Prepare For A Recession

September 10, 2018 | Sam Rook


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It IS Coming...

  I just have no idea when. I buried the lede there, so shoot me (not literally).

 

                I have had a lot of calls this year about Bitcoin, Cannabis stocks, Trump, Trump’s tweets, Trans Mountain Pipeline and Brexit but the most questions I get from clients surround the potential for a recession. Recession is this big scary word to the media so they call it a “RECESSION!” and use words like imminent and soon to scare you. It is a unique trick because it plays on our brains to make us think of the last RECESSION! we can remember….which was 2008’s Financial Crisis.

 

                Here is a great example of scary headlines in action:

Macquarie thinks housing will drag Canada into a recession as bad as the financial crisis in two years — and that’s the best-case scenario

(Source: https://business.financialpost.com/news/economy/unprecedented-reliance-on-housing-fuels-canada-recession-call )

 

                Oh boy, “as bad as the Financial Crisis” is a pretty big claim to make and it sure has worked to conjure up memories of that dark time. A dark time for which Canada mostly avoided any real pain. I got 5 calls on this specific article highlighting a research piece from Macquarie. The fear is real because our most recent memory of a recession is the Financial Crisis naturally you will have an outsized reaction to this headline. We call that Recency Bias.

 

                Here is the truth about calling for a recession. No one actually knows the what/how/why/when about the next recession. Could a drop in house prices in Canada start the next recession? Absolutely. Could we discover new technology that makes oil useless and that causes the next recession? Sure. Could a trade war start a recession? Probably. Could the Sun enter retrograde and cross over Venus while cows start walking backwards cause a recession? I think you get my point. It’s a fool’s game to predict “the next recession” but it makes for great headlines which attracts attention [Editor: Ironic comment given the title of this post] and that is kind of the business of media isn’t it?

 

                What can you do to protect yourself from the next recession? Well a couple of things can help but nothing will be fool proof because no one knows how the next recession will impact things. First, you should always have an amount of money set aside to cover AT LEAST 3 months of lifestyle expenses, preferably 6 months. Most recessions are fairly short and shallow. We remember 2008 because it was so long and difficult for many people.

 

                Second, you should regularly review your portfolio and rebalance back to your comfort level. It has been a great Bull market and if you have not rebalanced lately, you will be surprised to learn your equity allocation is much larger than it was 3 years ago. Equities get hit harder in recessions because they are your holdings for growth and a recession is the opposite of growth.

 

                Third, review your spending and try to trim a bit each year. You will be surprised at how much you are paying for your phone, cable, Internet, gas or lunch now as compared to 3 years ago. Check your Lifestyle Creep. Doing this regularly allows you to keep a bit more for yourself. That little bit more can mean the difference between having to make a forced decision in a recession and surviving through it to make the other side.

 

                Lastly, never stop learning. Recessions tend to lead to job losses and especially hard hit are workers with jobs in manufacturing and other labourer positions. Jobs that tend to get replaced by automation and robots after a recession. When the oil price crashed in 2014 and 2015, Alberta roughnecks (workers on the oil rigs) came back to a drastically altered universe. When times were good, a typical oil rig would run with 20 workers. After the crash, that number dropped to only 5 workers. The difference was automation. If you add to your skills and education you become valuable in any economic situation which lessens the risk of job loss. It also helps you find new jobs, better jobs when the economy is expanding.

 

                I have a favourite saying to use when I am asked about calls for a recession; “Economists have correctly predicted 10 of the last 3 recessions”. I admit I stole that saying from somewhere but it is absolutely perfect for the situation. I don’t know when the next recession will be and truth be told we don’t know we are in a recession until after it has started. However, I do know there will be another recession. Better to prepare and plan now for that eventuality than to be scared by every headline but do nothing.