Recession is Here: How to Survive and Build Wealth?
We had seen it coming for months, US economy is unofficially in recession. Bureau of Economic Analysis today released the Advance Estimate GDP data for the 2nd quarter of 2022, and it's negative. That's 2 consecutive quarters or around 6 months of negative GDP growth, and that's the often-cited rule of thumb to be in a recession. But economists and strategists remain split on whether we're in an actual downturn or not, due to the ongoing strength in the labor market. But whether official or unofficial, these are more than just numbers on some financial charts.
There will be real-life implications that we can feel on the ground. Jobs will be lost, firms could go out of business, poverty can rise, and the value of our assets and investments could hit rock bottom. But recession could also be a great opportunity to build wealth. Only for someone who understands, learns, and prepares. So in this blog, I will explain how we got here, what it means for you as a consumer and investor, and how we can survive this together and maybe build our wealth. Finally, not a financial advisor, just a random dude on the internet; with that said, let's dig in.
For those who are new here, my name is Srijith, and, we talk about the recession because we have nothing good to talk about. The National Bureau of Economic Research defines a recession as a significant decline in economic activity that lasts more than a few months. But how can we measure economic activity? Three words, Gross Domestic Product or the GDP.
GDP is a metric to measure the financial health of a country. And is simply the total value of all the goods and services in the country. For those who are thinking, how is it even possible to measure that? Stop thinking. It's not important to know how it's calculated. Just understand that every time you get a coffee, buy groceries from the supermarket, or watch a movie, money is exchanged, value is transferred, and you contribute to the GDP.
The country's GDP increases when you have more money and spend more money. So a negative GDP means we are not spending as much as we did last year. When we don't spend, there will be less economic activity and, by definition, we read earlier, a recession. But why do people spend less? Of course, the main reason is they don't have enough money to spend. But it's not as simple as that.
Most of you might remember the last time we had a major recession. In 2008, the US housing market collapsed, taking the economy with it. This was due to an asset bubble, which occurs when the price of something goes beyond a sustainable level and then crashes like what happened with the property prices in this case. And when the bubble breaks, the value of the asset drops, people become less wealthy, and they cut back on spending.
And we know that when spending is reduced for extended periods, we get into a recession. But this was not unexpected. Many economists warned about the housing bubble, but we acted on it a bit too late. However other events occur without an invitation and can ultimately lead to a recession. Those are called the black swan events.
These are the events that we can't predict, like the COVID-19 Pandemic and Russia Ukraine crisis, that can bring a lot of uncertainty. And naturally, during uncertain times, people save more and spend less, and when that happens, you know what it leads to. But the third and the main reason why we are now in a recession is an overheated economy.
An overheated economy is when the economy grows too fast when there is more demand and less supply. This means there is more money out there in the market, but there are fewer goods available to buy. And how did we get here now? Two reasons. To avoid a financial crisis during the COVID-19 pandemic, central banks around the globe printed more cash, increasing the money factor in the equation. And we know most of the world's manufacturing occurs in China.
Due to supply chain issues, the pandemic, and the Russian-Ukraine crisis, companies could not get products from the factories to the markets as fast as they wanted. So this reduced the supply factor in the equation. That leads to the increased price of the products and ultimately to increased inflation, which is just the rate of increase in prices. A little inflation is not a BAD thing, and it keeps the economic activity going. But if left unchecked, it can make life miserable for the common man, finally go out of control, and lead to a situation called wage/price spiral.
I will explain this with an example. Suppose you are an employee in a company that makes bread, and your country is going through a period of high inflation. You go to the supermarket to buy bread and see these high prices. Not just for the bread but for groceries and everything price is so high. So what do you do? You return to your boss and ask him for a higher salary to afford the increased prices.
Hopefully, your boss pays you more money, and if he has to do the same for most employees, company costs go up. Then the company decides, we need to charge more for the bread to compensate for these increased costs. So the next day, when you get to the supermarket, you see the bread prices have gone up again. You again head back to your manager. Slowly it starts to create a spiral and, if kept unchecked, can lead to hyperinflation, and that's a place we don't want to go.
So to avoid getting there and to bring inflation under control, the Government or the Federal Reserve steps in. As we saw earlier, two factors cause inflation, demand, and supply. The Feds can't do anything to increase the supply. However, they can reduce the demand by removing the supply of money from the market.
The Fed has a tried-and-true method for this: raising the interest rates. When the interest rates are high, there will be less borrowing and less supply of money. When the home loan rates are high, you won't probably go to the bank to get one rt. But then, when there is less money available for people and businesses to borrow, they spend less, and we end up in a recession. And this rate hike was what the US Federal Reserve has been doing for the past few months. But there is a catch here. When the Fed tries to avoid a recession by increasing the interest rate, they have something called a soft landing in mind. Think of it like this. Consider the economy as an airplane; we are the passengers, and the Federal Reserve is the pilot. The pilot needs to maintain the right speed and angle for the landing. Otherwise, there will be a hard landing or, worst case, a crash.
Similarly, they try to balance the economy with just the minimum needed rate hikes to stop inflation without pushing it into recession. At least, that is what they think they are doing. But if we check the history, the fed’s track record is not so good, and a successful soft landing is extremely rare. Eight of the Fed's past nine tightening cycles have ended in a recession, and now we are almost on the ninth. All these factors are out of our control. But what we can do is control our behavior and actions, which determines how we survive this recession.
What can we do?
Cut down on all the unnecessary spending. If you are waiting anxiously to get your hands on that new iPhone next month, think again. Maybe skipping one year would be a good idea. If your family has two vehicles, consider reducing it to one and using more public transit. And use all that saved money to build an emergency fund to cover three to six months of living expenses. This will give you a safety net to fall back on so you can ride the wave and emerge from the recession back on your feet.
Start learning a high-value skill that can give you access to the many benefits of self-employment. If you have considered returning to school to get an advanced degree or improve your work skills, now may be the time to do it. And use that skill to do a second job or an online business that increases your financial security by creating additional income streams. You can check this to find the best side hustles you can do from the comfort of your own home.
As important as it is to find other sources of income, your primary focus should be to keep your current job. Get to work and finish your tasks on time, be more active, and be more visible to your employer. Make yourself so valuable to the company that they can’t let you go even if the situation demands that.
And if you have these three points in check and still have some additional money to spare, then get on to the shopping spree. A recession could be thought of almost like a Black Friday for investors. When people have less money, their priorities would be to buy food and pay rent and not invest in the stock market real estate, or crypto. So the value of these assets is most likely to fall. If you are financially sound, this is an opportunity to purchase these assets now on sale. And if you aren’t still convinced, a wise man once said, The market will always bounce back.
And finally, my strategy is just to continue investing, and a dollar cost average of a fixed amount monthly in my portfolio. Primarily to broad market index funds such as the S&P500 and a few individual stocks. And when it comes to crypto, I'm mainly focused on Bitcoin and Ethereum. I am not going to invest more or less; just go at the same pace.
You can watch this if you want to know more about assets in my stock market portfolio. I hope things will turn out good for you and your family and we can all survive these difficult times together. Thank you again for visiting my blog, and I hope you have a wonderful rest of the day.
Disclaimer: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. It is important to do your own analysis before making any investment.
