For some people, the ghosts of the 2008 recession are still haunting them. The most severe economic and financial meltdown since the Great Depression, it was even termed as the Great Recession by the media. What started with the subprime mortgage crisis in the US markets had widespread global ramifications that shuttered businesses overnight and left thousands jobless. Regulatory agencies have significantly upped their game since then. By imposing stricter regulations and close oversight, they started the herculean task of overhauling the banking system.
But just how successful have they been? There are always some bad apples. And the banking sector seems to have a lot of them. For every new regulation that authorities created, rest assured that the bankers have come up with an ingenious loophole.
If you’ve been keeping up with your reading of leading financial columns, you would’ve noticed a strong pattern, somewhat reminiscent of 2008, emerging. And people are increasingly asking the question, “Is There an Impending Global Recession on the Horizon?”
Well, not in those words per se, but you get the message. There is a collective fear in the air and it has been there for a long time.
But are we simply making a mountain out of a molehill?
We asked some experts if we are indeed entering another recession cycle, why they think that and what can people do to protect themselves from it?
Here’s what they had to say.
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I believe that we will see a recession in 2020 or 2021 if we are not in one already.
Scott Pederson, Financial Advisor at Harmony Wealth Management LLC
I believe that we will see a recession or are in a recession for the following reasons:
A. The U.S. Treasury Yield Curve inverted for the 1st time since 2007 on 3/22/2019. Over the last 50 years, the median span between inversion and recession starts: 12 months (range of 5 to 16 months)
B. New York Fed Recession Indicator: New York Fed Recession Indicator shows the probability of a recession in the next one year at 34.80% as of 10/3/2019. A reading above 30% has preceded all recent recessions (the measure has breached the 30% threshold before every recession since 1960).
C. End of Rate Hiking Cycles: Recessions have generally come after the Fed has finished hiking rates in a cycle—not while they’re in the process of raising rates. Fed last raised rates in December of 2018 and the Fed cut rates at the end of July and September and there is currently a 93.5% probability of them cutting rates in September based on CME Fed Funds Futures. Obviously, we are at the end of a rate hiking cycle in December of last year.
D. The trade war with China: the longer it goes the more it hurts our economy. Our economy is 70% consumption-based and tariffs are a tax on consumption. Either the companies need to eat the cost of the tariff which eventually cuts their profit margin or consumers eat the additional cost of the tariffs which leads to fewer dollars for future consumption.
He advises people to…
A. Find a financial advisor that has experience managing investment portfolios through a recession. The last recession ended in June of 2009 according to The National Bureau of Economic Research, better known as (NBER). So, any Financial Advisor who started in the last 10 years has not been through a recession with clients. With that experienced Financial Advisor, start by reviewing your financial plan to make sure that the plan is appropriate to meet your long term goals and needs with the least amount of risk. If you don’t have a financial plan, work with an advisor to help develop that plan. That advisor should be able to take the information from the plan to help build an appropriate asset allocation, that is well-diversified, that can control the controllables to help make you successful
B. Make sure that you have enough put aside in cash or cash equivalents to handle your day to day expenses so you don’t have to sell out of your portfolio at the wrong time when markets are down. With the average time frame of the last 11 recessions being 11.1 months and the great recession lasting 18 months, having somewhere between a year to two years of cash available would make sense based on your personal preference to ride out a recession if one occurred.
C. Work to keep your emotions out of play. Nobody is more emotional about their own money than you are. The number one reason why individual investors fail or have a hard time meeting their long term financial goals and needs is because their emotions make them do the wrong thing at the wrong time. Working with an advisor that can look at things objectively can help to make sure that you don’t make those emotional mistakes that can affect the long term viability of your plan being successful.
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Mortgages aren’t being given left and right, and subprime mortgages aren’t an issue this time around.
Matthew Yu, Vice President of Socotra Capital says,
“The current state of the US economy is definitely a hot topic.
