Recessions happen. Being prepared for the inevitable is the key.
The world markets are contracting. Manufacturing is down, retail sales are starting to flag, companies are laying off people in a "hot" job market (a condition that exists prior to most recessions). Is this the end of the world as we know it? Not exactly, but it will cause pain for a lot of people who were unprepared or who fail to trim their sails in advance of the coming storm.
According to the banks, credit card debt is at an all-time high. Economists claim this is because inflation is up and people, instead of cutting back on spending, are just buying as usual, and then putting the increased cost on a revolving credit card. You might as well shoot yourself in the head. This will not end well for those folks. Increasing credit card debt is the canary in the mine, and something that should be taken deadly seriously.
But before addressing that further, why are we having a recession, anyway? And how bad will it get? Well, in part, this is another "tech" recession and another housing collapse (although perhaps not as bad as 2008). Companies plowed money into esoteric technologies, convinced that "the next big thing!" was just around the corner. After all, they made lots of money off the last next big thing, so why not throw more money at that?
Problem is, you run out of next big things in a real hurry. Pie-in-the-sky ideas often don't pan out. Fraudsters move on, selling the next big thing! when in fact, it isn't even a thing - think: Theranos. Google is realizing that a lot of its ancillary businesses are not making money and likely never will - and are unrelated to their "core competencies". The Google self-driving car might someday be a thing, but not from Google. Similarly, Facebook is betting the farm on "Meta" (and still is) but it has yet to catch fire with anyone, and seems about as popular as Google Glass was. It could be the downfall of Facebook. Well, some of us hope, anyway.
Other companies never made money and it becomes clear they never will. Maybe Twitter could have cut costs and offered subscriptions and made a dollar. But now that it is saddled with massive debt, it will never dig itself out of its hole. From Richest man in the world to homeless - that has to be some sort of new record.
The list goes on and on - tech companies that were flush with cash, throwing it against the wall and seeing what stuck, until they ran out of cash. According to some trade papers, the "Venture Capitalists" saw the writing on the wall last year and started pulling back on spending in April of 2022. As money-losing "tech that is not tech" companies run out of spare cash, they will lay off people and eventually, one or more will go broke. Renting scooters may be a "thing" but not a "thing" that can support a half-dozen competing companies worldwide. Ditto for delivering food, illegal taxi services, renting out houses in suburban neighborhoods for raves and so on and so forth. Most of these companies never made a profit and never would. And "EBITA" is just a made-up number meaning nothing.
So, a correction was in order. Self-driving cars may be a thing, but it doesn't appear to be a thing in the near future in a way that will be profitable. Frankly, Tesla is going to be sued out of existence if Musk keeps claiming "full auto driving" or whatever, just using cameras and not Lidar as well. Other manufacturers seems to be pulling back from wild claims of automated highways in the next few years or even decade. The liability is just too huge, and all it takes is one kid on a crotch rocket to cut off an autonomous vehicle, to start a chain-reaction collision. Technology is great, but often it is overstated.
And this goes double - triple - for so-called "AI". A neat parlor trick, but it is unclear how it will be profitable in the near future. Sure, you can get an "AI" to fool the entrance exam for law school - or even pass the bar. But to represent a defendant in court? How would that work out? The practice of law is more than just filing pleadings, there are strategies to consider, investigations to be made. I think at best - like the self-driving car - it will be an assistant, not a substitute, for various professions.
But I digress.
The housing thing is a little harder to parse, but once again, as I have harped upon for well over a decade now, when it costs less to rent a house than to buy it, it clearly makes no sense to buy that house. A friend rents a house here on the island for $2000 a month. To buy the same house, pay the taxes, insurance, and various fees, as well as service a $500,000 mortgage (putting down a $200,000 down payment!) would run well over $3000 a month. Why would anyone buy that house?
Sure, when interest rates were 3%, it might have been affordable. Funny thing, but that house would have sold for $500,000 back in the days of 3% mortgages (two years ago). Now, rates are 6% or more and the price has nearly doubled. It makes no freaking sense at all, particularly for a house that the new owners will gut and spend $200,000 "fixing up" and living in one weekend a month.
There are a lot of people making weird financial choices these days. Like I said, maybe it was the pandemic which caused people to think about how finite life is. "YOLO!" they say, "might as well spend it all!" And spend they are - on $100,000 SUVs and pickup trucks, $20 delivery fees for $15 worth of food, and so on and so forth.
It was one helluva party, now comes the hangover.
So, getting back to topic, how do you survive a recession? Most of us will do just fine. When I was 21 years old, inflation was running at 10% or more, mortgage rates were as high as 14%, and unemployment was at 10%. I still had a job - as did nine out of ten people. We forget that even during periods of "high" unemployment, people still work, factories still make products, and the world keeps turning. Even during the depths of the great depression, when unemployment was at 30%, seven out of ten people were still working.
