What the Coming Recession May Bring and What We Can Do About It - Conclusion
It's time to conclude our series about what the coming recession may bring and what we can do about it. We'll stick with some of the thoughts and suggestions contained in Aftermath, by Jim Rickards. Just remember, please, that we're not endorsing or even necessarily agreeing 100% with this author's insights and claims. We can, however, recommend the book as a way to engage your mind with the issues in a constructive manner. If nothing else, you won't find the mostly superficial views expressed in the main stream and financial media.
While we may not buy everything Rickard's offers, his explanation of why he believes we're on the edge of a potential bad recession makes perfect sense. It focuses on the actions the Federal Reserve took in response to the devastation of the Great Recession: the purchase of long-term treasury securities in order to provide liquidity (cash) specifically to the big banks and generally financial markets.
Having already dropped the Fed Funds rate to zero - the usual response to a recession - the Fed embarked on a program of buying long-term treasuries and other government securities. By purchasing these long-term securities, yields on treasuries and other bonds dropped. The theory was that this would make them less attractive to purchase. Why buy a bonds with minuscule yields? With that, money would flow into stocks and real estate. Some of that did happen. Those higher asset values could collateralize more borrowing. More borrowing leads to more spending. This would push inflation up to 2% and GDP up to 3%.
But that didn't happen. Instead, the liquidity injected into the financial markets created bubbles in stocks, bonds, high-end real estate, emerging markets, and Chinese credit.
Then, in the face of a flaccid economy and weak inflation, the Fed began to raise rates and ceased buying bonds - a reversal of their initial program. Why? Rickard's explanation is worth reading and thinking about. Briefly, he posits that the Fed acted because it believes the following: 1) the validity of the so-called Phillips Curve (which Rickards pooh-poohs); 2) the purported solid growth of the U.S. economy (which Rickards questions); 3) the belief that raising rates and lowering the Fed's balance sheet (those bonds it was holding) was necessary to allow for a more forceful response by the Fed as the inevitable next recession approached. (Dropping rates and buying securities - as the Fed did after the Great Recession - are considered effective means of ameliorating the effects of a recession.)
But things started to go awry when the Fed raised rates and ceased purchasing bonds. The recent liquidity crunch we referenced in previous posts raised a yellow, if not a red flag, that all was not well with banks and financial markets.
Having set up the conditions for the next recession, Rickards both warns of the possibility of something possibly worse that the Great Recession, and offers suggestions on what to do to minimize the inevitable threat that the vulnerable financial markets present to our personal finances.
You might first try to somehow minimize the risk to your financial assets. There are a number of ways to do this, ranging from selling your securities before they decline in value to shifting your portfolio allocation of stocks and bonds to less vulnerable sectors. These can be effective, but require more than a cursory knowledge of investment allocation and timing.
You could increase your exposure to tangible or "real" assets. Rickards suggests certain types of real estate, including land, farmland, a rental or commercial property, a business that would hold its own in a recession. If you don't have these, it's unlikely you'll rush out and obtain any of these now. If you think you will, be careful. Purchasing these sorts of assets, or starting up a new business requires special knowledge and skills. If you have either, great; if not, don't make decision you'll regret.
Then there's the tangible asset we already discussed: gold. It's a lot easier to obtain than other tangible assets and doesn't carry any liability as those others do. Real estate entails taxes, typically mortgage payments, insurance, etc. A business requires start-up capital. Gold you just buy and keep in a safe place. Rickards also recommends some silver as well, for reasons he explains in detail.
Of all these, the simplest and most accessible approach would be to begin by reducing your expenses - right away. In addition, identify additional expenses that could be eliminated if things get tight in a recession. If you don't have adequate savings, try to stockpile what you can. Look too at those items you can purchase in anticipation of a disaster. (We discussed some of these in previous posts in this series.) At that point, decide whether you're comfortable with buying and storing gold and/or silver. (Where to store these is a whole separate discussion.)
Finally, raise your awareness. By that I mean don't ignore the seriousness of any recession, never mind one that turns out to be on the severe side. Busy as we may be at work, we can't use that as an excuse to effectively stick our heads in the sand. That won't fly when the going gets tough. And some day, in some lesser or greater degree, it will.
