423 comments

Great News: There’s Another Recession Coming

If you’ve been keeping an eye on the US economy in recent years, you might notice that things are looking pretty darned rosy. Unemployment is at its lowest level in 40 years, wages are rising, and house prices have not only recovered from their fiery crash of 2009 – they have had several years of record breaking prices in most regions, just like the stock market.

A current snapshot of how expensive the stock market is – not in sticker price, but in the more instructive price-to-earnings (P/E10) ratio. In all of US history, it has only exceeded this expensiveness once – for the late-1990s bubble. Not something that should make you sell your index funds, but probably a clue about an upcoming bubble-based recession. Image source is the very useful site multpl.com www.multpl.com/shiller-pe/

In short, today’s situation is very similar to what Mr. Money Mustache, despite no magical forecasting skill, forecast back in 2013, in an article called “How to Prosper in an Economic Boom“. In that post, I suggested that we were in for some very good years, which made it a good time for getting ahead – make hay while the sun shines!

It’s a lot easier to fix your problems right now, with a stiff economic tailwind at your back, than it will be in just a couple of short years (or less?) when the high seas and lighting bolts and whirlpools are ripping at your pockets. Fair weather preparations include:

  • Rake in your big paycheck while it lasts and don’t blow it on temporary luxuries
  • Keep your living footprint efficient – in expensive cities this is a great time to rent, and not a great time to spring for the sprawling home of your dreams on a big mortgage.
  • Eliminate any last shreds of consumer and student loan debt
  • With the stock market at higher price-to-earnings ratio than usual, there is less harm in paying off your mortgage earlier, keeping six months of living expenses in cash or money market funds, and other non-stock investments like rental properties in low-cost cities (where reliable rent is over 1% of total property price per month).
  • Design your career and your self-employment side gigs so that they are resilient: multiple streams of income from different sources, and an easy answer for “What would I do if my job or industry ceased to exist?”

Of course, becoming less dependent on a steady job is always a good thing – it just happens to be much easier to build that independence if you’re surfing atop a giant economic wave like this one.

So, Here We Go:

With all those preparations in progress, I hope you’re ready, because there’s a recession on the way.

I can say this with confidence because there’s always a recession coming – we just never know exactly when. About the only thing I can guarantee is that we are about four years closer to the next recession than we were when I wrote that optimistic earlier article.

But it is very important to remind yourself of this, because when we get to this rosy point of the business cycle, things have been so good for so long that we  forget that crashes are even possible. If you’re a sagely 27 years old right now, you may have never experienced a recession in your adult life – all you have ever seen is the good times. You’re in for an interesting surprise.

However, on top of that folksy “It always happens” wisdom, there are a few other clues that suggest the time is approaching:

Household debt levels have risen back to their pre-crash peak, and with an even worse composition: more student loans, and a record level of auto loans, the most ridiculous and self-destructive piece of personal finance outside of mortgaging your shins to a loan shark to afford tonight’s cocaine.

Image from the very good Zero Hedge article linked above.

Consumer debt shouldn’t really exist at all – it’s simply a house of cards that allows impatient people to pull their consumption from the future, just a teeeeny bit forward into the present, in exchange for spectacularly bad costs, stress, and wrecking of lives. But because it exists and is profitable, a huge ($1.3 trillion in 2015) financial industry has sprung up to originate, multiply, and churn this debt.

Just like 2007, the financial industry is on top of the world again, with lots of easy money flying around into things like “subprime auto loans”. The Great Recession of that era was caused when the wild packaging and reselling of mortgage debt combined with a false sense of confidence that the party would go on forever.

The final piece of evidence comes from just how long the present party has gone on. If you look at the history of economic expansions – how long we have gone since the last recession – we are currently enjoying the third longest one in history:

When we put all Good Times since WW2 into a graph, you can see just how exceptionally long we have been riding high.

So we’ve had a good run. If we go on to tie the Clinton-era record, that still gives us a maximum of two years until the trouble hits. And if you happen to think that economic success correlates with the level of brainpower currently in the White House, then, hmm.. you can make some adjustments based on that as well.

“OK, But What Actually Causes Recessions? And What will Cause the Next One?”

In succinct terms, recessions are caused when a bunch of people lose confidence all at once.

Usually it starts with a mini-crisis: the prices of stocks and houses have been going up for so long that people forget the opposite can happen. A bunch of testosterone-fueled betting and speculation (often by overconfident and under-regulated junior hotshots on Wall Street) ensues. And in general, speculation is a dumb thing.

