If he addressed the question, I missed it. (Yes, I read the whole article.)
I get that thinking medium and long term, and ignoring the possibility of a six month recession, is sound advice. However, given the state of the world (for instance, with Russia bringing up nuclear weapons) there are perfectly reasonable people thinking it would be prudent to expect a not-routine financial hit.
> Peter Lynch once said, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”
> The same is true of recessions.
> How do you prepare for one? The same way you prepare your finances for anything else.
> Instead of changing your portfolio because you think a recession is coming, create an investment plan that is durable enough to withstand a wide range of environments (one of which includes economic contractions).
> Give yourself a margin of safety with a high savings rate and an emergency fund not because it will help you survive a recession but because it will help you survive any number of curveballs life will inevitably throw at you.
> Pay your bills on time and create a good credit score not because it will help you during a recession but because it will help you anytime you need to borrow money.
Better to purchase durable goods (save real value, not shared delusion of money) (edit: or shelf-stable consumables), and invest in future productive capacity (backyard farm, work on your health and strength and education).
A backyard farm will be a productive investment for almost nobody. Farms take a huge amount of labor to be productive and farming has huge economies of scale. "I can grow lettuce and carrots in my backyard" doesn't produce enough food to even make a dent on your overall calorie needs.
It is a fun hobby and you can grow tastier food than the stuff at the grocery store but the people with kickass farms in their backyard that actually grow meaningful amounts of food have been doing it for years and years and spent lots of money on it.
Somewhat. Depends on what you want to do. Three year ROI can be reasonable. I probably spend about $100-150 per year on garden (and mushroom) stuff, with the higher years being in the beginning or for one time improvements (plus random new seeds to try just for fun). I get about $400-500 worth of produce every year. I try to focus on stuff that limits labor time like weed barrier and raspberries (no weeding, easy to survive, perennial). I also try to focus on expensive stuff like peppers, berries, mushrooms, and hops (for homebrew beer).
I also have an LLC for honey. It's generally low labor (compared to other livestock), but tends to have expensive equipment and replacement costs. It's possible to break even in 3 years on a small scale with cheap equipment.
So it can be productive and a net positive. During the season we can get 50-75% of our fruit and veggies from the garden with the remaining percentage being the desire for varieties I don't grow or can't be grown around here. Plus some canning, freezing, hot sauce, etc for later.. We can also get all the honey we desire, including to make mead, and still make a net profit on the bee operation of $100+ per year (can vary wildly based on the circumstances). I think this is a meaningful amount. Obviously this isn't something that you could scale to turn your 401k into.
Now I do some stuff for fun. This year I'm planning to malt my own wheat and barley that I will grow. Even if grain prices double, that's not going to help me financially since wheat will still be relatively cheap compared to other produce.
In the broader discussion about preparing for large recessions, it seems optimistic to assume that in a big recession you'll have a sweet tech gig making big bucks. Think of the labor more like building sweat-equity in a garden "startup" or "investment".
OK you might not be, but your post did. Working in tech the entire cost of your produce for the year (you quoted $400-$500) is a few hours worth of income. I grow a garden and for me it's a lot more than a few hours of work (an order of magnitude more, maybe two).
"Working in tech the entire cost of your produce for the year (you quoted $400-$500) is a few hours worth of income."
This is highly presumptuous. We don't all make over $100k.
On top of that, you're assuming that you could offset the cost of the produce by working a few more hours. Many of us are salaried, not hourly, and have restrictions that we aren't allowed to work for other companies. The option to work more hours in that scenario is not a valid one. Trying to account for opportunity cost doesn't work when there's no opportunity being lost.
there is an opportunity cost but it's hard to precisely measure. if you're a salaried employee making $100k, you can't just work extra and automatically get to $110k. it might improve your chances of a raise/promotion in the next year, but that's uncertain. or you could spend extra time learning new tech or doing interview prep. if you're willing to change jobs, I bet the latter option nets you a lot more than $400/year.
Consulting for non-overlapping (with your employer) businesses is a very good answer.
