You Should Behave As If We’re Already In A Recession
Be proactive, not reactive
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There’s no magic bell that gets rung to signal the start of a new recession. It just sort of happens — with the cause often being one too many interest rate increases.
Sales start to slow forcing businesses to cut costs. The biggest component of most companies’ costs is labor so a lot of people get laid off. Unemployment rises, which leads to reduced consumer spending, leading to sales slowing even more. If things get bad enough, some businesses go bankrupt, which causes financial conditions to further tighten (hitting economic growth and the job market).
The point is that by the time newspaper headlines are shouting recession, we will already have been in one for many months. The real economy (GDP growth) lags the stock market. And labor markets lag the real economy. And real estate lags the labor market. Things take time to roll through.
That’s why you shouldn’t look at real GDP growth (3.5% year over year as of the Q1 2022) or the unemployment rate (currently sitting pretty low at 3.6%) and be relieved. Both of these lag and are impacted by interest rates — rates move first, then markets, and then GDP, and then employment. Rather you should look at inflation and rising rates and be worried about the difficult times they might bring in the months to come. So what’s the optimal way to operate in a recession?
Making it through difficult economic times
While there’s a chance that the Fed might stop raising rates if markets fall further, it’s looking less and less likely thanks to how stubbornly high inflation has been this year. When the facts change, we must change our minds. And right now, it looks like the Fed will keep raising rates until inflation is tamed, the economy be damned.
This means that while a recession might not be imminent, the likelihood of one occurring is significantly higher than usual. Rather than blindly hoping that things will work themselves out, I believe it’s wiser to behave as if we’re currently in a recession. To me, this means the following:
- Build liquid savings. Yes, I know inflation is high, making the returns on cash terrible. But you want insurance…
