In this brand new guide, we’ll walk you through:
- What We've Learned from Past Economic Recession
- What to Expect Economically from COVID-19
- How COVID is impacting various Asset Classes
- How to Invest Today (based on your goals)
- What You NEED to do in this Economic Climate
Here's what's included..
Chapter 1
Major Recessions in the 1900s & 2000s
Chapter 2
2020 (The world pre-COVID)
Chapter 3
Likely Impacts of This Recession
Chapter 4
How COVID-19 will Impact various Asset Classes
Chapter 5
What You Should Do Now
Chapter 6
How to Invest based on your goals
Major Recessions in the 1900s & 2000s
Economic growth increases and decreases as our social environment changes.
It’s a natural thing, like the ebb and flow of the tide in response to the moon.
When the value of the Gross Domestic Product (GDP) for trade and industry declines for two successive quarters, then we call that a recession!
The chart below looks at GDP in the United States since 1871. You can compare a countries overall standard of living by looking at this chart.
Let’s kick this guide off with the 1900’s.
Great Depression (1929 - 1933)
The Great American Depression of 1929 was a purely economic crisis that endured through the 1930’s after the stock market collapsed.
The wealthy made wholesome profits, but increasing numbers of Americans spent more than they earned.
The lingering aftermath of World War I (1914-1918) caused economic problems around the world, as Europe struggled to pay war debts and reparations.
Droughts compounded the situation; food was scarce, jobs dried up, and people waited in long queues for government handouts.
One estimate suggests 34 million Americans had no income at all.
The chart below looks at the unemployment rate from 1926-47.
For perspective, as of April 2nd, most analysts suspect the U.S unemployment rate is creeping over 13%
Back then, food handouts were basic foods like cereals and legumes.
Radio broadcasts explained how to cook them. Ethnic diets that distinguished communities vanished.
The crisis taught Americans about nutrition and how to obtain maximum value from small portions.
The shadow remains. Most of us follow a similar diet where vitamins and minerals play a major role in purchasing decisions.
It’s worth mentioning here that throughout the roaring ’20s, the media, and our leaders per se indicated that everything was stable.
But if however, our leaders thought otherwise, the stage could not be set for the unexpected.
Panics happen because the leaders themselves have lost direction. And panics on Wall Street are notoriously periodic.
Recession of 1937 (1937-38)
Fast-forward to the mid 1930s and America’s unemployment rate rose sharply to 20 percent near the Spring of 1937.
The 1937 Recession is only considered a blip when compared to the Great Depression but is also recognized as America’s third-worst downturn of the 20th century
The American economy took a steep nosedive that particular Spring.
It lasted for 13 months through most of 1938.
Industrial production declined almost 30 percent, and the production of durable goods fell even faster.
This recession is often attributed to a tightening of fiscal and monetary policy.
To summarize this bizarre time in history:
Roosevelt’s administration became concerned about large budget deficits and soon began reducing the growth in government spending and increasing taxes.
The Fed and Treasury became concerned about the inflationary potential of excess reserves in the banking system.
They were also concerned about large gold inflows and therefore decided to double reserve requirements and sterilize gold inflows.
Source: https://www.nber.org/papers/w17595
The recession ended when the above policies were overthrown in December 1936, and the Roosevelt administration began pursuing expansionary fiscal policies.
The recovery from 1938 to 1942 was seen as spectacular.
Output grew by 49 percent, fueled by gold inflows from Europe and a major defense buildup.
https://www.federalreservehistory.org/essays/recession_of_1937_38 (Source)
1945 Recession
The 1945 recession resulted from winding down the war. GDP fell by 11.6 percent.
As WWII dissipated, there was a slow transition between ending war-related manufacturing and ramping up the civilian job market.
Unions were pushing for higher wages while credit was hard to come by.
We can summarize 1945 as a transitional period from a war-time economy to a peacetime economy.
Recession of 1949
This minor economic downturn lasted for 11 months until October of 1949.
Unemployment was roughly 7.9%. GDP was reduced by -1.5%, and Department store sales fell 22%.
The wholesale price and cost of living indexes fell 12 and 5 points.
By February 1951, CPI inflation had reached an annualized rate of 21 percent.
