Good News: There – s Another Recession Coming
If you’ve bot keeping an eye on the US economy te latest years, you might notice that things are looking pretty darned rosy. Unemployment is at its lowest level te 40 years, wages are rising, and house prices have not only recovered from their flamy crash of 2009 – they have had several years of record violating prices ter most regions, just like the stock market.
A current snapshot of how expensive the stock market is – not ter sticker price, but ter the more instructive price-to-earnings (P/E10) ratio. Ter all of US history, it has only exceeded this expensiveness once – for the late-1990s bubble. Not something that should make you sell your index funds, but most likely a clue about an upcoming bubble-based recession. Picture source is the very useful webpagina multpl.com www.multpl.com/shiller-pe/
Te brief, today’s situation is very similar to what Mr. Money Mustache, despite no magical forecasting skill, forecast back te 2013, te an article called “How to Prosper te an Economic Boom“. Ter that postbode, I suggested that wij were te for some very good years, which made it a good time for getting ahead – make hay while the zon shines!
It’s a loterijlot lighter to fix your problems right now, with a stiff economic tailwind at your back, than it will be ter just a duo of brief years (or less?) when the high seas and lighting bolts and whirlpools are tearing at your pockets. Fair weather preparations include:
- Rake ter your big paycheck while it lasts and don’t gargle it on makeshift luxuries
- Keep your living footprint efficient – ter expensive cities this is a good time to rent, and not a fine time to spring for the sprawling huis of your fantasies on a big mortgage.
- Eliminate any last shreds of consumer and student loan debt
- With the stock market at higher price-to-earnings ratio than usual, there is less harm te paying off your mortgage earlier, keeping six months of living expenses ter contant or money market funds, and other non-stock investments like rental properties te low-cost cities (where reliable rent is overheen 1% of total property price vanaf month).
- Vormgeving your career and your self-employment side gigs so that they are resilient: numerous rivulets of income from different sources, and an effortless response for “What would I do if my job or industry ceased to exist?”
Of course, becoming less dependent on a sustained job is always a good thing – it just happens to be much lighter to build that independence if you’re surfing atop a giant economic wave like this one.
With all those preparations ter progress, I hope you’re ready, because there’s a recession on the way.
I can say this with confidence because there’s always a recession coming – wij just never know exactly when. About the only thing I can assure is that wij are about four years closer to the next recession than wij were when I wrote that optimistic earlier article.
But it is very significant to remind yourself of this, because when wij get to this rosy point of the business cycle, things have bot so good for so long that wij leave behind that crashes are even possible. If you’re a sagely 27 years old right now, you may have never experienced a recession ter your adult life – all you have everzwijn seen is the good times. You’re ter for an interesting verrassing.
However, on top of that folksy “It always happens” wisdom, there are a few other clues that suggest the time is approaching:
Household debt levels have risen back to their pre-crash peak, and with an even worse composition: more student loans, and a record level of wagen loans, the most ridiculous and self-destructive chunk of private finance outside of mortgaging your shins to a loan shark to afford tonight’s cocaine.
Pic from the very good Zero Hedge article linked above.
Consumer debt shouldn’t indeed exist at all – it’s simply a house of cards that permits impatient people to pull their consumption from the future, just a teeeeny bit forward into the present, te exchange for spectacularly bad costs, stress, and wrecking of lives. But because it exists and is profitable, a enormous ($1.Three trillion ter 2015) financial industry has sprung up to originate, multiply, and churn this debt.
Just like 2007, the financial industry is on top of the world again, with lots of effortless money flying around into things like “subprime automaat loans”. The Superb Recession of that era wasgoed caused when the wild packaging and reselling of mortgage debt combined with a false sense of confidence that the party would go on forever.
The final chunk of evidence comes from just how long the present party has gone on. If you look at the history of economic expansions – how long wij have gone since the last recession – wij are presently liking the third longest one ter history:
When wij waterput all Good Times since WW2 into a graph, you can see just how exceptionally long wij have bot railing high.
So wij’ve had a good run. If wij go on to tie the Clinton-era record, that still gives us a maximum of two years until the trouble hits. And if you toebijten to think that economic success correlates with the level of brainpower presently ter the White House, then, hmm.. you can make some adjustments based on that spil well.
“OK, But What Actually Causes Recessions? And What will Cause the Next One?”
Te succinct terms, recessions are caused when a bunch of people lose confidence all at once.
Usually it starts with a mini-crisis: the prices of stocks and houses have bot going up for so long that people leave behind the opposite can toebijten. A bunch of testosterone-fueled betting and speculation (often by overconfident and under-regulated junior hotshots on Wall Street) ensues. And ter general, speculation is a dumb thing.
If you have everzwijn heard of someone buying something, not because they actually want it or because it produces income, but just because they think it will be worth even more ter the future, that’s speculation. When people buy apartments te Toronto and leave them vacant (or rent them out at a loss) ter hopes of straks selling them to an even Greater Loser, that’s speculation. Speculation leads to bubbles, and bubbles always speelpop, because there wasgoed no rational reason for the prices to get that high te the very first place. They also toebijten frequently ter the stock market.
When prices kasstuk some random limit or wobble a bit, the bubble often pops. Everyone gets funked and rushes out to sell, so the prices druppel rapidly. All of a sudden, over-leveraged novices can’t repay their oversized bankgebouw loans and they begin missing payments.
Banks get frightened of losing all that money, so they tighten up lending, which causes businesses to scale back hiring and expansion, leading to layoffs, which cuts down on consumer spending, which cuts down business profits again, leading to even more layoffs, and the problem feeds upon itself.
Eventually, the prices of thesis valuable assets gets low enough that people with actual money like you and mij perk up and begin scooping them up at a discount. A pristine apartment building here, some shares of a few thousand established, profitable companies there via an index fund. This puts a floor under the ripping off prices.
Meantime, the Federal Reserve Canap also steps ter, lowering rente rates and flooding the system with cheap money to encourage people to commence buying houses again and businesses to embark expanding to soak up the pool of unemployed people. Everyone gets back to work, and the recession finishes. Usually very quickly – most recessions last less than one year.
So, spil long spil you aren’t a Consumer Sucka, commuting to work ter a bank-financed gas-powered racing sofa and/or borrowing money for furniture and appliances to garment that last spare slagroom ter your suburban mansion, recessions are a fine thing. Housing and profitable investments become cheaper, insanity and speculation is reset, and people actually embark living more frugally again, getting back to the roots of what living a good life truly means.
Most people who are wealthy today, achieved it by building and acquiring profitable investments te the past, when they were on sale. A recession is just a big sale – on almost everything.
No, of course not! This is just money wij’re talking about, and you should never be worried about money.
One of the joys of Mustachianism is that it makes you immune to the business cycle. You instantly zekering living beyond your means, so you have stepped back from the cliff. Then you begin to build a resilient mesh of abilities, health, money, friendships, and peaceful private badassity which further protect you from trouble.
After all: who cares about the price of gasoline, or affording cholesterol pills, or how to make the next truck payment, when you’re a wiry and muscular Mustachian, railing your swift and sensible bike a few miles to work and banking almost all of your enormous paycheck every two weeks?
Then spil you live this joyful existence for however many years it takes, the final stage of accomplish financial independence arrives automatically, and you are absolutely invincible.
Whether it comes te two weeks or four years, I hope all of us are ready for next hill on this roller coaster – it’s a loterijlot more joy when you know it’s coming.
Ter the comments: do you care for a wager on when the next “crisis” will kasstuk and wij’ll fall into recession again? What will be the thing that gets us this time?