a trillion dollars a year. Divided government blocks bold new expensive programs, but existing programs and spending just keep growing.

You don't see it as practically possible. Totally get this and agree.

The thing is, maga republicans basically control the house. If democrats want to do anything at all in the next 2 years, they have to give them what they want. They made it clear what those things are.

Forcing the democrats to balance the budget will be beyond disruptive for the next 2 years on its own.

> Had 1 in 2020, and 1 in 2022.

What people colloquially refer to as a recession vs the textbook definition is important to understand.

> Reality speaks, the next recession is always coming.

Just like the sun rises and falls. But this is meaningless information. Recessions have varying severity and you can't say when it comes.

> Reality speaks, the next recession is always coming.

The question is about which plans it affects. This year, next year, or seven years from now?

>The question is about which plans it affects. This year, next year, or seven years from now?

If you find out, tell me.

Having lived through like 5+ of these downturns now, here's what I tell my kids:

-- These cycles are part of the sickness of our system. Prepare for it.

-- When times are good, hoard money. IE: save it, don't spend it. Put it in the market, in assets, in something for when you need it.

-- Always have a side hustle. It doesn't have to be much, but some little side thing where you are making a little money can make a difference when times get tough if you lose your main income source.

-- Live way below your means. While I hate the idea of being so frugal that you can't enjoy life, the cycles I've seen tell me that you have to be really on top of this. Drive that used car for 5 more years. Don't go out to eat. Buy clothes only at thrift. Don't expect to be able to vacation every year. Squeeze that budget as tight as you can to make sure that you have cash in the bank to last a year+, and more than that if you have a spouse /house / kids.

-- Even when things are bad, there's someone out there who is making money and doing ok. Health care, for example, at least in the US, is often a safe place to work in bad times. There are stocks that run counter to the rest of the market, etc.

--Try to stay ahead of the curve when things look like there are clouds coming. The market can shift downward quickly and unexpectedly, but it is often a longer, slower improvement. There is no logic to any of this, it is often the whims of forces we don't control.

-- Decide how much risk you are willing to take on in life. Being a self-employed / small-business owner is hard in a downturn.

I'm optimistic that things are going to get better again throughout 2023, because the things that are dragging us down at the moment feel more ephemeral than real, IE: we're in a recession because we all think we are in a recession and we are all following the playbook for a recession. So there will be layoffs and cutbacks etc until such time as we all realize it's probably not armageddon and we all go back to trying to push our respective businesses forward again.

Regarding living below your means. For a lot of people their default mode if they don’t stop themselves is to spend almost as quickly as the money comes in. For people raised in a culture (be it family or larger) of saving and living below your means, who then get good jobs, I think the problem can easily become reversed where you are so attuned to the time-value of money and frugality that you become a bit miserly.

I was spending about 10-15% of my gross income for a few years until I realized I was denying myself a lot by not spending closer to like 20%. Yes I am happy that it allowed me to grow my investments quickly. but after a certain point it feels like you are just optimizing for a high score in your 60s. If you are financially driven you may always be thinking that $1 now could become $10 (in real terms) in a few decades. But I imagine when I’m 60 I’d gladly trade 20% of my worth to be able to experience things as a young adult.

Exactly this. Saving is very important, but also spend money on things that are meaningful to you now.

You could get hit by a bus tomorrow. I know people who died of cancer at 34.

Plan for the future, but it may never come. Or we might hit Japanese "stagflation" and returns are flat.

Make smart choices, but don't forget to live.

Plan all big improvements to your house, when the construction sector would have a hard time finding a job. Any expensive improvement like roof, road, fence should be much cheaper.

I consider the Eastern Europe having unique opportunity these days, as the Ukrainian market has extremely good potential to grow in many areas. If it goes EU+NATO direction after the war, it may boost the whole region and follow the direction set by other countries two decades ago. Just the property market alone rose manyfold in those countries after the EU access.

I am in a similar position to you, living in EE country as well. We may exchange some contact and share some more info if you are interested.

Potential is great, but so is the risk. For example consider this: apartments in Kiev are now priced at about 50% of their usual price, you may buy one. Now hypothetical scenario: in the Spring there is an Russian offensive on Kiev and your investment is destroyed, you have $0 in that case.

I think investing and war are very very bad companions. If you want to _invest_ your cash you should avoid too risky moves.