Stagflation (1973 - 1975)
Stagflation got its name during the recession of 1973 - 1975. There were five quarters when GDP was negative.
Inflation tripled in 1973, rising from 3.4% to 9.6%.
The graph below highlights stagflation just after 73' when oil prices shot up to well over $12 a barrel.
GDP remained between 10% and 12% from February 1974 through April 1975.
So what caused this recession?
Most experts blame the 1973 oil embargo. That's when the price of oil rose nearly 400%, from USD $3 per barrel to nearly $12 globally while US prices went significantly higher.
This event triggered inflation in oil. Although, that alone wasn't enough to cause stagflation.
Instead, it was a combination of fiscal and monetary policy that created it.
Eventually...The Fed adjusted its mandate.
They believed that the inflation-unemployment tradeoff was much higher than previously thought and established a 6% target as full employment.
Thus, unemployment, which had reached a peak of 9% in May 1975, did not dip below 6% until June 1978.
Let’s now jump to 1981.
The 1981 Recession
The Iranian Revolution sharply increased the price of oil around the world in 1979, thus causing the 1979 energy crisis.
You can see this sharp increase in the price of oil by looking at the graph above.
This was caused by the new regime in power in Iran, which exported oil at inconsistent intervals and at a lower volume, forcing prices up.
Tight monetary policy in the United States to control inflation led to another recession.
The changes were made largely because of inflation carried over from the previous decade because of the 1973 oil crisis and the 1979 energy crisis.
By October 1982, inflation had fallen to 5 percent and long-run interest rates began to decline.
The Fed allowed the federal funds rate to fall back to 9 percent, and unemployment declined from the peak of nearly 11 percent at the end to 1982 to 8 percent one year later.
(1990 - 1991) Recession
Back in 1990, Barack Obama was busy graduating from Harvard Law School.
After the longest peacetime expansion of the 1980s, inflation began to increase and the Federal Reserve responded by raising interest rates from 1986 to 1989.
Image source: https://www.npr.org/2012/05/22/153214284/obamas-harvard-days-began-with-exclamation-point
On August 2, 1990, Iraq invaded and annexed of Kuwait, after accusing the latter of taking its oil.
Within a week of the invasion, crude oil prices had risen to well over $20 a barrel, a spike that affected Americans at the gas pump.
In January 1991, an international coalition led by the United States attacked Iraq and drove its occupying forces out of Kuwait.
Although oil prices subsequently stabilized, the oil spike of 1990 further eroded consumer confidence, although the recession officially came to an end in March 1991.
Dot Com Bust (2001)
The 1990s was a period of rapid technological advancement in many areas, but it was the commercialization of the internet that led to the greatest expansion of capital growth the United States had ever seen.
The dotcom bubble started growing in the late 90’s, as access to the worldwide web expanded, and computing took on an increasingly important part in people’s daily lives.
Online retailing was one of the biggest drivers of this growth.
You can see the Nasdaq took major losses in 2000 looking at the graph below.
Between 1995 and its peak in March 2000, the Nasdaq rose 400% only to fall 78% from its peak by October 2002, then heading into a bear market losing billions of dollars in the process.
By the end of 2001, most dotcom stocks had gone bust.
Even the share prices of blue-chip technology stocks like Cisco, Intel and Oracle lost more than 80% of their value.
It would take 15 years for the Nasdaq to regain its dot-com peak, which it did on April 23, 2015.
Companies that notably survived the bubble include Amazon and eBay.
Great Recession (2007-2009)
We could write all day about this one, partly because it’s fresh in the minds of most of us.
It’s more commonly called ‘the subprime mortgage crisis’
Subprime mortgages are home loans granted to borrowers with poor credit histories. Their home loans are considered high-risk loans.
If you haven’t seen The Big Short, this Academy Award winner does an excellent job of portraying the collapse of housing market.
Here’s a great clip from the said film.
To summarize briefly:
- In 2006, house prices began to fall.
- Come August 2007, the Federal Reserve responded to the subprime mortgage crisis by adding $24 billion in liquidity to the banking system.
- By September 2008, Congress approved a $700 billion bank bailout, now known as the Troubled Asset Relief Program. (TARP)
- By February 2009, Obama proposed the $787 billion economic stimulus package, which helped avert a global depression.
