What’s A Recession?
Having survived the 1980 recession, none of the other recessions seemed quite as bad. I did not know what a recession was at the time, all I knew was that I had no job, my employment insurance was running out, I had a 26% car loan I couldn’t pay and some goons from the credit card company were looking for me.
Then the gurus of the financial world announced that there was a recession. Phew! I thought it was just me. Misery loves company you know. If you want the long drawn out explanation of what it is, you can find it here. I will summarize it for you. You notice the price of things going up. You notice activity is slowing down in your business or at work. You hear a lot of people complaining about it. Interest rates start going up rapidly. Just after you lose your job, the financial gurus will let you know there is a recession. The good thing is they will let you know how to rebalance your portfolio to fight this financial dragon.
In 1980, my portfolio consisted of a car that I owed money on, an onion, half a bag of mixed vegetables, a pack of gravy mix and hope that my employment insurance check would arrive soon. I rebalanced my onion, vegetables and gravy mix into soup. None of those gurus thought of that one.
My point is that the vast majority of people don’t have portfolios of assets. For years about half of average Canadians and Americans have been a paycheck away from bankruptcy. For people with lots of assets a recession is more of an inconvenience than a disaster. For the rest of us IT IS a disaster.
Look For The Signs
The best thing us financial mortals can do is to acknowledge that a recession is in progress while things still seem good. Typically there is a recession every 8 to 10 years. That’s not actually a bad thing. It allows for a rebalancing of the financial system. If left without government meddling they would be short and not too painful for most. It is government intervention to prevent this occasional rebalancing that pushes it down the road until it becomes a devastating event.
There are many signs, some more obvious than others. One that seems counterintuitive is the illusion that things have never been so good. Think about the 1920’s before the crash of 1929. They called it the “roaring twenties”. Everybody was invested in the high flying stock market and spending money like it was water. Sound familiar?
One of the more obvious signs is inflation. Inflation has been with us for a long time but when it turns to hyperinflation we have a problem. If you buy gas, groceries, cars or housing then you know we have double digit inflation. The response to this is for central banks to raise interest rates to curb spending. Done before hyperinflation kicks in. This seems to work pretty good but, the geniuses that run the show rarely act BEFORE it is too late so, now that it is too late they have to act more aggressively. The Financial Post comments on rapid rise of interest rates here.
Also from the Financial Post:
“The problem for retail investors is that central banks, including the United States Federal Reserve and Bank of Canada, got caught behind the eight ball, since they believed inflation was transitory and were too slow to adjust their monetary policies as a result. In hindsight, they should have begun tapering last year, so now they need to play catch-up in an environment where the yield curve has just inverted, signalling the potential for a recession.” Full article here.
Your debt is about to get more expensive. The idea is that if you have less available credit because it is more expensive then you will buy less stuff therefor lessening demand and lowering prices. You also spend more of your disposable income servicing your debt.
The result of raising rates aggressively is tightening of lending. The lenders want to be sure you are able to pay higher rates. When rates are going up and prices are going down there is a lot more risk to lenders than when rates are going down and prices are going up.
We live in a credit economy. If you can’t get credit, you don’t buy things. When you don’t buy things, makers and sellers of such things reduce capacity (jobs).
What To Do about It
I can’t tell anybody what to do because I am often wrong but if you have a portfolio, I guess now would be a good time to reposition it. If not, now would be a good time to think about what you could afford if you lost your job or your income reduced. Getting rid of as much variable rate debt as possible would be a good choice too. If you have a large mortgage and need to refinance then now would be a good time as there doesn’t seem to be anybody that expects rates to go down. Keep in mind that when interest rates rise property valuations tend to fall.
These are just my opinions and just thoughts to ponder for your own situation. If I had all the answers I would have a portfolio.