If you have ever heard of someone buying something, not because they actually want it or because it produces income, but just because they think it will be worth even more in the future, that’s speculation. When people buy apartments in Toronto and leave them vacant (or rent them out at a loss) in hopes of later selling them to an even Greater Fool, that’s speculation. Speculation leads to bubbles, and bubbles always pop, because there was no rational reason for the prices to get that high in the first place. They also happen frequently in the stock market.

When prices hit some random limit or wobble a bit, the bubble often pops. Everyone gets scared and rushes out to sell, so the prices drop rapidly. Suddenly, over-leveraged novices can’t repay their oversized bank loans and they start missing payments.

Banks get scared of losing all that money, so they tighten up lending, which causes businesses to scale back hiring and expansion, leading to layoffs, which cuts down on consumer spending, which cuts down business profits again, leading to even more layoffs, and the problem feeds upon itself.

Eventually, the prices of these valuable assets gets low enough that people with actual money like you and me perk up and start scooping them up at a discount. A pristine apartment building here, some shares of a few thousand established, profitable companies there via an index fund. This puts a floor under the dropping prices.

Meanwhile, the Federal Reserve Bank also steps in, lowering interest rates and flooding the system with cheap money to encourage people to start buying houses again and businesses to start expanding to soak up the pool of unemployed people. Everyone gets back to work, and the recession ends. Usually very quickly – most recessions last less than one year.

So, as long as you aren’t a Consumer Sucka, commuting to work in a bank-financed gas-powered racing sofa and/or borrowing money for furniture and appliances to outfit that last spare room in your suburban mansion, recessions are a great thing. Housing and profitable investments become cheaper, insanity and speculation is reset, and people actually start living more frugally again, getting back to the roots of what living a good life really means.

Most people who are wealthy today, achieved it by building and acquiring profitable investments in the past, when they were on sale.  A recession is just a big sale – on almost everything.

“So, Should I Be Worried?”

No, of course not! This is just money we’re talking about, and you should never be worried about money.

One of the joys of Mustachianism is that it makes you immune to the business cycle. You immediately stop living beyond your means, so you have stepped back from the cliff. Then you start to build a resilient mesh of skills, health, money, friendships, and peaceful personal badassity which further protect you from trouble.

After all:  who cares about the price of gasoline, or affording cholesterol pills, or how to make the next truck payment, when you’re a wiry and muscular Mustachian, riding your swift and sensible bike a few miles to work and banking almost all of your enormous paycheck every two weeks?

Then as you live this joyful existence for however many years it takes, the final stage of complete financial independence arrives automatically, and you are absolutely invincible.

Whether it comes in two weeks or four years, I hope all of us are prepared for next hill on this roller coaster – it’s a lot more fun when you know it’s coming.

—-

In the comments: do you care for a wager on when the next “crisis” will hit and we’ll fall into recession again? What will be the thing that gets us this time?

  • Roadrunner June 20, 2017, 11:39 pm

    Eventually a crisis will happen for sure. As somebody who’s still in the wealth accumulation phase, I’m hoping that it’ll happen as early as possible. Nevertheless I believe the low interest rates can delay it.
    It’ll also be interesting to see where money will go during a stock market sell off. Bonds are already expensive. All I can think is gold…

    Reply
  • Euro Mike June 21, 2017, 1:02 am

    Two observations:

    1. This reinforces the point that one should invest globally, not only in stocks of one country/region – whilst this would not avoid a recession (which typically happens everywhere), it should soften the impact.

    2. Interest rates are very low and expected to stay low for the mid to long term. This means that it is rational that shares have a higher P/E ratio than in a period with high interest rates (which could suggest that there may not be a bubble in the first place, or it is less pronounced than it looks). Would be interesting to correct the P/E radio accordingly. However, low interest rates also means that future returns should be lower than in the past (whilst share prices increased more than normally while interest rates were going down). Now for the bad news, the next recession could be worse than the previous ones as central banks have less of an option to decrease interest rates in response to a contacting economy.

    Reply
  • Live Free MD June 21, 2017, 1:32 am

    You can’t predict when the next recession will occur, but at least you can plan for it. Keep fixed expenses as low as possible, eliminate all debt, save at least 6 months of living expenses in cash, develop multiple sources of income (primary job, side gig, rental income, dividends from stocks and bonds), and be prepared to find another job or career if needed. Hope for the best but plan for the worst.