The Most Shocking Economic Prediction Of 2020
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Now that we’ve taken a look at all the major economic downturns in the past 100 years, let’s look at the world pre-COVID.
2020 (The world pre-COVID)
The world was a very, very different place before the coronavirus became a public health crisis.
For one, the US economy had grown for 121 consecutive months following the Great Recession in July of last year, marking the longest economic expansion in American history.
Imagine that! The longest ever economic expansion, then came early February of this year... boom!
Longest economic expansion in history
Here’s a quick lesson on Economics.
As economic activity increases, we see an expansion.
When spending increases, prices start to rise. This happens because increased spending is fuelled by Credit.
So, when the amount of spending increases and overweighs the production of goods, prices rise. This is what we call Inflation.
In June 2009, there was a decade long expansion in our economy fuelled by job growth, record-low unemployment rates, and low-interest rates set by the Central Bank.
With 9 million job losses during the Great Recession, we saw a further 21.4 million jobs spring out of nowhere in this expansion from 2009 onwards.
From negative 9 million to plus 21.4 million is a pretty big jump.
As Ray Dalio put’s it:
When Credit is readily available, we see economic expansion.
When Credit is not readily available, we see a recession.
With employment growth remaining historically low, and not returning to pre-recession levels until 2016, what else occurred in this 10 year period?
Although this was the longest economic expansion, it was also one of the slowest economic expansions with an average annual GDP growth of just 2.3%.
This in comparison to the 3.6% growth during the 1990s and the 4.3% growth in the 1980s as noted by Forbes
You may say there are two sides of the same coin, huh?
As we’ve already discussed in an earlier chapter, the U.S has seen a lot of recession, but subsequently abundant economic growth.
The only question is, what kind of economic expansion shall we see post-COVID-19?
More debt in the economy
Even though it did create the last financial crisis, debt doesn’t seem to be a major problem yet this year.
While corporate bond issuance continued to climb last year, debt-to-equity value, owing to muscular stock market growth, was at a 19-year low as 2019 came to a close. CNBC
Corporate debt is an element that could compound the effects of COVID-19.
Besides the US shale oil producers, there is a lot of other corporate debt in the US and around the world.
If this debt becomes unsustainable it will put pressure on the entire financial system. The global economy will, at best, experience a severe recession.
However, it could also develop into a prolonged depression if the financial system is overwhelmed.
Personal debt also had been rising, but debt service payments to income were at all-time lows last year.
Fast-forward to April of this year, and worries are arising over defaults and bankruptcies as companies in particular face suddenly daunting leverage levels.
Government debt has increased $319 billion just over the past six business days, bringing total indebtedness to $23.8 trillion.
Goldman Sachs estimates that the budget deficit will be $3.6 trillion this year and $2.4 trillion in 2021, which respectively will equal 17.7% and 11.2% of GDP for the two years. CNBC
"The economy is not going to come running back to 100% when COVID is solved." said Jeff Klingelhofer, co-head of investments for Thornburg Investment Management.
So how does this affect the last economic expansion?
In an economy like the US with credit, you can increase your spending by borrowing.
As a result, this type of economy allows for incomes to rise faster in the short run, but not over the long run.
A low-interest-rate environment is great for homeowners because it will reduce their monthly mortgage payment.
Similarly, prospective homeowners might be enticed into the market because of the cheaper costs.
Low-interest rates mean more spending money in consumers' pockets.
Over decades, we see debt burden gradually increasing amidst economic expansion. This creates ever-larger debt repayments.
At some point, debt repayments become greater than actual income.
This creates decreased spending and decreased income as a knock-on effect.
Debt burdens, and bubbles so to speak, are commonplace in history.
2008 was a prime example of that bubble getting burst.
Low interest rates
As mentioned above less spending leads to less income and less borrowing.
So what does the Central Bank do to interest rates in times of deleveraging?
They slash them.
Because interest rates can’t go below 0 percent to stimulate the economy, the stimulation of interest rates must stay at this rate of 0.
Notice how interest rates got slashed in 1940, and in 2008?
Expensive stock market (cape/shiller pe ratio)
The market strategists and portfolio managers at Wall Street's big banks predicted that the good times for stocks would keep rolling in 2020.