And, of course, keep God and your Catholic faith front and center. There's only so much each of us can do, as good stewards of the blessings God has sent us, to prepare ourselves for a recession. As with all things in our lives, in the end, we rely on Him. And if things get tougher than any of us can anticipate or imagine, we have to trust in His mercy and love.
While we may not buy everything Rickard's offers, his explanation of why he believes we're on the edge of a potential bad recession makes perfect sense. It focuses on the actions the Federal Reserve took in response to the devastation of the Great Recession: the purchase of long-term treasury securities in order to provide liquidity (cash) specifically to the big banks and generally financial markets.
Having already dropped the Fed Funds rate to zero - the usual response to a recession - the Fed embarked on a program of buying long-term treasuries and other government securities. By purchasing these long-term securities, yields on treasuries and other bonds dropped. The theory was that this would make them less attractive to purchase. Why buy a bonds with minuscule yields? With that, money would flow into stocks and real estate. Some of that did happen. Those higher asset values could collateralize more borrowing. More borrowing leads to more spending. This would push inflation up to 2% and GDP up to 3%.
But that didn't happen. Instead, the liquidity injected into the financial markets created bubbles in stocks, bonds, high-end real estate, emerging markets, and Chinese credit.
Then, in the face of a flaccid economy and weak inflation, the Fed began to raise rates and ceased buying bonds - a reversal of their initial program. Why? Rickard's explanation is worth reading and thinking about. Briefly, he posits that the Fed acted because it believes the following: 1) the validity of the so-called Phillips Curve (which Rickards pooh-poohs); 2) the purported solid growth of the U.S. economy (which Rickards questions); 3) the belief that raising rates and lowering the Fed's balance sheet (those bonds it was holding) was necessary to allow for a more forceful response by the Fed as the inevitable next recession approached. (Dropping rates and buying securities - as the Fed did after the Great Recession - are considered effective means of ameliorating the effects of a recession.)
But things started to go awry when the Fed raised rates and ceased purchasing bonds. The recent liquidity crunch we referenced in previous posts raised a yellow, if not a red flag, that all was not well with banks and financial markets.
Having set up the conditions for the next recession, Rickards both warns of the possibility of something possibly worse that the Great Recession, and offers suggestions on what to do to minimize the inevitable threat that the vulnerable financial markets present to our personal finances.
You might first try to somehow minimize the risk to your financial assets. There are a number of ways to do this, ranging from selling your securities before they decline in value to shifting your portfolio allocation of stocks and bonds to less vulnerable sectors. These can be effective, but require more than a cursory knowledge of investment allocation and timing.
You could increase your exposure to tangible or "real" assets. Rickards suggests certain types of real estate, including land, farmland, a rental or commercial property, a business that would hold its own in a recession. If you don't have these, it's unlikely you'll rush out and obtain any of these now. If you think you will, be careful. Purchasing these sorts of assets, or starting up a new business requires special knowledge and skills. If you have either, great; if not, don't make decision you'll regret.
Then there's the tangible asset we already discussed: gold. It's a lot easier to obtain than other tangible assets and doesn't carry any liability as those others do. Real estate entails taxes, typically mortgage payments, insurance, etc. A business requires start-up capital. Gold you just buy and keep in a safe place. Rickards also recommends some silver as well, for reasons he explains in detail.
Of all these, the simplest and most accessible approach would be to begin by reducing your expenses - right away. In addition, identify additional expenses that could be eliminated if things get tight in a recession. If you don't have adequate savings, try to stockpile what you can. Look too at those items you can purchase in anticipation of a disaster. (We discussed some of these in previous posts in this series.) At that point, decide whether you're comfortable with buying and storing gold and/or silver. (Where to store these is a whole separate discussion.)
Finally, raise your awareness. By that I mean don't ignore the seriousness of any recession, never mind one that turns out to be on the severe side. Busy as we may be at work, we can't use that as an excuse to effectively stick our heads in the sand. That won't fly when the going gets tough. And some day, in some lesser or greater degree, it will.
And, of course, keep God and your Catholic faith front and center. There's only so much each of us can do, as good stewards of the blessings God has sent us, to prepare ourselves for a recession. As with all things in our lives, in the end, we rely on Him. And if things get tougher than any of us can anticipate or imagine, we have to trust in His mercy and love.
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