    Reply
  • Divnomics June 21, 2017, 3:24 am

    An optimistic post about a market crash, wonderful!
    We’re still fairly at the beginning of our journey, so if we happen to get some nice opportunities because of a recces ion, than bring it on.

    I’m curious though what the effects will be in the EU, we’re currently still a bit behind on the trend you see happening in the US. Interest rates are still being kept very, very low and the quantitative easing is just barely being reduced bit by bit. If a recces ion would be happening any time soon, there would be very few triggers the ECB can use to fuel the economy…

    Reply
    • BGA June 21, 2017, 9:15 am

      My thoughts exactly – will the central banks have any power whatsoever to fuel the economy? I don’t think so. Do we try the failed negative interest rate policy of Japan? Probably. But it won’t do anything.

      Reply
  • Mike June 21, 2017, 5:31 am

    Hi from South Africa, where we’re currently busy with a self imposed recession.

    Reply
  • The Vigilante June 21, 2017, 5:32 am

    “A bunch of testosterone-fueled betting and speculation (often by overconfident and under-regulated junior hotshots on Wall Street) ensues. And in general, speculation is a dumb thing.”

    I’m not sure I’d blame the “juniors” for damage caused by overconfident speculation. The juniors aren’t calling the shots! I don’t know what the average age of a hedge fund manager is, but I bet the number evokes thoughts of gray hair and wrinkles. And when you’re seeking investors in a highly speculative property, you don’t chase down a whole lot of fresh college grads – you go for the big fish. The folks who have built up or inherited a lot of money and never learned to manage it. There’s lot more wealth found in higher age brackets than in lower, and a correspondingly greater number of potential fools to take advantage of.

    – Signed, a person who would still be a junior in most industries, and who really enjoyed this post anyway!

    Reply
  • Trip June 21, 2017, 6:39 am

    I did not know that we were in the 3rd longest expansion in US history. As always, another post with first-rate content. The graphs and the entire last section on “So, Should I Be Worried” are pure gold.

    I’ve always liked to think of investing like an integral. You want a minimal area under the curve during your working years so that you can pick up a maximum number of shares. After retirement, that’s when you want to start seeing a lot more area under that curve (represented as share price vs time).

    Since you invited me to speculate:

    The next US recession will begin during the 3rd quarter of 2018 and the trigger will be yet another housing bust centered squarely in California (a very large economy in its own right). That housing bust will be a direct result of a powerful earthquake on March 4th 2018.

    Reply
    • BGA June 21, 2017, 9:21 am

      That is quite the prediction. I disagreed with the prediction until you mentioned a powerful earthquake – that would definitely be enough to start another housing bust in CA.

      Reply
      • Trip June 28, 2017, 1:34 pm

        This is what makes speculation fun — you can be as creative and specific as you want to be. Much easier to do when money isn’t on the line…

        My favorite movie clip regarding speculation can be found by going to YouTube and putting in just these 3 words:
        blinkin lookout guessing

        Reply
  • Lucas June 21, 2017, 6:40 am

    I watched the economy melt in my senior year of college and walked out into 2009 with a B.A. Recession mindset is built into my genes by this point. I’m excited to have a few years of influence of MMM/Dave Ramsey to a lesser extent and income this time around to weather a recession. My eye is on cryptocurrencies as a solid but volatile investment in coming years, especially if traditional finance and banking implodes once again.

    Reply
  • Insourcelife June 21, 2017, 7:23 am

    ***Why will the next crisis hit?*** This article.
    ***When will the next crisis hit?*** Shortly after June 20, 2017 publish date.

    Reply
  • Mr. Freaky Frugal June 21, 2017, 7:37 am

    I FIREd in 2012 and if you’d told me that in 2017 we would still be in a bull market, I would have said you’re crazy. I feel pretty lucky the bull market has lasted this long and since I’m a net seller of assets I would like it to go on forever.

    But I know you’re right MMM – it’s only a matter of when we have a recession. I’ll be shocked if we aren’t in a recession within the next 2 years but I’ve been shocked before (see above). :)

    Reply
  • MRF June 21, 2017, 7:39 am

    What is FI referring to? I’ve perused this site frequently but am not sure I caught that term.