That may have been an overstatement.
The boom in 2019 wasn't driven by a surge in earnings, but by an explosion in valuations that makes today's S&P 500 vastly more pricey than the beginning of last year, when they were already very expensive.
In January of this year (before COVID-19), Market Insider wrote:
The S&P 500 trades at a price-earnings ratio of 18.4x, its highest level since 2002. The simpler multiple was mostly fueled by the S&P 500's dividend payout ratio, as shareholder payments have grown rapidly over the last decade.
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Likely Impacts of This Recession
Assuming COVID-19 comes to an end late in the Summer, and supply chains are restored, economists predict the resumption of normal economic activity and a growth rate of 4% in the fourth quarter.
Right now we’re seeing an economy that has gone from full-speed-ahead in January to a full-on freeze.
Economists have to revise their models daily as this virus vigorously throttles employment, commerce, and tourism.
There are an estimated 37 million domestic jobs currently vulnerable to layoffs in the U.S alone, and while the unemployment rate is highly unlikely to reach that of the Great Depression (24.9%), it could be the highest in nearly 40 years.
That’s almost unthinkable when you consider unemployment was near an all-time low back in February (3.5%).
Ultimately, the severity of the economy’s slowdown depends on the length and seriousness of the pandemic.
According to the NY Times, Torsten Slok, chief economist at Deutsche Bank Securities, says consumers will continue to be cautious even after authorities signal the all-clear.
Reduced Consumption
In Alberta Canada, the local government announced that the Canadian Energy Centre (CEC), dubbed as the war room, is reducing its current operating budget by 90 per cent to reflect needs during the COVID-19 pandemic.
This reflects a reduction in the CEC’s operating budget from $30 million to $2.84 million.
According to Alberta’s Minister of Energy Sonya Savage:
“Global energy demand is down dramatically because of reduced consumption due to the COVID-19 pandemic and the Russia-Saudi-initiated price war. But in time, demand will recover. The world still needs reliable energy.”
History suggests that global disasters, particularly those with major effects on the economy, tend to drive a temporary decline in carbon emissions.
The 2008 recession was accompanied by a temporary dip in global carbon emissions.
According to https://www.scientificamerican.com/:
Less vehicle traffic, on its own, seems good for the climate. But there’s a potential catch.
If people are spending more time in their homes, they could be using more energy. It depends largely on weather conditions, geography and different family lifestyles.
“If you come home to a cold house and you have to heat it, that’s going to more than offset the savings from not driving your vehicle to work, on average,” Jones said.
Shopping patterns for eCommerce have surged in recent weeks, with more and more people avoiding public spaces and grocery stores.
Pandemics like COVID-19 could also spur less obvious behaviour changes, which may nonetheless affect a someone’s carbon footprint.
In the United States, a recession like we’re seeing now will likely drive down greenhouse gas emissions, as people simply consume less resources.
Reduced Travel/Tourism
Not surprisingly, airline stocks have plunged in response to COVID-19, with many losing about half of their value in less than a month.
Take a look at some of the losses these major airline stocks took in March.
Iconic tourist attractions like the Metropolitan Museum of Art in New York City is projecting a loss north of $100 million for the near future and expect to be closed until July, according to a letter the museum sent to its department heads.
The U.S travel and tourism industry will see losses as big as $24 billion this fiscal year, with that being nearly 7 times greater than the SARS outbreak in 2003.
In the aviation industry, Virgin Atlantic recently asked staff to take 8-weeks of unpaid leave in light of the ongoing situation.
British Airways’ parent company IAG also revealed that its capacity for April and May would be cut by “at least 75 percent” compared with the same period in 2019.
With worldwide travel from developed countries almost ceasing to exist through the summer period, we can expect huge losses globally, with countries such as Thailand, Fiji, and Indonesia struggling to hang on in this storm.
Inflation
The extreme measures taken by the U.S. government and the Federal Reserve to combat the COVID-19 pandemic could push the U.S. into an episode of hyperinflation and boost gold, according to Peter Schiff.
We’ll further discuss whether Gold Investing is a good idea later in this guide.
The White House reached a $2 trillion deal on the third phase of a relief package that extends cash to the individuals, and small businesses that were hit hardest by this economic fallout.
