Recession is Coming; How to Make Most Of It

Even if the government passes its $700 billion rescue plan, as it's likely to do, that won't be enough to prevent a pretty deep recession.

On Friday, I predict the House will pass the $700 billion TARP, or as it's more commonly know, the bank bailout plan.  But even if that happens, it's becoming increasingly clear that the economy is in for a rough time.  $700 billion is a lot of money, but it's a drop in the bucket compared to the money lost in the decline of housing values and the ripple effect on construction, home furnishings, etc.  But perhaps more damaging is a new notion among consumers that debt and spending might actually be bad things.  As consumers get scared and reign in their use of credit cards, etc., a large portion of the consumer market will decelerate.  Rising unemployment will only fuel the decrease in consumer spending.  Put in a good measure of inflation, and you have the makings of a really nasty environment.  Incomes drop, people lose their jobs and homes, and yet prices keep rising.  Here are some stats to think about:

  • Economists predict that 100,000 jobs were lost in September.  That's the ninth consecutive month of job losses.  We've been losing jobs even before the credit crunch became the credit crisis.  Total job losses are around 600,000 and analysts expect the unemployment rate to go up to 8-9%, the highest rate since the recession in the early 1980s.
  • Inflation is up.  The cost of food and oil is up significantly from last year.  Oil, which closed at 94 dollars today is still up significantly from the 70 range it traded in last year (see chart below).  According to the American Farm Bureau Federation a basket of 16 basic food items has risen 10.5% in the last year.
  • Housing prices continue to plummet.  The S & P / Case-Shiller home price index showed a drop of .5% in June and .9% in July.  That's right, the drop was accelerating before the credit crisis even hit full force.  Now that a mortgage is that much harder to get and everyone is feeling insecure, the price decline will accelerate even further.

So, what's the point of all this doom and gloom?  Several things to keep in mind as you think about what to do with your money:

  • From a savers standpoint, look for the Fed to reduce interest rates, cutting savings, cd, and money market yields.  The probability of a Fed rate cut has increased dramatically over the last two weeks.  If you see a good cd rate, you might want to lock in.
  • Housing and equities are divebombing.  Remember our central mantra - buy low, sell high.  Real estate and the stock market is deflating and this will present enormous opportunities for those individuals who are fiscally prudent.  If you have cash in the wait, you will be handsomely rewarded if you invest.  But we may not be at bottom yet, we may not even be near bottom and when we do bottom it may be a long time before we see a recover.  You'll need to be patient.
  • The US will need to borrow significant amounts of money and also print significant amounts of money.  Look for the dollar to drop.  You can play a falling dollar buy purchasing foreign stocks, foreign currency, or foreign currency cds.  Just be sure not to buy into countries or currencies that are doing as bad as the US - i.e the UK.

This is not the end of the world.  Capitalism is resilient and smart investors will realize that this is a once-in-a-lifetime buying opportunity. 

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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  • thedorightman

    October 03, 2008

    Why does it feel like we are caught between the Twilight Zone and Howdy Doody Time?

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