Another Update: People are asking me what they can do in the recession (if anything). I should mention this post about how to make extra money in a recession I read the other day. Yes, it is legit.
2009 Update: I wrote this post over a year ago. Since then the economy has tanked and people want to know if what I say here still stands. In fact, it is now more than ever important.
One of the major freezes on the economy is low consumer confidence. This is something that a stimulus package can’t save us from. As long as the average American wants to save and not spend businesses can’t make money.
The media is helping to perpetuate this crisis and every time they say “financial crisis” a business somewhere closes its doors.
As someone who has a significant interest in both economics and business, I’d like to share with you my thoughts on the upcoming recession, as well as some business tips you might find helpful.
Cause of Recession
I believe there are very few legitimate reasons for a recession. For sure, all the big spending on easy credit done during the good years take a toll on spending, which of course reduces how much cash is going around.
But a recession is really a social epidemic–a state of mind held by the population at large and certainly propagated by the media. Sure, it sounds insane, but bare with me. After the economy booms for around six years, economists love to start predicting the fall of the marketing, citing the long accepted market cycle diagram. Although the first few rounds of speculation get ignored, the extended period of good times start to make people wonder when it’s all going to crash. Being accustomed to this cycle (6 years of good, 2 of bad) is really a self-fulfilling perspective. As soon as recession rumors begin, the media spreads it like wildfire.
Once news starts spreading, the vicious circle starts: investors as well as consumers start thinking twice about spending big, which in turn shows as a minor decrease in spending; as soon as the decrease is released, it turns into huge news that the initial recession speculations were correct. Enter big expenditure cutbucks across the country, which ultimately causes the recession.
The cycle I’ve described is analogous to Oprah Winfrey going on her show and saying “I have a feeling Book X is going to get a million more sales next week, because it’s a great book”. The pattern of causality is more obvious here: Oprah’s speculation was the cause of the increase. In effect, the media confirms any rumor of a recession and is the cause of the subsequent decrease in spending.
How does a recession end?
The same way it starts. As investors become convinced that the recession is ending, they start to become more liberal in investment (if prices have hit rock bottom, it’s a good time to buy right?). Again, the feeling that the recession should be ending soon is what causes the speculation that it is ending. Soon as the news gets on it, the country starts getting out their wallets and going nuts.
In fact, the huge boom we see after a recession is thanks to the enormous capital war chests corporations get from investors who’ve been patiently waiting to invest.
Invest during a recession - make huge profit
OK, so if I think a recession is purely psychological, am I going to cut down spending and start penny counting? You bet your ass. Even though I think the recession is caused by people thinking this way, I’m not planning to turn the economic condition of the country around singlehandedly. Still, knowing how people think during a recession works to my advantage.
I’m psyched for this recession. Why you ask? So I can finally out earn my dad. My dad is an old school kinda guy. He laughs at my internet businesses. My sites bring in a few thousand a year, not a bad hobby the way I see it. Still, my dad’s hobby is real estate and he makes a few hundred thousand a year.
A lot of people get turned off by a bad experience with real estate. Real estate works the same as stocks–buy low, sell high or sit on your ass and collect dividends. The key here is timing. So what can you, recession savvy webmasters do? Start looking into investments. Recessions are great times to start buying up properties dirt cheap. And I mean dirt. In fact, if you’re really looking to stinge out, go foreclosure shopping (believe me, there are going to be no shortage of these).
The same principle applies to websites. If anyone is willing to sell his/her site, it’s going to be when the revenue pool starts drying up. Don’t think the internet is immune to recessions; there’s still a good chance we’ll see lagging revenue in the years to come. If you were looking to scoop a site, or even better, a domain name up your chance is coming.
Investing heavy vs Investing light
This is one of those times I wish I started this blog a few years ago. My thinking has always been to invest smart in the good times, then cash out heading into the slump. How am I going to leap frog my dad? Slowly picking up all the properties I can afford to carry. I have a moderate amount of cash behind me, so I can start buying in a few months, before the general public starts to spend.
The only problem here is that anything you acquire now, you’ll need to be able to sustain loses on for a year or two. If you’ve set aside enough money for recession spending, then you can engage in heavy investment. If you’re not planning on cracking your piggy bank open, focus your attention on one or two assets. A mix of online and offline investments is best. A word to the wise: incurring loses for more than a year is harder than it sounds. As soon as the value of your property jumps, you’ll be tempted to sell. It’s comparable to a family friend who sold a downtown surburb building for 5.5 million and watched it be resold two years later for 9. On the other hand, an uncle of mine held onto several million dollars worth of Bre-X shares instead of selling and watched his gold money turn to nothing.
For the more risk adverse, try the bond market during a recession. The interest is decent, but protecting your money against deflation is the real gem here.
Get your portfolio together and join me in counting down the days to the full blown recession.