The Fed said earlier this week it would buy unlimited amounts of assets to support market functions and the economy. The central bank has also cut rates to nearly zero to ease lending conditions.
Schiff added that hyperinflation, or extremely high and worsening inflation, is “very much on the table,” and that a complete destruction of the U.S. currency would be accelerated if the world “dumps the dollar as a reserve.”
This graph below measures cumulative inflation since 1910.
Stagnation & Unemployment
Economic stagnation is a prolonged period of slow economic growth, usually accompanied by high unemployment.
This will be a knock-on affect due to the extremely high unemployment levels we’re seeing right now across the world.
The graph below shows unemployment claims in the U.S. Notice the peaks at 2006, and subsequently: 2020
Robert Shiller won the Nobel prize in 2013 for his work on financial bubbles, and more recently he has written about the narratives and popular stories that affect our economy.
In light of the Coronavirus, Schiller claims:
The secular stagnation is a fear that from now on, or for a very long time, we’re going to be stagnated.
He says the Fed’s low interest rates are a sign of that.
Schiller also adds that It hasn’t been talked about as much under Donald Trump’s regime because the economy has started to look strong.
Further to that Shiller adds that the unemployment rate has been so low that it doesn’t seem to confirm the traditional secular stagnation narrative.
Based on the topics mentioned above, we can probably expect to see a period of economic stagnation leading into the 4th quarter of this year.
Supply chain
If you’re a regular online shopper, then you’ll know that lately the pandemic has really hit the supply chain hard.
Amazon, in particular, has hired 80,000 new workers in the last few weeks, with plans to hire 20,000 more.
It's seeing increased demand for essential categories like groceries, health and household items, baby products, beauty and personal care items, and pet supplies.
In fact, Amazon told its third-party merchants it can't accept non-essential items in its warehouses starting in mid-March in order to ensure capacity for more urgent customer needs.
With warehouse shelves full of Amazon devices like Kindles, Echo smart speakers, and Fire TV devices, Amazon may have to sell them at a loss.
The Motley Fool indicates Amazon will likely lose $100 million on about five million devices in excess inventory it expects to hold this summer.
Theoretically, if the virus spreads faster than experts predict, we could even see grocery stores shortages, as air cargo and sea cargo see more and more workers laid off due to illness.
That’s worst-case scenario of course, and right now we’re not seeing elements of that reality pop up all that much in Europe or North America.
How COVID-19 will impact various Asset Classes
The stock market right now seems like an investor's nightmare, with shares of companies large and small down by double-digit percentages so far this year.
Large Cap Equities
On the other hand, it could be an opportunity for value investors.
Plenty of stocks, especially large-cap stocks, are trading at bargain prices right now.
Unfortunately, a lot of those stocks are cheap for good reasons.
Coronavirus-related travel restrictions, the oil price war, and a souring global economy may make it hard for some of these beaten-down companies to recover.
Even in a market like this one, savvy investors can find good prospects.
As Rothschild once said,
"the time to buy is when there's blood in the streets."
While the pandemic has been shedding its wrath across Europe and the US, COVID-19 has also been unrelenting on Wall Street's pocketbooks.
The mitigation measures meant to slow the spread of the coronavirus, which includes a halt to nonessential business activity in most U.S. states, have indeed lead to recession.
It's most certainly led to a bear market, with the major U.S. indexes shedding more than 20% of their value in just over three weeks, marking the fastest descent from a recent high in history.
History shows that bear markets are buying opportunities.
As long as investors buy into quality businesses and give their investment theses time to play out, they tend to make money over the long run.
It may also be worth looking into large-cap equities who are notoriously ‘recession-proof’ in nature.
Small cap equities
Small-capitalization stocks have been hit particularly hard in the market’s rapid volatility over the past couple months.
Investors see the Coronavirus’ fallout threatening this sensitive group, which tends to see its performance suffer more than larger companies in recessions.
The S&P 500 can be seen below.
Small-cap stock funds are thought to be more aggressive investments compared to large-cap stock funds.
This is because small companies can be more affected by changes in the economic environment:
The Balance writes:
During a recession, small-cap stocks can see larger declines in price; whereas, in economic recoveries, small-caps can rise in price faster than large-caps.