The majority of folks employed doing tech (day to day work is technical) aren't employed by tech (i.e. for a tech firm shipping product). And those that are (HN-wise) tend to be employed at more targeted enterprises.
Both of which are to say... there are likely a lot of clients you could consult for after hours, fully disclosing to your employer, that your employer wouldn't have any competitive concerns about.
And critically, consulting is almost always hourly. Which vastly simplifies the expectations and transactions.
I'm not assuming that at all, just putting a value on your time. You could consult (I do) and you might find your time is more valuable than you think.
At the end of the day I'm not trying to convince you growing vegetables isn't worth it, it is! Just that justifying in terms of saving costs probably isn't that great of an argument. Most hobbies are not cost effective. But life would be pretty awful without them.
I have friends who grow large quantities of potatoes and veggies in general. They really do drastically reduce their food bills.
I have more modest ambitions. I like to grow lots of sprouts and fresh herbs for cooking. No real calories but makes simple meals made without processed foods (e.g., with brown rice, beans, homemade pasta, tiny amounts of animal protein, etc.) much tastier.
Potatoes still cost like $1/lb at the store. Less if you are grabbing Russets. It is hard to drastically reduce food bills by targeting crops that are incredibly cheap. But it surely is done by some people!
What I mean here is that the huge majority of people who attempt to plant potatoes in their backyard are going to pull up like $20 worth of potatoes a year after a couple years of failed attempts. That's not really meaningfully understood as an investment.
Home gardens are fun. They are great for things like herbs (as you say) where you only need a small amount in a dish and the little clamshells at the store are both low quality and $5. But they aren't a "productive investment" except in very extreme circumstances.
Also you will starve to death eating fruits and vegetables from your backyard. You're not going to grow a meaningful amount of grain. Chickens are an option, but you have to feed them.
They might contain more calories, but they're also significantly cheaper than fruits/veggies. So much so that it's probably not worth your time/money even if food prices go up 100%.
But also other things. At the time I was digging tatters with my grandad, I was also reading with him a cartoon adaption of Melville's great book "Moby Dick", and from that point on digging up tatters was interspersed with cries of "Thar she blows!" and "Tis the great white whale!" as the tatters came to the surface.
> I did the sums - it takes me 6 minutes of paid work to earn enough to buy a day's calories worth of potatoes.
Assuming you have a job to work at. Or that (food) supply chains have not gone sideways.
What you grow in your garden depends on (a) whether you're just doing it for fun, and/or (b) if you're offsetting certain risks you're worried about. E.g., how hard is it (for Ukrainians) go get potatoes with a war on? How hard is it to get groceries after an earthquake (or hurricane)?
>Assuming you have a job to work at. Or that (food) supply chains have not gone sideways.
If you want to mitigate that I still suspect it's cheaper to buy rice and beans, then stockpiling that, than it is to operate a vegetable garden every year. Not to mention, a stockpile works any time of the year. A vegetable garden only produces food during harvest time.
>E.g., how hard is it (for Ukrainians) go get potatoes with a war on?
how easy it is for ukranians to get potatoes when the ground has only recently thawed?
>How hard is it to get groceries after an earthquake (or hurricane)?
How useful is your vegetable garden when everything has been blown away and/or is rotting in the ground from all the water?
I'd add "difficult to transport" and "freshness delicate" to the characteristics list.
There's a huge amount of produce out there that we simply never see, because it's inhospitable for ship-to-grocery. Or that we don't eat at its best, even if we're able to get it.
E.g. banana varieties, fresh figs, most things green and/or leafy
Potatoes could go up in price by a factor of like 50x before it'd become remotely cost effective to grow them. A productive backyard is going to produce like, what, $20 of potatoes annually?
And basically everybody I know who has attempted potatoes (and sweet potatoes) has pulled up a failed harvest for at least the first year.
There exist people who have highly productive backyard farms. Almost nobody who starts a backyard farm will achieve that within five years.
If everyone suddenly switches from low-savings to high-savings, yes, that may happen. But if everyone consistently has a not-low savings rate, then that is the 'baseline' that the economy will base its production on. It's the sudden changes that can cause problems and not necessarily the/a steady state.
