How to Prepare For a Recession

Posted March 17, 2022 by Ben Carlson

A reader asks: What are some moves you’re making to prepare for the recession?

There seems to be a growing consensus among smart people I follow right now:

Inflation was already high and is only going to get worse because of the war. We could easily see a 10% inflation print this year.

The war is going to cause massive food shortages in the next year since so many agricultural commodities come from Ukraine and Russia.

Supply shocks were already bad and are only going to get worse. Tack on China’s Covid outbreak that’s shutting down entire cities and the supply chain is in trouble yet again.

Therefore, a recession is now inevitable. 

Last week I even hopped on this bandwagon by showing how a recession is the only way we’ve seen high inflation fall in the past.

I do believe the probability of a recession is higher now than it was a month ago.

However, when dealing with probabilities, you have to look at both sides of the argument. Nothing is 100% certain in the markets or the economy.

Let’s look at the other side of this argument to show what could keep us out of a recession for a while longer.

There is a ton of pent-up demand.

Delta’s CEO said the airline just had its busiest two days in history in terms of sales. Travel spending is booming right now.

I was at Disney last month. The parks were packed every single day. My Disney insiders tell me they think sometime in March could see the busiest week ever for their theme parks. And I know from experience — Disney is not cheap. Inflation is not holding back spending at the parks.

The housing market remains scalding hot, even in the face of rising mortgage rates. Logan Motashami posted this picture of people lined up down the street waiting to see a new listing in California last weekend:

This is not exactly recessionary behavior.

To be fair, these are just anecdotes. How about some data?

Each quarter, the Federal Reserve releases a report on household wealth. Last year saw the largest increase in household net worth ever: LINK

U.S. household net worth surged almost $19 trillion in 2021. Real estate alone accounted for more than $5 trillion of gains.

Households have never been wealthier.

So on the one hand, rising prices could cause consumers to rein in their spending on certain products and services.

On the other hand, inflation has only been above trend since last April. Consumers have been saving and paying down debt for two years. It’s certainly possible U.S. households will complain about inflation but then go into debt and spend down their savings to make up for higher prices.

That could certainly extend the expansion.

Both arguments have their merits.

So we could go into a recession this year or next year or four years from now.

I honestly have no idea.

All I know is we will have a recession at some point.

Since World War II, we’ve had 13 recessions in the United States:

This means that over the past 80 years or so, a recession has occurred once every 5.9 years on average.

Now, recessions don’t run on a train schedule. Sometimes they happen in quick succession (like the 1950s or early-1980s) and sometimes they are few and far between (like the 1990s or 2010s).

The way I look at it is you’re not preparing for THE recession but a recession. There is a difference.

To continue reading, please go to the original article here:

https://awealthofcommonsense.com/2022/03/how-to-prepare-for-a-recession/