Investors who want to take advantage of price fluctuations can choose to buy more shares of small-cap stock funds during market corrections.
However, it's important to keep in mind that market timing is not a smart strategy for most investors.
A simple strategy to manage a portfolio is to dollar-cost average with consistent purchases and to rebalance the portfolio at least once per year.
See chart below for Novavax, who are in the process of creating a vaccine. This could be a good one to invest in.
Here’s Catalyst Pharmaceuticals, another eye-catching healthcare stock.
PRO TIP: Set aside spare change to invest in defensive stocks like NovaVax and Catalyst Pharmaceuticals.
Acorns is such a simple tool that works on autopilot and adds up all those extra cents so you can invest them in something that matters.
Commercial Real estate
Commercial real estate is impacted quite bad as of now, with shares of several companies, including Boston Properties and Vornado Realty Trust, plunging an average of 37% from March 1, 2020, to March 18, 2020.
Similar decreases dragged down the value of hospitality companies, apartment owners and golf businesses.
In fact, the core of President Trump’s Empire remains tied up in commercial real estate holdings.
Before the coronavirus disrupted everything, those properties were worth an estimated $1.9 billion after deducting debt.
By March 18, 2020, that was down to an estimated $1.2 billion. Part of the problem: Trump owns 125,000 square feet of retail real estate near Fifth Avenue in Manhattan, typically a bustling retail corridor.
Today, it’s a essentially a ghost town.
Office space doesn’t look like a safe investment these days, especially if work from home becomes an ever-continuing reality.
Commercial real estate prices will likely drop, as foreign equity, which is constantly looking to buy real estate in the U.S., will have issues with accessing U.S. markets. The outbreak will affect their ability to invest overseas.
Residential Real Estate
Real estate listings are drying up, open houses have been canceled, and buyers are staying home.
In Canada, the economy is also under threat from the coronavirus pandemic.
A roaring start to the spring house-hunting season has ended in a whimper.
By the time the dust settles on what’s likely to be months of disruption, Canada could see resales plunge 30% to a 20-year low and the first nationwide drop in prices since 2009, according to Royal Bank of Canada.
“This is freezing the market,” John Pasalis, president of Toronto property brokerage Realosophy Realty, said in a phone interview.
“The best-case scenario is we see an improvement in activity in the fall. I don’t think anyone’s really expecting anything before that.”
Real estate, along with residential building construction, accounted for almost 15% of Canada’s output last year, ahead of energy at about 9%.
It’s a big change from early March when markets were soaring in Canada.
Precious metals
Gold and silver each have tremendously bullish technical setups that cannot be ignored.
Furthermore, there are a number of fundamental tailwinds to help bring higher prices.
Take a look at Gold’s price below, and notice it’s rise during shaded areas (past recession)
Aside from Gold, the Federal Reserve has cut interest rates to zero and unleashed a massive QE-infinity asset purchase program.
They are not alone, as central banks around the world have done much of the same.
On top of that, the historic $2.2 trillion measure is sure to contribute to rampant inflation.
You can purchase gold safely, and securely to combat inflation here
The world has known easy money for more than a decade, but not to this scale.
We could see a bullish Gold market as a result.
With the global economy contracting, currencies around the world all devalued at the same time, and the U.S Treasury yields hitting record lows, this reinvigorates not only safe-haven characteristics for gold but its reserve currency characteristics.
This made the current deflationary environment gold’s only near-term headwind.
We will further discuss investing in Gold later on in this guide.
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Private equity
There is a lot of uncertainty about how the pandemic will change the startup investment climate.
500 Startups, a leading global venture fund and seed accelerator decided to survey its investor community to get a sense of the impact the current pandemic is having on startup investment activity.
139 members of the startup investor community, who identified primarily as venture capital firms (40%) or angel investors (35%), responded to the survey and said that the Covid-19 health crisis will indeed have an impact on early-stage investment activity.
The majority of investors suggested that Covid-19 will have a negative (32%) or somewhat negative (36%) impact on early-stage investment activity in 2020.
When asked how long investors believe the impact of COVID-19 will last for the early-stage investing community, most believe the impact could last between one and two years.
Many venture capital firms are also offering resources and guidance to startups during these tumultuous times.
