The Thinker

Riding recession’s wave

As we headed for a recession? Are we in the midst of one now and just do not know it? Do I know? Heck, no. Even our best economists do not know. Most likely by the time it is declared official, some six months to a year after it begins, we will be out of it, or climbing our way out.

There is little doubt that recessions hurt. On a personal level, many people lose their jobs and that pain extends to all aspects of their lives. Those of us watching our financial portfolios get upset and nervous when we see the value of our assets decline. Many of us are already stretched to the limit and up to our eyeballs in credit card debt. Our house, if we have one, has provided us the equity we needed to confront life’s little financial emergencies. With declining home prices. for many of us our home equity is tapped out. Moreover, since the average credit card debt exceeds $3000 per credit card holder, taking on more credit card debt looks unwise, particularly at 18% annual percentage rates.

Then there is the problem lenders are having valuing their assets. With so many financial institutions holding bad debt in the form of dubious mortgage backed securities, they are unsure exactly what assets they have and how much they are worth. Without knowing what their assets are worth, it is harder to loan out money. Those of us with dubious credit histories are likely to find there are no lenders who will lend us money.

A recession should serve as a warning notice to those of us in debt. It is hard enough during flush times to live on borrowed money. During a recession, it can become impossible. There are stories locally like this one where otherwise normal people find that their fragile financial cards quickly tumble when the economy turns and end up homeless. Granted, even in flush times it is hard to build financial wealth if you carry a large amount of unsecured debt. Economic factors and job markets are always finicky meaning your hot profession may turn out in a few years to be worthless. During flush times, it is possible to get out of credit card debt and build reserves of cash. These assets may not get you through the next recession unscathed, but you are more likely to emerge less battered and bruised. Spending habits, like eating habits, can be devilishly hard to change. A recession though can give many of us the fortitude to make painful short-term choices for a long-term benefit.

Then there are others like me for whom a recession is in some ways good news. No job is guaranteed but I am fortunate to be a well-paid civil servant. Most likely, I will have a steady income throughout this recession. However, even if I were not in such a situation, many people in the private sector do fine during recessions. Their jobs are in relatively high demand, or they possess some important institutional knowledge that lessens their likelihood of unemployment.

You can usually tell which groups will be unduly affected by a recession. These are the same groups whose jobs are tenuous even in good times. Autoworkers, for example, tend to be among the first in the unemployment lines. The financial sector is taking a whack this time around, which is not surprising because of the debt crisis. Any industry that depends on discretionary spending is vulnerable. Those planning a career would be wise to keep these factors in mind.

I have good news for those who have always wanted to own a home, but could not afford one. Perhaps housing prices have not hit bottom yet, but if you have saved enough money for a traditional down payment and have a decent credit history, now is the time to buy. Not only are house prices down but mortgage rates are down as well. There are plenty of houses on the market to choose from now, so you are likely to find that dream house at an affordable price. You should be actively looking around.

Ironically, if you have ready cash, recessions are also a great time to buy most products or services. Businesses everywhere are anxious to cut deals because often they are just trying to stay in business. If you have the money for rather expensive things like getting the roof fixed or replacing the siding on your house, now is the time to get this work done at a discount. You will also help stimulate the economy by keeping people employed.

If you are invested in stocks, bonds and mutual funds, while you may be feeling nervous about the value of your assets, there is also a flip side. Many funds are a great bargain during a recession. Granted there are exceptions and I am certainly no stock analyst but you may find terrific buys out there. Presumably, you are in the market for the long haul. Profit is made by buying low and selling high. Consequently, this is the right time to buy.

It may not be fair but when some part of the economy suffers someone else profits. Recessions tend to happen because people, corporations and governments do foolish things. That certainly is true this time. Mortgage brokers created packages of bad mortgage debt. They sold them under false pretenses to investment firms that should have known better. In addition, our foolish federal government spent the last seven years spending like a drunken sailor on shore leave. Moreover, people in general ignored macro trends like global warming.

Very few of us will be the Donald Trumps of the world. Most of us though can distinguish between speculation, which usually throws away good money, and investments, which allows good money to grow prudently. Prudence and moderation are virtues, not just personally, but financially as well. People ride out and even prosper during recessions by exercising prudence in good and bad times. They do not live beyond their means. Saving money is their highest financial priority. They do not do foolish things with their lives or their money. Their lives may look boring. They may have a Subaru in their driveway instead of a BMW or Lexus. They may be sending their kids to public schools even though they can afford to send them to private schools. They may be buying clothes at Target instead of Nieman Marcus. They may live in a rambler rather than a McMansion. These are the sorts of people likely to live to see their golden years, and have plenty of money to enjoy those years.

If the pain of this economic downturn bites you, you do have my sympathy because I have been there a few times too. I was fortunate enough to learn my lesson early. While I am aware of the pain that recessions cause many people, I also know that recessions are a temporary phenomenon. Eventually conditions change, markets adapt to new realities and prosperity reemerges. While I cannot stop a recession, with some prudence and a little bit of luck I can not only ride recession’s wave, but also soar above the recovery’s crest when it happens.

So can you.

 

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