Even sudden changes up can cause problems, as we've learn with supply chains when everyone switched from buying services (going out) to buying goods during the lockdown(s).
Of course 'just save more' isn't an answer for some people, as the author's coworker observed:
If everybody has high-savings, then does anybody actually have high savings? As in, would it still be possible for everyone to redeem those savings for concrete goods and services?
I don't think that's much different than today. There's tons of money tied up in intangible things, or speculative stuff above it's true value. If everyone tried to buy tangible things, then inflation would happen. Too much money + plus not enough things = price increase to take advantage of that money until there's no excess.
A savings rates (of a person's income) of 15% is higher than a savings rate of 5% is higher than a savings rate of 0%. Some of those savings goes to building an emergency fund (which eventually tops out), while other savings goes into a retirement account to generate for future income; some may go into a child's education fund.
Eventually most people will retire and draw down their savings. Eventually one's child will grow old and go to some kind of post-secondary school and need money for tuition, books, etc.
That doesn't really answer OP's question, which is how everyone would turn those savings into goods/services. At the end of the day, the production capacity of the economy is fixed, and if there's more dollars chasing the same amount of goods, the value of goods will go up and the value of dollars will go down.
> That doesn't really answer OP's question, which is how everyone would turn those savings into goods/services.
You don't. Saving = not-spending = not getting goods and services. At least not at the present moment.
You save now to protect against future income risk (e.g., emergency fund) and future income needs (e.g., retirement). You convert savings to cash flow when non-savings (e.g., employment income) dries up.
>You save now to protect against future income risk (e.g., emergency fund) and future income needs (e.g., retirement). You convert savings to cash flow when non-savings (e.g., employment income) dries up.
Everything you described works at an individual level, but fails at a societal level, which is what the GP was talking about. If society as a whole saved a bunch of money, and a few years later there were some sort of society-wide income risk (eg. war), those dollars won't do you much good.
Just because something is high value and resources from lower valued production can be diverted into them, doesn't mean that the production capacity of the economy as a whole isn't fixed. At the end of the day there's still only so many people available to do stuff, and so many machines/raw materials available.
> Better to purchase durable goods (save real value, not shared delusion of money)
I don't understand what you mean by it being better to purchase durable goods. Do you mean things like appliances and vehicles? Those things depreciate.
Saving, and investing in stocks (diversified) has been a better move historically than just about anything else you could passively do with your money.
"Durable" means holds it value for later use or sale.
> Saving
Not cash, because inflation.
> and investing in stocks (diversified)
Creates a bubble if people aren't consuming. "diversified" is load bearing there. Invest in a range of companies that are creating persistent value, sure. Not consumable or rapidly depreciating luxuries.
I don't think it makes any sense to try to hold people responsible for keeping the economy running hot as individuals on top of being rational self-interested actors.
On macroeconomic terms, "investing" and "saving" are synonyms. The savings you put on paper instruments are just lent to somebody making an investment.
So, no, investing in future productive capacity is exactly the kind of thing that triggers that paradox.
Anyway, everybody seems to severely overrate their understanding of those things. I would advise people to not use macroeconomic theories to plan their own lives.
Theoretically, at least during the transition period. In reality I don't think there's any real danger of that given that the majority of people in the US don't even have $1k in a bank account. I don't think culture and circumstances are going to change fast enough to make that happen.
Money is not a delusion, it’s a data structure. The distribution of money is the state of a market. A market is a protocol for multi agent coordination. It’s effective because it minimizes the amount of information-exchange required to participate.
It's a couple of vague abstract sentences which will make sense to people who are financially savvy, but that specific target audience would already know this advice.
From my take on the article, I think you just can't think about such short term events like the impact of the Ukraine war. It's most probably going to be back to some type of status quo in one or two years, so making bets on it is more speculating than investing.
So the advice here is to "stop trying to predict the future" and "make sure you have a resilient portfolio". That's as useful as saying "if you want to be smart, don't be stupid, simple!". Looks like marketing fillers are reaching new bottoms recently.
