How can you survive a recession? Is there a recession survival guide or something that will help you come out on the other side of a recession better?
Recessions seem to be more frequent and in the past two decades we have had several notable recessions. One of them is the sub-prime mortgage crisis which is sometimes called the Great recession and the other is the termed the Covid-19 recession. It looks like Covid-19 is the gift that keeps giving eh?
In each of these recessions mentioned above or even the ones from earlier, there are people who came out of it better than when they went in and in some ways they were not impacted as much as others while some people were impacted economically and in other ways.
Although the causes of the recessions are different there are opportunities from the chaos they create and real lessons to learn. Let us explore a number of these.
What is a Recession
A recession is often described as two consecutive quarters of negative growth in an economy. The definition provided by the National Bureau of Economic Research (NBER) specifies a recession as a significant decline in economic activity across the economy that last more than a few months normally visible the real GDP, real income, industrial production, wholesale-retail sales and employment.
During or just after a recession there are often long lasting changes to the way an economy works. There is impact to business, employment, government policy, fiscal policy, price deflation, inflation and other aspects of the economy.
What causes Recessions
A recession can be caused by different things that have a long, deep and wide impact in the economy however that last few recessions we have witnessed had different causes. Let us look at a few recessions that have happened since the year 2000 and their causes.
The Dotcom Bubble 2000 – 2002
The dotcom bubble or the internet bubble or tech bubble as it is sometimes known, was a stock market bubble caused by speculation in internet companies in the late 1990’s leading up to 2000. A lot of money was put into early internet companies and in many cases, these companies had no records of profits or earnings.
Venture capital firms were pilling money into this sector by investing in companies with the aim of making a profit and many starts ups were eager to grow quickly. Some of these companies did not have growing revenues, growing market share yet their market cap was increasing.
Some of these companies did not have finished products however when they were listed on the stock market, where many saw their stock prices double, triple and even quadruple on the first day of trading.
These companies listed on the U.S Technology stock exchange (NASDAQ) saw investors of different calibres buying their stocks driving up the valuation to astronomical levels.
The dotcom bubble was caused by an over valuation of dotcom companies, too much money from venture capital firms in these companies and the role played by the media in encouraging ‘mom’ and ‘pop’ investors to buy stocks in these companies.
Global Financial Crisis 2007 – 2008
Leading up to 2007 the US housing market was doing very well for people who had invested. Property prices were going up, interest rates were low and life as it seems was good.
Banks, Hedge Funds and other big market players were looking for ways to make even more money so they turned to mortgage backed securities. Insurance companies covered these mortgage backed securities with credit default swaps which simply meant the buyer got paid out in the event of a default on the payment.
A mortgage backed security is an investment that is or financial instrument that is secured by a number of mortgages so for example think of it as a box containing different mortgages. This box is now traded on the secondary market and that allows investors to benefit from the mortgage business without the ‘hassle’ of owning the houses on which this mortgage is based.
Seeing how property prices were going up leading up to this time, mortgages were given to almost anyone and in many cases to people who could not keep up with the payment.
As someone put it, if you could fog a mirror, you could get a mortgage. In some cases people with temporary jobs, or people who had to work three part time jobs were given mortgages that were multiple times their monthly income. This is where the word sub-prime comes in.
These sub-prime mortgages were now placed in this ‘box’ – a financial instrument was created from this and now sold on secondary markets so investors could invest in them or at least sell to the next party and keep their profit.
Not all mortgage backed securities were the same because some securities were backed by mortgages where there was low risk of default because that ‘box’ consisted of mortgages where the home owners had jobs with good prospects, they were not over stretched financially and were keeping up on their payments.
However there were some ‘boxes’ that consisted mainly of mortgages that were sub-prime and these were being sold on the market. The fed raised interest rates and with that, the interest on the interest only mortgages increased and this meant the mortgage payments also increased.
In situations where the homeowner was barely able to pay the mortgage, the increase in payments due to the raised interest rates made it impossible for them to keep up with the payments.
Any mortgage backed security that contained these sub-prime mortgages were now worth a lot less considering how widely they were sold on the market, their toxicity had spread far and wide and any investors investing in them would have made a loss. American International Group (AIG) was unable to cover the large number of Credit Default Swaps as a result of the missed payment Uncle Sam had to step in.
Covid-19 Recession
According to official reports in late December 2019 new case of pneumonia was reported in Wuhan China. While the cause was not clear and the impact was not fully understood Covid-19 has caused seismic changes across a lot of industries, plunged millions of people in the world into poverty, companies have failed and despite government efforts to provide support to these businesses, many of them cannot guarantee their staff will be back from furlough because of the lockdowns.
So how did Covid-19 trigger an economic recession? Many governments around the world issued lockdowns and restrictions on movement until the spread of the virus was under control. Flights were cancelled and planes were grounded, construction work on many sites was halted, gyms, bars and restaurants were forced to close and only essential travel or activity was permitted.
Many people working in these sectors saw their incomes eliminated over a period of time. In the UK alone there is a third lockdown so as these companies tried to get back to business, they were forced to close down.
It is not difficult to see how the impact of covid-19 has led to significant reduction in economic activity across many countries and those people whose livelihoods are connected to the impacted sectors are seeing a reduction if not decimation of their incomes.
New car sales have plummeted, home sales were down significantly when compared to the same quarter in 2019 and attempts by the finance minister to boost homes sales by removing stamp duty on properties that cost up to £500,000 has not been successful due to new lockdowns and subsequent waves of the virus.
