Today we're going to talk about some recession protection strategies
that you're going to need to know in the next few months.
In a prior video, I talked about how the Federal Reserve has basically two options.
They have two poisons.
One's called inflation.
The other is called recession.
So the Federal Reserve is going to have to pick a lane.
And what they've decided to do is pick higher interest rates
and tamper down inflation, which is going to create a recession.
But the difference is the recession is going to come at a later point.
These are going to be strategies that you can employ to make sure
that you're in a good position when that happens.
First, let's define what a recession is, because the media will make you believe
that we're not in the middle of a recession as defined as the period
between an economy's peak of an economic activity and a subsequent lowest point
or a trough where a significant decline in economic
activity spans across the entire economy for more than a few months.
There are those that say that we need two consecutive quarters of negative GDP
or gross domestic product for the first two quarters of 2022.
We definitely saw negative GDP in the US economy.
However, the media will make you believe that we're not in a recession
because our unemployment is only 3.6% and therefore that means
we're not in a recession.
But it's indisputable that the economy is reacting
negatively and is going backwards from a GDP standpoint.
So before we get all freaked out about what a recession is,
I think it's important to understand that the economy does
ebb and flow, it does expand and contract, and that is very natural.
What happened in 2020 is that the Fed reduced the Fed funds rate to almost zero,
which created this economic boom and created all these asset bubbles.
So those asset bubbles created peaks.
And that's where real estate was at some point in the last six months.
Now, of course,
it is moving down the chain here and it's going to start to contract.
It's contracting primarily because the cost of borrowing has gone
up significantly and home sale purchases are down,
new constructions down, our purchases are down.
And as you can see from the prior chart, GDP as a whole is down.
Now, the question is, how long is this going to take?
Is it going to be short?
Is it long? What kind of a recession is it?
The chart on the left here has six things that typically happen during recession.
But I think as we just saw in the prior graph, a lot of these things
may not have happened yet and depend largely on where we are on that graph.
One thing is for sure, we're definitely seeing at least three of these things
that are showing up right now and they are less spending, government
debt increases and assets are losing value.
So the next thing to watch, of course, is the lag effect.
When we start to see unemployment rising, interest rates dropping, perhaps again
after inflation is curbed, and the difficulty of finding jobs.
So that's what you need to keep your eye on.
I thought it would be also important for you guys
to take a look at how long do these recessions last.
As you can see, traditionally, with the exception of the pandemic,
which was two months, most of them are six months to 18 months.
So we're in the bit of this transition right now where these three things,
the unemployment is still low at 3.6%.
The interest rates are actually going up to try to curb inflation.
And people are not having a difficult time finding jobs.
But at some point when this starts to move down that chart,
then you will start to see whether or not this is going to be six months, 12
months or 18 months.
Now, let's take a look at a little bit different chart, what I kind of liked.
It's spring, summer, autumn, winter.
And you can kind of see how this same kind of cycle moves through.
And down here, it shows the different things
that might show up during this period.
I believe we're just moving out of this
expansion phase, which in this chart is calling it summer.
All of these things have just happened.
But now we're moving in the expansion ages phase or autumn,
which is when inflation starts to accelerate, spending slows down,
inventories are starting to build and production slows.
Profits are declining largely because of interest rates,
and markets are now becoming more volatile.
Think of crypto, think of the stock market, those kinds of things.
And we are at the very beginning of the top one,
which is job growth is starting to slow down.
So I believe we're right here in the autumn phase.
And what's next is, of course, winter.
The winter means a full recession sets in.
Economic output shrinks.
Jobs are lost.
Consumer confidence and spending falls and profits are declining.
That's essentially what a recession is.
One thing that's a little different on this chart
from the last chart is that this shows from 1960,
the average recession lasted about 11 months.
But what's most interesting and most important is that it
took 71 months on the average for an expansion after the recession.
So think about that.
That's more than five years.
So said another way we should have some kind of a bust
as a result of the recession.
And then we're going to have many,
many years of an expansion rolling out on the average.
The anomaly, of course, is the pandemic
and the money that was used to fund the pandemic and all of those things.
And the two month recession that we had during that time.
But if you take that out of here, you're going to see a more consistent
pattern of the way recessions and expansions have happened.
So one of the things I talked about in the beginning of this video is
how do you recession proof your life and your finances?
And for that answer, I, of course, just simply went back to 2013
and took a look at the Great Recession,
which had a lot of the same things happened and tried to identify
which were the winners, the average group and the losers during that time
and some of the things that you can do.
So the winners group here includes agriculture,
forestry, fishing, hunting, mining, utilities, transportation and warehousing.
Professional scientific.
Technical services.
Management of companies and enterprises.
Educational services and health care and social assistance.
Those will continue to be winners in this next recession.
Those are areas that you should be looking at.
The average group is manufacturing of non durable goods
finance, insurance, real estate and rental and leasing,
administrative and waste management, services, arts, entertainment, recreation,
accommodation and food services and other services except government.
Isn't that interesting?
The losers, which is already starting
to show up, include construction, manufacturing
of durable goods, wholesale trade, retail trade and information.
So these are things just to be aware of if you're invested in any of those things
or you're employed in any of those businesses, please take note.
There's a couple other things that I highly suggest you look at.
One is that you have plenty of cash reserves.
We've talked about this a lot. Cash is king.
It's going to help you through this time.
Second, you're going
to want to take a look at your job and more specifically about your hours.
Make sure your hours aren't going to get cut during this recessionary time
because your employers could get hit with lower profits.
And if you're a work from home, you might want to take a look at whether
or not remote workers might be the first to be cut from those particular employers.
As always, passive income rules.
So rentals, I keep telling you guys, rentals
are going to do fine as interest rates go up.
People are going to default into rentals.
Rentals are going to continue to be great in a passive income way and side hustles.
Please have your side hustles.
Do not rely on just your job.
You're going to need multiple sources of income to get through this time.
The big difference
between the 2013 recession and the recession that's pending today
is that technology
and AI and all the things that you could do today from your laptop
or even your phone can create all kinds of side hustles and passive income
for you to make sure that you're not completely reliant on a job
or even worse, reliant on potentially one of the losers
in this group where an employer is faced with lower profits.
And that's going to have to go in and start cutting jobs.
Please make sure and take a look at that high interest debt
and do not cosign on any loans during this period of time.
You're going to want to make sure
that you don't get involved in any of that nonsense.
These recessions are part of an economy's expansion and contraction.
Don't be afraid of them.
Just embrace it how it is and go as the wind blows and not against it.