    Reply
    • Mr. Money Mustache June 21, 2017, 7:34 pm

      Yeah, I’m against the use of jargon too. In this context, it means “Financial Independence”, which means having enough investments to generate income that will pay for your lifestyle. It doesn’t mean you are not allowed to work, however.

      I’m pretty sure I have never used the term “FI” in all my six years of blogging, because the whole idea is sharing the concept with new people rather than having an insider chat with other “FI” insiders.

      Plus, it’s more fun to be more inventive with language.

      Reply
  • Brandon June 21, 2017, 8:07 am

    Not bringing anything to the table here..just wanted to say thanks for this blog. Please, never stop writing.

    Reply
    • Trip June 21, 2017, 1:07 pm

      I second this opinion.

      Reply
      • Felipe June 21, 2017, 2:15 pm

        I third this opinion.

        One of the few blogs I follow and continually learn from.

        Reply
  • Zeppelin Commander June 21, 2017, 8:17 am

    Personally, we’ve got way too many precious metals that I’m eager to get rid of. Other things have taken priority over selling, but a jump in metals combined with a sale in stocks could make it very attractive! (Also, prepper-minded partner would be much more likely to part with them).

    Reply
    • Mystic July 20, 2017, 2:17 pm

      Hang in there Commander. It would be a worst feeling selling metals just before the bull market. As per Technical s and EW-GDX between 28 and 34 later this year

      Reply
  • Geek June 21, 2017, 8:18 am

    Hey some of us are genetically fucked over on the whole cholesterol thing! Great article though, I try to remind people that the market will always go down at some point, but back up again.

    Reply
  • singledadmoney June 21, 2017, 8:30 am

    This is a great post and I love the line comparing auto loans to shin breakers.

    With the last peak in consumer debt numbers in ’08-Q3, and the low in ’13-Q3, I’m predicting we see the next peak in ’18-Q3 and the crash between ’18-Q4 and ’19-Q1.

    With good planning, I hope to be further along in my savings rate to be able to take advantage when it happens.

    Reply
  • Paula June 21, 2017, 8:57 am

    My husband, who is a really smart technologist for a large financial institution and also has a series 7 license, which he keeps up, you know, just in case, has been watching and reading and reading and watching and he thinks the recession will hit at the end of this year. I have a goodly chunk of my retirement assets (okay, most of them) in a general stock fund which I will probably sell this fall, by which I mean autumn. Cyclically, bad things happen in the fall, so we’re keeping an eye on the Shiller and once it hits thirty, or my stock fund hits $2.40, I’m out regardless. If there is one thing I’ve learned from Steve, it’s to set the bar, hit it, and get out. Don’t moan over a couple of lost cents or dollars that you could have had. Just take your profit.

    Reply
  • Norm June 21, 2017, 9:01 am

    I’d like to think President Trump will somehow be responsible for the next financial crash (maybe a disastrous new healthcare law, maybe Wall Street gambling tied to the rollback of Dodd-Frank), but since I know that government has little to do with the economic cycle, it probably won’t be traceable to him. The good thing is that doesn’t matter, and people will blame him anyway!

    I’ll be putting extra cash into my emergency fund to be deployed for additional stock purchases when the time comes. We had just bought a house after the 2008 crash and so didn’t have much money around to spend on cheap stocks, except a few shares of Fannie Mae and Citibank which have seen astronomical gains since then. I would love to experience that on a larger scale.

    Reply
  • BGA June 21, 2017, 9:08 am

    My wife and I have no student/auto/consumer debt but we did just purchase a home in inland empire (CA) – yes it was too expensive. We justified it because rents are almost as expensive and cheaper apartments in our city are mostly in less desirable areas.

    Still scares me to death though because I know we are nearing the end of a cycle – I just don’t know when. I sure hope we have a few more years in us, not because I don’t have job security if a recession hits, but because I hate buying at the top. I thought this thing would keel over in 2015. Too bad.

    I suppose the good news is that we have no other debt and I’ll finally be close enough to bike to/from work.

    Reply
  • Jerry June 21, 2017, 9:25 am

    What money would you expect to have on hand to invest during a recession? Assume someone keeps cash on hand for an emergency fund, and puts the remainder in index funds and investment real estate. During a recession, the value of their investments will drop along with the rest of the market. They may still have a salary to continue investing, but without keeping a large pile of cash on hand and trying to time the market I don’t see how you would expect to scoop up new investments at a discount.