On the other hand if you want to _speculate_ then go ahead, but be prepared to lose 100% of money for maybe 200% gain (for my example with real estate).

I don't say you have to rush and buy anything now. After the uncertain long-term peace, there would be many issues to rebuild the country for years.

That is why I don't see many people living in the West would consider it safe enough anytime soon. If the correct legislation and public funds would build up over the years, with the natural resources, land fertility and industrious population it may grow even faster than post soviet block in the 90s.

I don't say it's certain, I just consider it possible.

https://en.wikipedia.org/wiki/KyivNotKiev

The English word for the capital of the Ukraine (not ‘Ukraine’!) is ‘Kiev,’ just like the English word for the capital of Italy (not Italia!) is ‘Rome,’ not ‘Roma,’ or like the English word for the successor state to the Ottoman Empire is ‘Turkey,’ not ‘Türkiye.’ There’s no need to use a foreign language’s words for the names of places where that language is spoken.

Using the correct English word ‘Kiev’ in no way is any form of support for Russia’s evil war; it is simply a form of support for … correct English.

> We may exchange some contact and share some more info if you are interested.

Sure, email me at poordadrichsonhn / gmail

OP here: Thanks for the comments so far. Please, let's not sidetrack on whether there will indeed be a recession, it's a self-fulfilled prophecy etc. My point is what to do when it happens 6,12,18 months from now and/or if this happens 3 years from now. I think this should be obvious.

Realistically, if it’s as bad as they say, it could be wise to become a little bit liquid right now to reinforce your buying power during the apparently inevitable massive dip that’s coming.

Personally, I don’t see it getting nearly as bad as 2008, but I could be wrong. I think some big corps will eat shit, there will be some layoffs, yada yada same old shit. There’s not going to be thousands of people suddenly homeless and destitute like before.

>it could be wise to become a little bit liquid right now

That seems about a year too late on the nose, though I get your point.

One staggering stat for me is that ~40% of owner-occupied homes have no mortgage. Sure property tax and insurance (not required on a fully owned house) but that seems minimal especially if you were able to pay off the home, outside of very high areas or appreciation.

I'm sorry, can you verify that stat? Upon a search, I see references to that number but in relation to older homeowners.

There's some valid doubt [1] on whether the recession is going to happen, or if we'll muddle through on near-zero growth for a bit. But that's beside the point.

It's a good time to read up on investing now, figure out some asset classes (real estate, securities, gold, crypto, etc) that you think you could fairly evaluate, and then be ready to buy when you see stuff priced below what they're worth.

Investing is risky, so don't put all your eggs in one basket.

[1] I read this in two places, and forgot both, sorry.

Everyone is talking about "coming recession" but it is nowhere to be seen, it's like everyone was awaiting "Twitter collapse" because Elon is not woke enough. It never came. I don't think there will be recession soon enough to worry.

Invest in yourself. Everyone is in the same boat together. Just be the best you that you can be.

While it's a nice sentiment, it's not very actionable.

The question is coming from someone who saw his family go through financial hardship previously.

We're all in the same boat, like the people on the titanic were.

OP is asking how to get onto a lifeboat.

No one here has asked you about your risk tolerance. If you need to avoid losses (maybe due to supporting the family), you move to cash or partially to cash. I wouldn't have a fear of missing out if there is no recession because your income is how you make money, not betting on the market.

If you're sure a recession is coming, you move to cash or partially to cash. That allows you to buy in when things are lower (eg. Warren Buffet always carries lots of cash and everyone came begging to him in 2008 and he promptly told everyone to bend-over and he did some amazing deals).

In summary, if your risk adverse => cash. If you want to be opportunistic => cash.

> No one here has asked you about your risk tolerance.

Very much this.

There are too many idiots on the internet dishing out so-called "investment" advice without any sort of consideration of suitability for the person doing the asking.

In most cases the person doing the asking will not be willing to air sufficient dirty laundry in public to give a correct personal picture of their financial circumstances.

Hence people who give unsubstantiated "investment" advice should always be avoided.

Cash is king. With interest rates high, if you can pay cash for anything like a car or house there may be good deals. Right now supply is tight so prices are still high, but we'll see if that continues.

In the 2002/2003 recession I shifted all my investments to REITs. That worked out pretty well, and when those topped out I shifted everything to VTI (total market index) and rode that up to the top.