This is very bad and generic advice and it smells of just another a wealth manager advertisement. Junk.
If you have a mortgage and it is below property price rates (most likely), keep it or refinance for lower rates if you can. If you buy with mortgage, don't get over leveraged. Even if the property doesn't lose value, if you fail to pay your mortgage the bank will fire-sell it for lower to recoup their money leaving you in the red. And beware of bills piling up with inflation! Buy the smallest possible you can afford in a recession.
Now for savings. You can't compete with Goldman Sachs, JP Morgan, the bots, professionals. But you can take the other side of the bet of very short-sighted investors. Just do plain old and boring Sector Rotation. Pick large and liquid ETFs and REITs. Pick them very diverse.
Also mind there is likely a scenario of new and higher taxes, price controls, and a lot of other fun things to cover the upcoming Unfunded Liabilities Crisis, the Pension Crisis, public and private debt, etc.
If you are above 500k, I'd start looking for a second passport and offshore accounts. Have plan B and C.
I am surprised that during a recession, stocks usually tank.
You can either own part of the industry that produces stuff. Or you can own money with which you can place bids on the stuff the industry produces.
During a recession, the industry produces less. Now at first you might say: That is the answer. The industry produces less. So it has less value.
But if the amount of money is the same, the bids per piece of stuff should go up. Because there is the same amount of money bidding on fewer things. So the industry should still make the same amount of money.
Any easy answer to this, why stocks tank during recessions?
The "money" in the economy is actually mostly credit, and during a recession it contracts (usually from defaults) so the amount of "money" in the system is now less
Since the value of a stock is it's future cash flows discounted to the present and it's had it's current cash flows impacted, usually that makes forecasts revise those future earnings downward lowering the valuation of the company.
Other reasons are assets are sold to make up for lost income needed to pay for expenses, and stocks being liquid often get sold first.
Another example (I am no expert) is a margin call.
If I am purchasing using $100k of margin and my collateral drops to the point that I no longer have the margin. That 100k is gone. It wasn't a real 100k in the first place, it was leveraged and backed by a volatile asset.
And people sit on their cash because they don't want to make bets on the future.
So they park it in something which is believed to be incredibly safe like money market funds or a savings/checking account because a 0% to 1% rate of return beats the risk of a 20%/50%/100% haircut by investing in anything else which gets hammered by the unwinding of the recession.
The money is created when someone borrows it. But you cannot lend more than a certain multiple of what you have as deposit. This multiple is decided by the central bank.
Investors also need money. Somebody who loses their job has to access their investments to pay rent. This adds downward pressure on the market since people must sell.
This does not change the fact that the amount of money in the system stays the same.
Before "somebody" lost their job and sold their stock, there were X people holding Y dollars. Afterwards, there are still X people holding Y dollars. Nothing changed. The amount of money available to bid on stuff is still the same. Both, the sum of money and also the average amount per person.
> Before "somebody" lost their job and sold their stock, there were X people holding Y dollars. Afterwards, there are still X people holding Y dollars
Maybe it's better to think of it as X-1 people holding Y+1 dollars :P
But really, I think the above poster answered your question with this bit:
> This adds downward pressure on the market since people must sell
Prices go up when you bid higher than the current price for something, and conversely they go down when you bid lower than the current price.
When someone sells in these situations, it means the current average price has dropped.
Also sometimes, when people are desperate to sell, they can really lowball the value of something causing its overall value to depreciate significantly.
The quantity of money in the system doesn't stay the same. Speculators buy financial assets such as stock and real estate on credit. This increases valuations and causes more speculators to buy financial assets on credit, or at least stop paying back their other debts as fast so they can hold more assets, to capture asset price gains. When the process slows down eventually the expected asset price gains will be lower than the interest owed on the debt, causing a sell off.
Depreciation of assets like stocks and real estate will lead to a reduction in value in our portfolios, but not necessarily a reduction in the money supply. Money supply is only one factor here.
> But if the amount of money is the same, the bids per piece of stuff should go up. Because there is the same amount of money bidding on fewer things. So the industry should still make the same amount of money.