    Reply
    • Greg June 23, 2017, 1:01 pm

      Assuming you still have a job, the money comes from your regular buys into your retirement and brokerage accounts.

      Reply
  • Roux June 21, 2017, 10:01 am

    So naturally it’ll hit right as I graduate. Super fun! Engineering degree, don’t fail me now.

    Reply
  • joy June 21, 2017, 10:11 am

    I was saving my emergency fund in betterment. 60/40….are you saying I have to use a regular savings account?
    Please advice

    Reply
    • --Michael Sheldon June 26, 2017, 11:39 pm

      The general advice is that you want your Emergency Fund in stable, liquid assets, like your bank account or something similar. The stock market is pretty volatile, and a down-turn might correlate with job loss. If that happens then you have much less of an emergency fund that you were planning on.

      More detailed advice can be found here: https://www.bogleheads.org/wiki/Emergency_fund

      Reply
  • Sean June 21, 2017, 10:21 am

    Interesting, thanks for the post! I currently have a large mortgage and a large chunk of money invested in Betterment at a 70% Stocks and 30% Bonds. The idea being that equity and fixed income gains will outperform the mortgage in the long term.

    I’m thinking what I could do is pull out 25% of my Betterment portfolio and start dollar cost averaging the proceeds into my mortgage (3.25%) until the market takes a dive, and then move the remaining money back into Betterment.

    Would something like this be advisable? Typically I’d keep the money invested but I’m thinking the “guaranteed” mortgage interest savings might be worth it on this leverage equity/low fixed income market.

    Reply
  • Mrs. Picky Pincher June 21, 2017, 10:34 am

    Excellent points as always, MMM. We’re taking advantage of the great economy now while we can. We’ve been able to pay off a shitton of debt thanks to living beneath our means and slashing expenses like it’s our job. That hopefully means we’ll be able to thrive in a recession with less debt.

    Reply
  • Taylor K June 21, 2017, 10:38 am

    My wife and I are 24 and have only experienced the upswing, but we are prepared thanks to your blog! I’m interested to see this sale on stocks.

    Reply
  • Florida Mike June 21, 2017, 10:40 am

    I’m not worried about any cyclical changes as I am debt free. I just need to get better at my whole investing program as I am below par on it.

    I do know that home construction here in Florida is at an all time high and they are averaging well above what they have in the past. Not sure how many folks are affording the $300k+ price tags but they are selling as fast as they build them.

    I wish I had more cash to be able to buy a few of these when the market fails as future rental property but don’t have that amount of liquid equity just yet.

    Reply
  • Bike Bubba June 21, 2017, 10:48 am

    Regarding the current “boom”, it’s worth noting that this “boom” has occurred while ever larger numbers of college graduates still live at home, and while ever lower numbers of people participate in the work force. I personally have worked with young people whose prestigious liberal arts degrees qualified them for an electronics assembly job. So let’s be honest here; the low official unemployment rate is hiding some ugly realities where young people would read your comments about current “good times” and ask “what on earth is he talking about?”

    Other big issues;high default rates on student loans, as well as car loans, mortgages, and of course the PE ratios mentioned here. But that said, the weak recovery we’ve seen since 2009 might also have an upside; it could mean that if restraints on job creation are eased, we could delay a new recession.

    “If”, of course. And as long as we’ve got the Federal Reserve messing with interest rates, and Congress encouraging stupid debt (plenty of guilty parties in both parties here) and idiotic spending, we are going to have a business cycle. But if we have a lapse into a tiny bit of wisdom, we can at least mitigate it.

    Reply
  • ML June 21, 2017, 10:59 am

    First post here! I agree that a recession is likely within the next year or two, and I’d like to be in a good position when it comes. So here’s my question:

    Is the risk of moving and looking for new work worth the potential benefits? I live in D.C., and living near work has meant that housing expenses are very high — nearly 40% of my net worth is in my condo (which is only half-way paid off, mortgage is my largest expense and my only debt). The property has appreciated a good deal, but big-city housing prices are just so high relative to my other investments. If I moved to a less expensive area, I would free up tons of cash to invest in potentially more productive ways (assuming that I get a job that pays as well).

    Reply
  • Alicia June 21, 2017, 11:08 am

    Well, this certainly makes me nervous. I’m young and still just starting out and I’m more worried about things like rent than credit cards and car payments. A recession for even just a little while could mean getting laid off. My savings are still small and often tied up in retirement accounts. Losing my job for more than a few months means being out on the street no matter how Mustachian my life has become. I’m sure this is nice for anyone who already has FU money, but I can’t treat it quite so flippantly when I’m 25 and only have a few months rent put away for emergency use.