It is a bit premature to determine the long term effects of covid-19 on the global economy and different countries depending on how developed their economies are, and what their economic model is, will be impacted in different ways. That being said there a number of trends that have emerged as a result of the lockdown and some of those changes will be with us for some time to come.
The push to have a vaccine rolled out is promising in many ways and as many people get vaccinated, the hospitals should feel lesser of the burden introduced by Covid-19 cases and businesses can slowly rebuild especially in sectors that were heavily impacted.
Now let us examine the steps you should take to survive this recession and any future recessions.
Invest in Yourself
It is a long but rewarding process and it does not need to be difficult. One of the main lessons that can be learnt from the recessions mentioned above and any others is that new businesses emerge and new ways of doing business is born and being adapt to these changes will place you in a better position to survive a recession.
Learning from the dot-com bubble, being able to carry out due diligence on those companies would have served you well. Additionally, investing in the successful companies that came out of the tech bubble would have generated great returns on your investment.
Investing in what you know will help you realise opportunities other miss, keep you from making mistakes when everyone is exuberant and making the most afterwards.
With Covid-19, many things have moved online at a faster rate than expected. Zoom has become ubiquitous in our work and family life. People are spending more time indoors and keeping themselves entertained, in shape and sane so companies like Netflix, Peloton to name a few have presented opportunities for investing.
Producing content has also increased during this time and across many social media platforms from Only Fans to YouTube and Tiktok there is abundance of opportunities to create content and material to entertain and educate.
There are programs made available by governments that allow people to learn from courses and improve themselves. To the discerning, those courses are an indication of where the future is so as a consumer, learn those skills and as an investor, invest in those companies.
The team Career Masterclass are very good in helping you get to that next level in your career by, mentoring, highlighting skills and supporting you in that journey. You can find out more about them here.
There are number of skills you can improve for free on this link that you can start looking at.
Save Money
The future is unpredictable and for people who have currently lost their jobs due to Covid-19 and have no help from the government, their savings can be a life line even if for a few months until the situation improves or they find a way to complement their earnings.
It is important to save even before a recession and much money should you save? The number varies depending on where you look however it is good to save enough to pay your bills for at least six months.
Recessions present opportunities and if you are prepared you can take advantage of the opportunities. A quote by Warren Buffett says “Be fearful when others are greedy and greedy when others are fearful”. One way you can make the most of the opportunities that are available during a recession, is by using the money you have saved.
After the dotcom bubble, a number of companies survived and are now thriving. Apple, Microsoft and Amazon to name a few saw their stock prices grow significantly from the early 2000’s until now.
As the economic fallout from the Global Financial Crisis came to an end there were opportunities in the real estate market as repossessed properties could be purchased at discounted prices and presented opportunities came to invest in real estate in one way or the other. House prices have gained significantly in major cities across the world and early investors in that cycle are reaping good harvests.
Avoid much Debt
How much debt is too much debt and which type of debt are we referring to here? It varies. If you are in a situation where you having to pay a significant portion of your earnings on debt from cars, mortgages, or any large expense, you may be approaching the ‘too’ much debt zone.
Debt hinders your ability to keep more of your hard earned money in your pocket and that cannot be much of a good thing especially when you are looking to save money or take advantage of opportunities.
During the lockdown caused by Covid-19, many banks in the UK changed their criteria for first time buyers as many of them needed a larger deposit. Not saving enough money due to too much debt will deny anyone of good opportunities.
It is important to live within your means whilst improving your means so you can do more with what you earn. Take time to review your current expenses and cut unnecessary spending so you can also keep more of your money.
Create Multiple Income Streams
Having multiple streams of income will allow to still earn an income in a situation where one stream of income is impacted. If you are a piano teacher for example, you can put a course together in addition to teaching in person so in a situation where a lockdown in place, you can still earn an income from your courses.
There are many platforms that allow you to create a course and sell and if you choose not to go down that route, you can create an audience on social media and teach people who are looking to learn or just interested in your music.
This is one simple example and there are many others. If you work as a personal trainer or if you have a gym, you can have classes online. The fact that we cannot leave our homes due to a lockdown does not mean we want to be couch potatoes and exercise helps with your mental state.
We are now buying more things online due to covid-19 and Amazon among other e-commerce platforms have seen a significant increase in sale volumes. It presents an opportunity to sell on Amazon. From teaching, content creating, e-commerce, or just being a fitness buff, having multiple steams of income will improve your chances of surviving a recession.
Diversify your Investments
Diversifying your investments will help you come out of a recession better. Looking back at the recession caused by the tech bubble, if you had all of your portfolio in the stock market, you would have suffered huge losses. There were other aspects of the economy that were not taken over by the hysteria leading up to the tech bubble and those areas were good places to invest in.
During the Global Financial Crisis a large number of sectors were impacted. The crisis started in the housing market and spread to other aspect of the economy such as the stock market, the credit crunch made things even more difficult.
In light of this, there were other aspects of the economy that were not heavily impacted by the financial crisis and returns of any investment investments from those may have been subdued but not wiped out.
Final Note
It is not an easy task to predict a recession and considering how frequently they occur, it makes sense to be prepared for the next one. There are opportunities during and after a recession so savings are important. You have some saving should anything unexpected happen. It also allows you to be prepared financially for any opportunities that come up.
Developing a new skill or growing an audience while you share this hobby is another way to create different streams of income that will help when in terms of preparing for a recession.
