I think we are at a rare and possibly pivotal point in our lives and history. It might be that we remember COVID-19 like a storm that was uncomfortable for a season, but returns back to normal in a few months. It could also be that COVID-19 is the pin that pricks the larger economic bubble and will cause us to enter a recession. It is my belief that we are entering a longer-term downturn. While that idea might scare some of you, I would like to make the case that if each of us takes action, you can prepare and take advantage of the opportunities that come with pivotal change.
A recession happens when our economy moves from growth to decline for a period of time. Most recessions are deflationary in nature which means that asset prices go down. This can be devastating or uncomfortable for those who have too much debt or who lose their income source during the recession. However, it can also be like a 50% off sale for those who have cash and are able to buy assets at a discounted price. Recessions are a regular occurrence and should be expected. On average, expansion periods last from 5 to 8 years. The expansion period that is ending has lasted almost 11 years and is the longest in our nation’s history. Recessions typically last 9 to 18 months, and a depression is a recession that lasts over 2 years. I think we are in a debt bubble and this is the beginning phase of that debt bubble popping.
We are all creatures of habit and many of us resist change. In this season, I encourage you not to fear or resist change, but to instead seek knowledge and work to anticipate change so that you can be prepared to capitalize on it. We have all become familiar with everything growing, expanding and increasing, and some of us have forgotten that assets both rise and fall in value. We forget that asset prices are directly related to economic growth or decline, interest rates, ability to borrow, existing debt, and consumer confidence. If you become aware of how the economy works, you can take steps to create stability and opportunity for you and your family in these times of change and challenge.
The videos below were created by Ray Dalio who is the owner of Bridgewater Capital (one of the largest hedge funds in the world). These are the best videos I am aware of that describe market cycles and principles for success. As you prepare for a possible season of recession, seek understanding, anticipate the challenges, and consider the unique opportunities you may have.
How the Economic Machine Works