But basically you want to be in investments that are easy to liquidate and will generally hold steady, so that when the bottom comes and goes and we're out of the recession you can quickly shift to growth vehicles again.

Success often arrives through pre-established channels. If there is something you are already good at, maybe direct your efforts there. Employ some other data scientists and a sales person and you can run the show. Or use your cash to swoop in on some down markets. Essentially stick to a workflow you are already familiar with.

> have a decent amount of savings in cash

How much is a "decent amount" ?

If its not equivalent to 6–12 months salary, then its not enough.

Yes, the foolhardy will try to tell you that 6–12 months cash in the bank is deadwood. But they are wrong.

What happens if you lost your job tomorrow ? You're unlikely to walk straight into another job are you!

What happens if some other $expensive_shit hits the fan ? Trust me, you'll be grateful for a cash cushion.

Make sure you always have a decent cash cushion before you start looking at investing with those dangerous rose-tinted spectacles.

My savings / monthly living cost gives me a good 5-6 years of comfortable living

Best thing you can do to prepare for coming fake recession is to start hiking prices and force salaries down, so you will continue to have record breaking profits. And when real recession will finally hit, you can tell "Didn't I said so?" and use your past profits to carve even bigger part of economy for yourself.

If I read your post correctly and you still live in Eastern Europe - I'd use these funds to invest in security of you and your family and move out. Even being a few hundred kms further to the west (Romania / Slovakia / Poland) would put you in a much better situation.

I'd be curious about unique opportunities for smaller startups that are doing well. What is 'on sale' right now that we should consider buying more of? Have advertising rates nose dived to a point where it could make sense for startups, for example?

Income generating assets in industries that are resilient during recessions. Oil and gas, rental property, bedrock consumer goods like toilet paper, owning a business that has cash flow you can access. Diversify.

I suggest you acquaint yourself with the work of Peter Zeihan. There are demographic forces at play that are likely to swamp any marginal gains made trying to time the market, etc.

I was about the same age as you during the last recession, but in the US.

Looking back, I would strap up on cash until interest rates go down, or (the easy way) is to dollar cost average SP500.

There will always be another recession, but no one knows when. Therefore, the way you position yourself now should really be how you would position yourself at any time.

1. If there is a recession in the EU, nothing like 2008. It will be much shallower and shorter.

2. It actually looks like European data is rebounding a little, so y’all may skirt it.

Depends on how active you want to be with your investments. There are many investments that have the potential to exceed index fund returns, but they come with greater risks and time demands. Do you want to start your own business? Or invest in other assets like real estate? Basically, how willing are you to upset your lifestyle?

I think looking ahead to the next big (known) global risk is wise. From what I can see, there will be a global plateau in working populations in the early 2030s, with many countries seeing a larger percentage of older adults relying on a smaller number of working-age folks. How will that affect you and your community? You may want to prepare now for that.

To rephrase your question, what are the structural alpha opportunities within economic slowdowns/recessions? Check out SSRN for those.

what is SSRN ?

https://www.ssrn.com/index.cfm/en/

Buy China ETFs for growth, and Emerging Market dividend ETFs for cash flow. Both are super cheap after 2022.

When everyone is expecting a recession, one does not come.

Expecting higher inflation and flat to slightly reduced growth (aka stagflation). Find dividend paying stocks that actually keep up with inflation (10-20%). They exist and have track records of maintaining this pay out, you just need to find them.

I'm sorry but can you list a single stock with 15% dividend with track record for paying that out consistently?

15%+ growth (considering they pay taxes and have expenses other than dividend) consistently will reach astronomical numbers pretty quick.

There are plenty of high yield investments that pay 10%+ right now.

PDO paid out ~20% last year, including special dividends. And likely will perform similarly this year, though somewhat lower due to cost of leverage increasing.

AFCG has senior, real estate secured loans and pays 14.5% with no debt (though recently opened a line of credit). Even in event of default, they get to assume ownership of valuable properties.

PBR yields 50%+ on TTM basis. Though will be lower going forward and has a fair amount of political risk

High yielding stocks tend to be lenders, and the risk profile of the loans is up to you to assess. But you can find many apparent great deals right now, assuming we don't enter a new depression with mass defaults.