“As a private lending firm, we were definitely not expecting the market to have this much run-up. Every year we say, “Next year is the year.” We’ve done this for 4 years now! Nonetheless, the real estate market continues to rise and jobs continue to grow. Wages are finally increasing and rates are still low. The caveat is that this growth is slowing down.
“While homes in 2014 and 2015 saw a massive boom in values, they are now barely up 3% to 8% this year versus last year. Many high-end real estate markets, known collectively as the “trade up” market, are seeing longer listing times and even price drops. Because of the great job market, however, we are still seeing strong purchase activity in the low end of the market and with first time home buyers.
“With the Fed decreasing rates, home purchase momentum is moving along. The market and consumer reaction to the lowering of rates was a bit unexpected. Instead of increasing spending, we’ve seen that consumers are now more cautious. Decreasing rates signal a slowdown in the economy, which spooks consumers who fear that a recession is on its way.
“Tensions are high right now. The solace is that we aren’t in the same position as we were during the previous downturn. Mortgages aren’t being given left and right, and subprime mortgages aren’t an issue this time around. This means if there’s a recession, it likely won’t hit the real estate market as much. Then again, as this unfolds it may turn out to be a completely new scenario we didn’t anticipate, but which will seem obvious and inevitable in hindsight. “
There is an elevated, perhaps 40% chance that we will enter a worldwide
recession in the coming two years, but not immediately.
Dan Gallagher, Personal Finance Expert at ScoreSense estimates that there is “…perhaps 40% chance that we will enter a worldwide recession in the coming two years, but not immediately.”
“The delay is because the U.S. economy continues to create demand for foreign goods,
helping to buoy other economies, and credit remains historically very
available without an actual likelihood of disrupting factors like war or
shortages. However, the reason for the reversal is this:
“Worldwide, the birth rate fell some fifty years ago and that trend continued for five years. It was more significant than most people assume. Harry S. Dent created a model to monitor this many years ago because demand and availability of the demographic of mid-career workers/consumers proved to be the bulk of then-termed “Gross Domestic Product” for advanced economies. We are now on the cusp of a significant decline in the
population (not just slower growth rate) of mid-career workers. These workers spend the most, draw very little in public benefits, save and invest in stocks the most and are at near-peak productivity for their employers. In addition, the aged are increasing in number far beyond the past century’s historical average and these take from savings (reducing
capital stock additions), draw heavily from public benefits (that are based in most countries on current worker taxes rather than some government savings account), and sell off stocks (reducing capital formation).
In essence, the demographic that is the “engine of the economy” is retracting at the same time that the “costliest-to economies” demographic is increasing.
“Because technology and education are increasing productivity at an increasing rate (see U.S. Bureau of Labor Statistics), this recession should be partially mitigated. However, the wise investor will a.) reduce aggressiveness in portfolios until the bottom is reached (about 2022) and b) transfer risk by adding to portfolios the only three assets that can
guarantee against market risk while paying interest that is higher-than-market when stocks rise: “structured CDs” “SERPs” and “Equity Indexed Annuities” that transfer market risk while capturing part of any market gains that occur in the event that this recession fails to materialize.”
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The US economy is currently strong and doesn’t appear likely to slow down within the next couple of years.
However, Simon Nowak, CEO of 3 Credit Scores explains,
No, we are not currently in a recession. However, historically we know a
strong economy will slow down at some point. The US economy is currently
strong and doesn’t appear likely to slow down within the next couple of
years.
The primary force of the current economy is consumer spending which is
robust. It continues to drive positive activity. For a recession to occur,
many interrelated factors such as consumer spending, corporate profits,
housing sales, and employment would have to take a turn for the worse.
Those appear strong now and recessions don’t occur suddenly.
It’s impossible to make all your investments completely recession-proof.
Historically, equity investments lose value during a recession. One
approach is to limit such holdings while increasing the percentage of bonds
that have guaranteed returns and can actually increase in value during a
recession.
Image by Gerd Altmann from Pixabay
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