When asked what advice investors are giving to startups to navigate the current situation, the most common recommendation was that startups should aim to reduce cash burn and increase runway as quickly as possible.
What you should do now
Let’s start off by mentioning that it would be a fools choice to position your portfolio for a specific outcome.
Your investment portfolio needs to be positioned for every outcome.
If there’s anything we’ve learned over the past couple months, its that picking one asset is extremely risky.
Traditional safe-haven assets have not performed as well as Wall Street predicted, while others have.
Ultimately, two asset classes that have jumped out at us in this climate are Silver and Bitcoin respectively. We’ll be doing a full breakdown of these asset classes later in this guide.
Take any capital you can't risk out of the market
Even though the economic outlook is looking grim right now, it’s never too soon to ensure that your finances are well-equipped to weather any storm.
Start by making sure that you take any capital you can’t risk out of the market.
Value investing in particular only works if you have a long-term time horizon.
You shouldn’t think about investing in the stock market any capital that you think you will need for the next 3 -5 years.
This way you can act with confidence with the capital that you do have invested in the market, knowing that the short-term price gyrations cannot harm you.
This also means not using leverage on your portfolio.
If you do, wild stock price action can cause unfortunate margin calls to wipe you out. You also should pay careful attention to trust your investment process.
A global health crisis is not the time to make unforeseen changes to your investment portfolio.
The reason we have a rigorous investment strategy and process is to help us guard against behavioral mistakes and emotional decisions.
Follow through with your process and trust your investment thesis, no matter how uncomfortable it feels.
Maintain as much cash as possible
This one might seem like a no brainer, but staying cash heavy in this economic climate is extremely important.
If you’ve ever read Elon Musk’s bestseller autobiography, you’ll know how essential it is to have cash reserves when a recession comes your way.
Back in 2008, Tesla was on its death bed, as it was in dire need of cash to survive.
While Musk foreshadowed not being able to make payroll for his staff the following week, he watched as the banks bailed out Chrysler and General Motors for billions of dollars respectively.
It was only the German automaker Daimler, who itself was cash strapped at the time, stepped in and invested $50 million in Tesla.
Can you imagine how different the world would be today if Tesla hadn’t gotten that cash injection during the last financial crisis?
We can learn a lot from this example how important it is to stay cash-heavy at a time like this.
It's near impossible to recession-proof your money, says financial expert Ramit Sethi bestselling author of "I Will Teach You To Be Rich"
Regardless of the state of the markets, diversifying investments across stocks and bonds, and securing an emergency fund are two of the most important steps to take with your money, Sethi said.
Sethi recommends keeping cash reserves equal to at least three months and, ideally, up to a year's worth of expenses to fall back on whenever it's needed.
The best place to keep that emergency fund, rainy day fund, "oh f---" fund, or whatever you call it, is usually in a high-interest bearing account, like a high-yield savings or money-market account, where it remains within arm's reach but continues to grow while you're not using it.
Own cash flowing assets and yield (especially those that generate yield to outpace inflation)
When recessions strike, it's best to focus on the long-term horizon and manage your exposures, minimizing the risk in your portfolio and setting aside capital to invest during the recovery.
Amidst recession, it’s very important to own cash flowing assets, and especially those that generate yield to outpace inflation.
Cash flowing assets include things like recession-proof stocks and precious metals like Gold.
While it might be tempting to ride out a recession with no exposure to stocks, investors may find themselves missing out on significant opportunities if they do so.
Investors may do well to look at developing a strategy based on counter-cyclical stocks with strong balance sheets in recession-resistant industries.
We also mentioned above two assets that are proving profitable for investors during this economic downturn.
Borrow more to buy productive assets
Productive assets are those with the ability to generate profits and cash flow.
Think of items like farms, renting houses, productive dividend-yielding stocks.
Incidentally, they're also the ones you should aim to take advantage of right now.
This is something the Oracle of Omaha, Warren Buffett has long advocated, and if you know a thing or two you’ll know it would be a wise choice to trust his words.
It pays to concentrate on productive assets over the long term.
You will be likely to do well with these types of assets, and that's important because if there's one thing you can count on overtime, it's inflation.