That’s not how it works, so your premise is flawed.
Even if it is how it works, that’s not directly related to the stock market, because stock market valuations are speculative based on future earnings, not present earnings. Earning less money is not a prerequisite to a reduced stock valuation; often, growing slower than previously anticipated is enough.
To hoard liquid cash for buying opportunities. If the prices of commodities goes way up, individuals and companies need cash in hand more than the long term assets. Cash is king.
> Because there is the same amount of money bidding on fewer things.
But the reason there are fewer things is because producers are responding to less demand for things. It's not like a recession just knocks out production leaving demand untouched, causing the price to move along the demand/supply curve. You won't have the same amount of money as before being bid on the fewer things.
No, consumption goes down and savings go down too. One person's spending is another's earnings (which impact savings). The money supply isn't fixed and the amount that money changes hands certainly isn't fixed either.
Whenever stocks go down, the real reason is that there is fewer people buying stocks than selling. The justification is obvious: if we know a recession is coming, the gains in stocks will take a hit, and people don't want to buy something that will lose value. So investors will stop buying stocks and some people who are more sensitive to price drops will sell their stocks.
A credit bubble may pop due to loss of confidence, but the loss of confidence is not purely non-deterministic psychological phenomena, it is due to the interest owed on the debt held by speculators which bought financial assets on credit exceeding the expecting asset price gains from buying or holding more assets. When speculators stop buying more assets on credit, asset gains dry up, and those which bought assets on credit or by slowing payments on other debts in hopes of making gains still have to make payments decreasing quantity of money in market causing sell off.
In that case, shouldn't recessions instantly resolve themselves? When the price in stocks goes down significantly there's pretty much a guarantee that it'll come back up eventually, so wouldn't any prudent investor buy the dip?
As the parent comment said, the only explanation that really adds up would be that the amount of "available money" in the economy must be going down as a result of defaults on credit.
There are many factors that enter in this calculation. One of that we don't know which companies will survive a recession. This seems to be an easy answer when looking at Google or Apple, but it is not so clear otherwise. For example, many banks didn't survive 2008. Many tech companies didn't survive 2001. Nobody knows what will be the next group of victims in the coming recession.
Pay attention to the words.
Fewer people buying stocks than selling.
The amount of stocks "bought and sold" are the same, the amount of people is not.
If what you are saying is true, stocks would always be at the same price since the amount of stock bought and sold are the same!
If one day there are 100 people that want to buy the stock, and the next day there are 10 people interested, the prices will fall.
They mean "fewer people willing to cross the bid-ask spread to buy a stock than the number of people willing to cross the bid-ask spread to sell a stock"; what matters is who is crossing the line? if it's the buyer side of the transaction, price trends up. If the seller is accepting a small % loss on the sale, the price trends down.
Because stocks are just the right to a stream of earnings
Yes. And money is just the right to bid on the stream of things the industy produces.
If companies produce less, money should also be worth less. As your money is your share of bidding power on those fewer things.
The price of a stock is the ratio of the value of a company and the value of money. And should therefore stay the same if the industy overall produces less stuff.
I guess because the differences between the neoclassical homo economics and the biomachine homo sapiens become relevant when scared? The approximation of people as rational actors falls apart.
"The war is going to cause massive food shortages in the next year since so many agricultural commodities come from Ukraine and Russia." this argument alone makes this story laughable, it seems the poor sod who wrote this must have Google blocked, as it is very easy to check how much food Ukraine and Russia exports (in fact, Russia still has to import food). I was only waiting for another "argument" that China bought 50% of World supply of wheat, which was a bullshit spread my mainstream media.
"Inflation was already high and is only going to get worse because of the war". Why? US, French, British military equipment is hot now, nobody buys from Russians anymore as we all see how great is their stuff. Typically after the wars we saw rapid economic development, not stagnation. In fact a little inflation will help, as there will be no more stupid ways of "investing" money (cryptocurrencies are only the most pathological resource, there were many others, less popularized) so maybe there will be time for some real investments not hoarding money only.