Even in the GFC, high yield debt only reached a 15% default rate. Which still leaves you sitting pretty with a lot of these lenders, after factoring in yields and discounts to NAV. You can expect price to become depressed for a period of time in an event like this, though. e.g. See ARCC performance during 2008

I'm sorry, none of them have a track record of paying 15%+ yield. The yield looks high right now because they're in distress and the asset prices have gone down, with earnings heading lower and higher borrow cost I doubt those yields will even make a dent to capital losses in owning those assets.

PDO and AFCG were not even listed 5 years ago. PBR is very much a distressed asset in a state pursuing nationalization of oil profits.

You’re simply wrong, these positions are not distressed.

PDO is a bond fund, not a company. They earn interest on bonds they hold. All bonds have lost value as risk free rate has risen. The interest payments on those bonds has remained the same, and they don’t hold non-performing loans. There is no distress in the portfolio.

If rates drop again in the future, the capital losses revert back to capital gains. If you think the Fed will hike substantially more from here, then these arent the place to be. I for one think they dont have much further to go

These are managed by PIMCO which is a famous fixed income firm, not some nobody. You can look at PTY for a longer track record public fund. Which performed very well through the GFC by the way

AFCG has 0 debt and real estate secured loans. Not distressed, even if they experience defaults in a severe recession. Lenders go bust when they are overindebted and cant service debt due to defaults. Lenders without debt don’t

PBR has a PE of less than 2 and is not distressed at all. Its price is down due to political fears that the new government will mismanage the company. Fears which are likely to be overblown.

ARCC and CSWC are two other high yield lenders that are doing better than ever. CSWC sports close to a 15% yield including specials, and they’ve raised the dividend consistently every year.

ABR pays 13% and raises the dividend double digits every year. Multifamily secured loans. Has performed better than most hype growth tech stocks while paying double digits

There are plenty of deep value and high yield plays out there. Too bad that most don’t care to look for them

> PBR has a PE of less than 2 and is not distressed at all. Its price is down due to political fears that the new government will mismanage the company. Fears which are likely to be overblown.

You really don’t know what you’re talking about and are underplaying material risks like the govt. withholding most or all profits of the nationalized oil firm.

And like I said, the other stocks you had mentioned didn’t exist 3 years ago - that’s not a track record to judge by - issuing leveraged loans in free money environment which is no more.

Are you taking into account stock price, as well?

For example, if you buy a stock at $5, and it pays out $3 of dividends, ok that may be great, but if the value of the stock is now $2...

Yes OXSQ is a BDR firm I like. IEP is Carl Icahn's conglomerate that yields 15%.

https://www.marketbeat.com/dividends/high-yield/

Anything less than 20% is what you're looking for. If you expand to foreign markets like the UK, they're entire stock market is set up to prefer dividend payments over share price.

I avoid miners and commodity stocks like rio tinto though I did time the commodity boom correctly to get their fat dividend they had not that long ago.

They do not exist, absolutely. 4% is a good number for dividend paying stocks.

Also inflation isn't over 15% hahaha.

Dividend paying stocks will be pulling from the value of the stock. The 4% you get will immediately drop the value of the stock by 4%ish.

Dividend paying stocks may not be a great option for most US people (and maybe others) unless they are in tax-advantaged accounts. You will be taxed on that as income and not capital gains, which would have occurred if you had a stock that held value and then sold it when you needed to.

In other words, ignoring taxes, in a long-term holding strategy, one would expect reinvesting dividends from a stock to perform as well as if that stock just didn't pay dividends (all else being equal, which it never is).

Though, taking into account taxes, the tax on dividends is effectively compounding annually while capital gains taxes are a simple rate. As long as the dividend tax rate for stocks held long-term is equal to the long-term capital gains tax rate, it's more tax-efficient for investors if a company buys back its own stock instead of paying dividends.

This is also the logic behind end-of-year loss harvesting: compounding interest on tax savings in capital gains losses.

I'm not an accountant or tax attorney.

Dividend paying stocks are from cash cow companies that attract investors not with growth but with a dividend. Many of them are heavily leveraged to take advantage of tax reduction from the payment of debt with their predictable cash. However, if they have a lot of debt, the current interest rate increases are possibly putting a dent in their calculations. Not sure a highly indebted company is a good place to store money in an increasing interest rate situation. Apple and microsoft offer dividends but they are not high.

Wait wasn't the recession supposed to happen last year?

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