Tag: Recession

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Quick Finance Piece: Is this a recession?

Posted on by Karac Avalron

Yes, it is.

So before I go too far let me do the normal disclaimer. I am a finance professional and any advice you see on my blog is my own opinion only and is not meant as investment advice. So that out of the way, yes we are in a recession. “But the media says we aren’t in a REAL recession”. I don’t trust the media, if you do I can’t really help you….

An economic recession has been defined for decades as two quarters of economic decline as measured by GDP. Now that’s not the technical definition but that is what has been used as the gauge for many years. The United States is in a recession. Now there are DEGREE’S of recession and that is where the nuance comes in.

This is not a hard recession by any means. We have great job numbers (which is an interesting situation in of itself), but we have horrible inflation, a slowing housing market etc. You see what you aren’t hearing much about is the horrific impact that Covid shut downs had on industries and supply and demand economics. You shut down global production for 6 months, you just don’t flip a switch and it comes back to normal.

The ride shouldn’t be to bumpy this time around

Throw in a war, a decrease in domestic Oil refining, divisive politics, on and on. The situation is dynamic and fluid there is no one catch all correction to fix this. You had decades of artificially low interest rates now creeping up again. A hard recession would see the market decreasing, layoff’s and a higher unemployment rate.

Companies are reporting good earnings that means DEMAND is still there and that bodes well for a quick recovery. They call that a V shaped recovery. I suspect we will see another decline in the 3rd qtr. and possibly into the 4th but the basis for good economic outcomes are there. First, the job market is healthy, you can work and make money. Second, demand for goods and services is still robust, so companies are still making profit (which fuels point 1).

I think 2023 will be a better year economically, unless again something extraordinary happens (a pandemic, another war. Be prudent here and tighten things up as best you can and save a bit more than usual but I don’t suspect things to get horrible soon, but things will still remain in the current state for the near term.

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Another finance secret finance professionals won’t tell you (but I will)

Posted on by Karac Avalron

One of the more successful finance posts I have on my blog is a finance secret I shared that industry professionals wont. You can find that post here.

Today I have another secret for you, it’s not a true secret as its not actually hidden but unless you are astute in finance you aren’t necessarily going to catch it. It has to do with mortgages, which in the U.S. right now is a hot finance topic. House prices in the U.S. have risen over the last 3 years anywhere from 8-25% depending on what market you are in.  House prices traditionally do not go down, they level off. If we look at a 100 years of house price data, we can only find 2 years where the median average price drops in comparison to the prior year. Again, this is largely aggregated meaning a market like Manhattan is an extreme, a rural town in Montana might be an extreme as well but on average that is where it stands.

So what is the secret? When you go for a mortgage your ability to borrow money is based on your GROSS income, not your net. It’s a trick banks use to be able to lend you more. So your ability to borrow is based on the amount you earned, not the amount you actually have to spend. The bank/lender does not account for health insurance cost, taxes, child support on and on. The good news is people who would otherwise not qualify for a mortgage can based on their gross income.

Borrowing the max amount, is a foolish move.

The bad news is exactly the same as the good, you can qualify for mortgages you would not have the ability to afford because it was based on your gross income, not your net. So you get situations where people borrow too much, you get terms like “house poor” because most of your income goes to paying your mortgage. The kicker? (well there is two) you pay for the privilege to borrow more than you can afford via interest. The other? You pay for PMI (Private Mortgage Insurance) which essentially protects the lender if you cannot pay the mortgage THEY gave you. You know the one they based on your gross not your net.

No lender is going to tell you it’s too much house, unless its WAY overpriced for your income. You have to be the one who figures this out. You need to estimate the mortgage payment and look at how much you actually TAKE HOME a month. You don’t want your mortgage payment to be more then 25-35% of your take home pay. Additionally, you don’t want a 30-year mortgage if you can absolutely avoid it because the interest alone is a killer. Banks want to lend you money, that’s how they make THEIR money via interest. It’s a tough real-estate market out there you have to be extra careful.

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Anxiety: How to deal with a Recession

Posted on by Karac Avalron

Yes, you are going to hear this word “Recession” more and more. Let’s establish clearly what a recession is. A recession, in economics, is a downward trend in the business cycle characterized by a decline in production and employment, which in turn causes the incomes and spending of households to decline. Inflation is part of this but basically the best way to measure a recession is to check on what the GDP (Gross Domestic Product) is in your country. If it decreases for two consecutive quarters, it’s a recession.

The GDP is a broad measure, but it encompasses many different economic factors. In the U.S. the 1st quarter of 2022 declined from the previous quarter. So in July we will get the 2nd quarter results for the U.S. and it’s likely to decline again based on the inflation we are seeing. We also have the oddity of the economic conditions from the Pandemic. Manufacturing was silent for long periods decreasing supply (which makes things more expensive). You also had governments increasing their production of currency in the form of aid (increasing the money supply, makes it less valuable). Last, you had many people leaving the workforce. Boomers retired and many people went to the “Gig” economy.

This is putting pressure on companies as there are not enough workers. When you have a shortage of labor, what generally happens is the higher end positions fill up first. What is left is the lower pay jobs that most don’t want to do. So you get this weird situation where there are jobs to be filled but those looking for work don’t want them. Then you get a war, which impacts commodities (oil and wheat) which inflame all of the above.

A storm is brewing, are you ready?

So this is a perfect storm of economic factors. It would be a real stretch to say that a recession isn’t coming. For those of us with anxiety this is going to be the next fear proposition. This will come at a time in the U.S. where mid-term elections are happening as well. It’s going to be a mess if you have anxiety. I wish I had some wonderful advice to get through this, I really don’t. Over the summer the noise will pick up, you will be bludgeoned with it. If a recession drags through the end of the year earnings will be impacted for companies and the employment situation might flip as well.

Yes, this is a mess. So as someone with anxiety how do we deal with this? STOCKPILE CASH NOW. I normally recommend people have a 3-6 month emergency fund, I would now recommend 6-9 months, a year if you can. What is that? You take the average of your monthly bills time 9 months and that amount of cash should be sitting somewhere for you to easily access it. I know that’s a tall order for many but that cash will allow you to weather a short to mid-term storm.

Start tightening up the budget now. Start selling extra possessions you don’t really need/use and bank that money. Hopefully you don’t need it, but I suspect 2022 is going to be a down economic year for the world. I don’t see things improving much until after the U.S. mid-term elections and even then there are no guarantees. Build up your cash reserves now.

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