"Supply shocks were already bad and are only going to get worse", what actually people were buying from Russia except oil and gas? What other Russian product you've bought in past 5, 10, 15 years?
China is clearly staying away from all this "trouble" that Russian have, in fact, China learned a quick lesson about true power of USA and NATO and their determination to support a country, which is not even NATO member. China also learned how great is post-soviet era military equipment, which both China and Russia still use and base its power on this. All those "innovative" solutions like Russian SU-57, Armata T-14 tank sound so great and fearful, the problem is that they don't really exist, I suspect that China might have the same issue. Maybe that's why we haven't heard about any recent Chinese provocation near Taiwan.
So, the question is, why so many bullshit in this article, as usually, the answer depends on what this guy is selling, and we learn this at the very end of the article:
"I also had Bill Artzerounian on the show to answer questions about the benefits of working with a tax advisor and the tax implications of selling a huge loser in your portfolio."
Ah look not sure if you've been following the detail but with a lack of supply of wheat, fertiliser, oil and gas this contributes massively to risk of food shortages.
You personally may not have been buying product from Russia or Ukraine but others will have been. They now have to look for replacement options creating market pressure.
Wheat and crops sourced from other countries still have to be harvested, so the oil prices going up (even if that was a single factor) can risk reduction in harvest and crop yields.
Oil supply is just one of the issues right now. Once you add fertiliser, crops, not to mention unpredicted or unreported factors, this is going to get painful for some.
And here is one of the most commonly-used chemical processes used to produce ammonia for fertilizer -- it often uses natural gas as an input: https://en.wikipedia.org/wiki/Haber_process
Food scarcity and food price increases could cause large amounts of human suffering. Despite any ongoing conflicts I think it should be a priority to maintain and improve food supply chains.
> Why? US, French, British military equipment is hot now, nobody buys from Russians anymore as we all see how great is their stuff.
Oil, for one. Which has knock-on effects for the transportation of just about every other product out there. Then there's the natural gas that Germany is dependent on, and Germany is a major manufacturer / exporter.
> what actually people were buying from Russia except oil and gas?
Oh, so we have to worry only about the global consequences of oil and gas prices. Is that all? Only oil and gas.
Using the Internet to put out their brand and philosophy out there so like-minded customers come to them instead of trying to chase down leads. And everyone who doesn't need a wealth manager / family office gets interesting content.
Aggregate household wealth may not be a great indicator of economic health. Demand may be up for many things, but do people have the money to sustain their lifestyle with the price increases? Distribution matters. If the top people saw the bulk of the gains, it won't help much because they can't spend it all themselves (see recent comments by Melinda Gates, the Giving Pledge, etc).
Then that doesn't seem like a great recession hedge. I think the biggest immediate fear of a recession is losing your job, your investments should be available in that situation.
My wife and I used a web based inflation calculator to see how 10% inflation over ten years would effect the long term purchasing power of our retirement savings. A little scary, but it is good to plan long term how money can be saved by reducing expenses (for us, travel is a large expense) while still maintaining a good quality of life.
That’s a great question and will be your homework for this week. :-)
On a more serious note, the answer really depends on your situation. I.e. what investment products are accessible to you and how much risk you can tolerate.
IMVHO every Citizen must do one single analysis in two questions: "do I think that those who led us to the recession can fix their mess?"; "who profit from that recession?".
Answering those question it's enough to start going to the court asking for removal of actual neoliberals in power for a long tail of crimes, the first one for crime against humanity. Otherwise that means Gustave Le Bon and Eduard Bernays was right saying that most humans are just animals in a flock to be led. So Democracy is impossible and abusing human being for profit is a normal activity...
Italian, living in France. But also nephew of Italian's Partisans from WWII, so I was "trained" to recognize the nazi when they do not dress formal uniforms...
I get that thinking medium and long term, and ignoring the possibility of a six month recession, is sound advice. However, given the state of the world (for instance, with Russia bringing up nuclear weapons) there are perfectly reasonable people thinking it would be prudent to expect a not-routine financial hit.
So it is at the least a very misleading headline.