Invest in productive assets with long-term growth potential and you'll manage to keep pace with inflation or, better yet, beat it to the ground.
It would be wise to consider borrowing, or taking out a loan to cover the cost of your productive asset.
How to invest based on your goals
Not all financial goals can be met with a single investment strategy. There are various factors that need to be considered in connection with any investment strategy.
These include risk tolerance, portfolio size, and overall financial position, which reflects the balance between income level, income stability, non-investment savings, cost of living and debt level.
Whether your focus is short term or long, here are some investments that could prove in your favour in an economic downturn.
Buy a cash-flow 7-figure Recession Proof Business
This is the 10 Trillion Dollar Opportunity that nobody is talking about.
Deciding to purchase and scale a recession-resistant business is probably the best investment you can make in this economic climate.
When acquiring a business like this, you can expect 100%+ returns with only 10-20% cash down to purchase the business.
This model can work even if you don’t have a million dollars in the bank and don’t have the experience to acquire a business.
The team at Acquira just released a free training that teaches you the exact systems and processes to purchase a 7-figure business and scale it so that it works for you.
These guys have allocated over $10mm in the past 5 years and have bought over 16 businesses.
Needless to say, they know a thing or two about business buying!
If you want to say goodbye to startup entrepreneurship, and building a business from scratch, we highly recommend checking out their free presentation below.
Free presentation: Earn over 100% returns during a recession by acquiring a recession-resistant business.
Buy gold and bitcoin as a hedge against inflation
When the going gets rough—stocks falling, interest rates in decline, debts mounting—investors look to “safe haven” assets, like gold, that are supposed to retain value while the rest of the world burns up.
Cryptocurrency investors argue Bitcoin should hold a similar place in the financial firmament: a reliable fallback in times of crisis. It’s digital gold, they say.
See a time span chart for Bitcoin below.
To hedge against inflation successfully, we need something that actually tends to go up in value during inflationary periods.
In particular, we’re looking for things that tend to go up in value generally and actually are going up in value at the time of consideration, meaning that we are trading with the trend and not just guessing or assuming too much.
The reason why bitcoin can be a good hedge against inflation in certain circumstances is that the performance of bitcoin is superior and often greatly superior to what it is hedging, for example a certain currency which is experiencing high inflation.
Don't be afraid to consider bitcoin as an IRA rollover. Turbulent volatility in the markets post COVID is not a 'maybe', its a guarantee.
Get a FREE Crypto Investing kit here
Faced with looming recession, Bitcoin could serve a market function similar to that of a safe-haven commodity, rather than an equity, due to its inherent scarcity and decentralism.
Because its supply is not controlled by any one person or entity, it’s more likely that Bitcoin will perform independently of broad market pressures (akin to how one would expect gold to react)—potentially even appreciating in value should demand for alternative forms of dependable value storage arise.
On March 20th, Bitcoin climbed back to nearly $7000 from resting at $4000 on March 16th, a 75% price increase in 4 days.
It’s a volatile period, but as the financial markets suffer severe losses around the globe, central banks will pump liquidity into markets, just like we saw the White House reach a $2 Trillion stimulus package to lessen COVID-19’s economic impact.
On another note, BTC has a finite supply and can maintain its value as fiat currency values drop due to inflation.
Despite popular opinion, now might be a great time to invest in Bitcoin.
Invest in yourself by starting a business
While COVID-19 has seen nearly all of the brick and mortar businesses across North America and Europe close, there is still a huge boom happening in the eCommerce industry right now.
As more and more people stay at home and lose their sanity watching Netflix for the 4th time in one day, consumers are straying towards their mobile phones.
Starting an online business now could be a great investment if you have the capital.
In fact, some of the best-known companies around have their roots in those tough economic times.
Companies like Mircosoft, General Motors, CNN, and Apple were all started respectively when the economy was on a downturn.
As with any investment, it’s important to do your due diligence and maintain the capacity to further educate yourself on different aspects of starting a business where you may be lacking.
A lot of start-ups tend to burn through a lot of cash on things like Marketing, so if that’s your weak hand then you should strengthen it.
Aside from eCommerce, make sure that whatever business you are considering starting can be run autonomously from home, or from anywhere for that matter.
We hope this guide has helped you find an edge on the current economic climate.
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