Sure, maybe it isn't as glamorous as before. 1958 was the height of ostentatious automobiles from Detroit, with chrome-laded befinned monsters being the only choice in most car dealer showrooms. By 1961, though, the "big three" were offering "compact" cars at compact prices, as people pulled back from spending. We will see this again, as companies tighten their belts and offer deals. McDonald's may even bring back the dollar menu - or a two-dollar menu, anyway.
The best way to survive a recession is to not be in overwhelming debt, particularly for silly things, like credit card debt. If you have increasing credit card debt and are paying $100 a month for cable television, something is wrong in your life (BTDT!). If you just got a new tattoo and can't pay off your credit card every month, something is wrong. If you complain about the price of food and are 50 pounds overweight, something is wrong. If you are eating out in restaurants several times a week (or getting takeout or delivery) and complaining about "living paycheck to paycheck" something is wrong.
And the something is YOU, not society or the banks or Wall street or the politicians.
The less debt you have, the less you have to service and the lower your monthly overhead will be. If you are leveraged so far in debt that each paycheck is spoken for, well, when that paycheck stops it all comes undone.
However, there is even hope there. We saw this in the last recession. People fought like mad to hang on to possessions - jet skis and bass boats, monster trucks, vacation homes. I went down that route - it was fun to have "things" in your 40's. But as you get older, they are just a burden. And in 2010 or so, many people were forced to let go of things - often in bankruptcy court. And a funny thing - many reported a sense of euphoria when they had their debts washed clean (or worked out, anyway) and the "things" in their life, even the "dream house" gone. Yea, maybe it sucks going from granite countertops in a mini-mansion with a three-car garage, to a two-bedroom apartment. But it is also liberating to be out from under the burden of debt - a burden you realistically never could afford, anyway (at least back then, with the "payment optional" hand-grenade mortgages offered).
I suspect the same will be true again. A small percentage of people who wanted to "have it all now" and didn't think about how to pay it all back, will end up in foreclosure and bankruptcy - and come out the other side just fine, but without all the baubles they once had. A few will be bitter and angry about it and claim it was all someone else's fault. But many more will learn from the experience and realize that being in debt is not a natural condition and that leveraging your personal life is never a stable or happy condition.
A friend of mine had her children come visit. They live in Fairfax County Virginia - as we once did for 20 years - one of the wealthiest counties in the country (with a very high level of education as well). Our friend remarked that their son had "changed" since moving there and seemed overly serious and status oriented and tense and even angry all the time. Mark and I just nodded. It is a great place to seek your fortune - but once you find it, leave.
No doubt their son is clenching his teeth because he is thinking of the mortgage he has to pay - and the second mortgage - as well as car payments and the cell phones and the cable tee-vee and the credit card debts. Sure they are making "good money" but the are spending even more. I can tell you firsthand how this works!
Mark went to a closing once for a client who worked for Fannie Mae. This was mere months before the housing collapse in 2008. They had $50,000 in credit card debt, thousands per month in car payments for two expensive German cars, and were taking out a "payment optional" mortgage. "We know what we are doing!" they said, "We work for Fannie Mae!" And right there you understand how the housing market melted down back then - the blind were leading the blind. Don't assume these "experts" running things have a handle on their personal finances - they often don't. They are just like you and me.
Sadly, these are the people we get normative cues from. They are in debt, so we go into debt. They leverage themselves, so we leverage ourselves. "Borrowing money - that's how it's done!" my boss once said when I bought a used Camry. To him, having me in debt meant I kept coming to work every day - not by choice, but due to obligations.
But there is another way. And those who are not leveraged into a debt corner will find themselves in a much better situation in the coming months. The folks who followed the "opportunity cost" arguments could find themselves quite broke.
It happened before - it will happen again. And the warning signs have been around for a year or more - but most choose to ignore them.
As for losing your job, well, you have to be brutally honest with yourself. The slackers and goof-offs are usually the first to go. The young people whining about student loan debt and pining for "guaranteed annual income" and a socialist takeover of America will be the first on the unemployment line. Loser talk creates losers. Like I said, I've never been unemployed during the previous recessions, only because I worked hard and wasn't overpaid. Maybe some wisenheimer made more money than me and goofed off on company time. In the long run, those sort of folks never end up doing well.
And even if you work hard, you have to understand whether your job is obsolete - or you are. Age 55 is the magic number for layoffs, with most people losing their jobs at that age never finding work in the same field again. You're just too damn expensive, in terms of salary and benefits. They can hire two younger people for less money, and eventually get more work out of them.
Unfair? Maybe. Reality? You bet. And tilting against windmills - fighting reality - is never a good plan. Go ahead, boo-hoo about it, rage against the injustice of it all, and then pick yourself up and move on, because the world isn't going to change overnight to accommodate you. At least, it never did for me. Maybe you are the special exception to the rule.
Eventually, the economic cycle picks up again. As the above chart shows, the bear market of 2007 lasted only until 2009. Granted, a lot of people were financially hurting for years afterward - foreclosures continued and houses were "underwater" for a decade. But it is never the end of the world. People still need places to live and food to eat. Jobs exist to serve the basic needs of mankind. Eventually, people stop being afraid and spend a little more.
And then the whole damn thing starts all over again.
