The economy may be heading for a downturn but there’s a lot that you can do about it. I’m gonna go over how the economy is shaping up the signs pointing to and away from a recession and the things you should be doing to prepare. Let’s get started, so according to one of the most respected names in finance Jaime Diamond who’s the CEO of JP Morgan chasing an economic hurricane is imminently barreling our way in his words. We just don’t know if it’s going to be a minor one or a superstorm sandy you better brace yourself now. What’s leading us this direction, there are a lot of factors at play inflation continues to rise rapidly up 8.3 over year in the most recent reporting which is the highest spin-in 40 years. Then there’s the national average for gas prices which is fast approaching five dollars or more a gallon and is already above six dollars a gallon in some states. For example, yours truly California the supply chain continues to remain in a crippled state with semiconductors car parts even baby formula in high demand and short supply.
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The fed is employing quantitative tightening to unravel its bond portfolio while increasing interest rates in an effort to combat inflation and soaring home prices. This would put upward pressure on real yields which in turn, makes stocks less attractive investments. They’re basically reducing the amount of money floating around in the economy which is exactly opposite to what they did during the pandemic with all these stimulus measures new cove variants and unpredictable spikes in infection continue to cast a shadow over all sectors. Particularly, these service industries are heavily reliant on a consistent stable workforce and the threat of nuclear warfare is as real as it has been since the thick of the Cold War as the conflict in Ukraine continues to create a ripple effect across the global economy. It’s not just affecting us this is a global problem and the world bank just issued a dire warning that the global economy could be heading towards 1970-style stagflation with years of continually rising prices coupled with lackluster growth ahead. It’s no wonder then that experts think the cash buffers and investment portfolios that many Americans built up. Over the course of the pandemic are in the position to possibly be wiped out entirely. Even though Americans were saving a record high of 33 percent of their after-tax income in April 2020. As pent-up demand was unleashed with portions of the economy beginning to reopen in 2021 with the introduction of the coveted vaccines by January of this year, Americans were saving just 6.4 percent of their after-tax income which is the lowest level. We’ve seen it since 2013. So, obviously, this is super scary because I can totally envision an economy where people are getting so burnt out with rising prices but with stagnant wages and then like what you do because your savings are being chipped away from all these things.
That are costing more money maybe you start cashing out your investments your 401k or anything else that you have equity in because if you don’t do that then you won’t have money to live anymore and if you have a mass selling of investments then that will put downward pressure on the markets. As well it’s a recipe for disaster and we’re all witnessing it happen right now in a New York Times survey only 16 of the public report having more in savings today than they did during the pandemic and a virtual majority 50 said. They had less those numbers get even more dire for low-income households where nine percent said that they had more now than their pre-pandemic levels and a whopping 64 said that they now have less. It’s quickly getting worse simply put the daily cost of living is increasing exponentially faster than what someone can find by keeping their money on the sidelines with the national average savings account interest rates still stalled at a paltry 0.07 percent. According to bank rate and even the best savings account interest rates through online banks like discover and ally are struggling to get back to one percent which as you probably remember was the norm not too long ago when crashes like this happen.
It always affects low-income households disproportionately and you’re right it’s not fair same with inflation since low-income individuals are way less likely to have assets that grow with inflation the fact that savings rates have really faded as we previously explored is really scary more people live paycheck to paycheck than we realize. If you think about it minor shifts can have devastating consequences when you’re a paycheck away from not being able to afford living then what if something happens that is out of your control. It shifts you from being just to not and that can create a big ripple so in one of the most uncertain periods of our lifetimes what can you do to avoid being completely wiped out well.
Let’s remember that history is doomed to repeat itself. This is not the first time we’ve seen conditions like this there’s some really real resemblance between our current situation and Japan in the late 1980s a period coming off incredible economic vitality that ultimately led to what was known as the lost decade to those who lived through it. Throughout the 80s Japan’s economy was outperforming just about every other industrialized nation on Earth including the United States, Japanese, GDP was growing at 3.89 percent annually compared to 3.07 percent in the US unemployment was at a low level hovering around 5 and housing prices were flat out exploding the bank of Japan, the country’s central bank grew concerned by rising inflation and the continual climb of property and asset values so an effort to sort of mitigating the sharp escalation.
The bank of Japan pulled back the country’s money supply which depressed equities but even as those equity prices sank real estate prices continued to grow in value and the central bank undeterred pushed interest rates even higher this move did eventually slow down the rise in property values. But it also sent the Japanese economy into a free fall a simultaneous credit crunch and liquidity trap were born with lending activity grinding to a halt. People deciding to sit on whatever money they had having no confidence that the market would provide reasonable yields now does that sound familiar it should because there’s no doubt that it’s eerily similar to the environments. We find ourselves in today in the United States, in Japan’s case this series of events led to a near-collapse of their markets with equities dropping some 60 between 1989 and 1992 and land valleys plummeting a jaw-dropping 70 through 2001. A decade is a long time to endure in an economy where returns are nearly impossible to find but Japan’s case was extreme and there’s no guarantee that what’s going to happen in today’s environment. I definitely don’t think it’s going to happen severely not even close, but it is something we need to keep in the back of our minds in fact dating back to 1857. The average length of the recession in the US loosely defined as two straight quarters with contracting. GDP is less than 17.5 months and dating back to 1929 the average length of a bear market defined by an index dropping at least 20 percent from its most recent high is just shy of 290 days or nine and a half months. There have been almost 50 US recessions since the inception of the United States only 15 of which have occurred since 1929 and the most recent. The code recession of 2020 was, in fact, the shortest in history lasting just two months later within those recessions have been 26 bear markets also dating back to 1929. and again 2020 marked the shortest bear market in history a shocking 33 days with the s p shedding 34 in a one-month period between February and March 2020 before beginning a historic rally that carried us through 2021.
This is all to say that we’ve been here before when you look around there is more wealth available today than ever it’s just not with the majority of Americans and that wealth will still exist for those who play their cars right when we come out of the other side with this current period of uncertainty. Despite all the instability I just mentioned since the introduction of the S P 500 in 1957. It has returned an incredible average of 10.7 percent per year. The lifeboat solution to Jamie Dimon’s stormy outlook is a lot more simple than you’d think it’s been validated by study after study for a century invest in a diversified portfolio and hold that portfolio as long as you can let your money work for you over a sizeable investment horizon better yet. When the market is depressed, you are actually getting more value for every dollar you invest instead of having to pay an all-time high premium for a share of an S P 500 ETF at the start of this calendar year.
You can now get that exact same diversified basket of goods at a discount of 15 or more and with nearly 70 years of history telling you that basket of goods will average a 10.7 annual return. If you hold on to it for a while I personally think that it’s a no-brainer sadly like I mentioned before these types of downturns have a tendency to disproportionately affect those in the lowest income group. This group who needs liquidity the most is more likely to overreact by selling their investments to get cash to pay for their day-to-day needs and expenses or to just calm their own fears. They do this at the exact time they should be just investing more and buying the debt locking in that discount.
This article is a transcription of a video made by Charlie Chang
Original video: https://youtu.be/RrrGmJONlvo