    Reply
  • DanLee June 21, 2017, 11:24 am

    I love recessions, I have to pay less capital tax. (In the Netherlands you need to pay around 1,2% of total capital every year in taxes) . So long dividends stay the same and everything is at a discount its great. Bud then I should start working again because I can’t let the bargins go past me:p.

    Reply
  • Jacob June 21, 2017, 11:39 am

    An impending recession really doesn’t change my strategy at all. I’m going to continue to put money into my retirement portfolio and keep it rebalanced for my retirement timeline. My portfolio is diversified across different return drivers, so it’ll be fine. I’ll continue to make above-minimum payments toward my mortgage because that’s part of my strategy. I’ll continue driving my gas-sipping Prius compact.

    When the recession DOES hit… I’ll continue putting money into my retirement portfolio and keeping it rebalanced for my retirement timeline. Maybe I’ll postpone some vacations and cut back on my beer budget to maximize my haul when stocks are in the bargain bin, but the changes will probably be minimal.

    I think if you have a good strategy, you shouldn’t need to adjust it depending on whether or not you think a recession is imminent.

    Reply
  • FIRECracker June 21, 2017, 11:40 am

    As Warren Buffett says “Be Fearful When Others are Greedy.”

    There will definitely be a market correction sometime in the future, but no one will be able to predict when. And if they do, it’s just luck.

    For those who are property diversified, have contingencies in place, and can live off their dividends or side income, a market crash won’t hurt them. But those speculators who think the market will go up forever, will be screwed.

    As you mentioned, the Toronto housing speculators are a good example. Canadians now have a higher debt-to-income ratio than the Americans did before the 2008 crash (165% versus 147%). But as long as homeowners can find a greater fool, they think they can just borrow their brains out forever.

    Very cool that you read Garth’s blog!

    Reply
  • dave June 21, 2017, 11:50 am

    Thanks for sharing such helpful informative about where we currently are in the business cycle. As you said, a recession is coming, but we do not know if it will be next year or the year after that. All we can do is keep our own financial house in order. Don’t take on debt to buy more house than you need. Don’t take on debt to buy an inefficient SUV. Don’t take on debt for any reason. If anything, now is the time to pay down your debt to be in a better financial situation when the recession does come.

    Reply
  • Josh-stachian June 21, 2017, 12:13 pm

    I’m pretty sure I am the 27 year old you were talking about! I started reading this website about 2 years ago. Now my mortgage is paid off as of last month, and I decided a few weeks ago to keep a little more in my money market account so I will have a Stache to buy stuff cheap instead of putting it straight into my taxable account like usual. This article was perfect timing for a little reassurance. Thanks!

    Reply
  • Jess June 21, 2017, 12:24 pm

    Honestly, I’ve been worrying about this. I downloaded Personal Capital yesterday and I’ve been reading up on what to do during a recession, and then you come out with this article. I’m 27 years old too! I swear you can read my mind. Thanks for being my life coach!!

    Reply
  • Jessalee June 21, 2017, 12:27 pm

    Setting aside everyone’s glee and friendly wagers, try to remember that recessions hurt real, working people who can’t afford to have “fun” riding the “roller coaster.” People lose homes, jobs, insurance, etc. Did some of them spend too much and fail to plan wisely? Maybe. But they have kids and loved ones and their pain will still be real. I’m not arguing with your financial premise here, just asking for a little more humanity when considering the possibility of a recession.

    Reply
    • Mr. Money Mustache June 21, 2017, 7:27 pm

      It’s all true Jessalee, and I think my tone in the article kind of set the stage for this “bring it on!” party vibe.

      My real goal was to get people to be less worried and more prepared, because that decreases the severity of the recession itself if there are enough of us to move the needle.

      But even more importantly, I’d also like FAR more people to get into this more resilient and less leveraged way of living, because in a country with $56,000 GDP per capita, there is really NO reason for anybody to EVER really need to suffer from a 1-year decline in economic output. We have the power, if we can manage it a bit more wisely.

      Reply
  • Carolina on My Mind June 21, 2017, 12:33 pm

    Here’s a question. Suppose you are currently renting your home and are casually looking to buy if you find the right place. If you want to be ready to pounce on a deal when housing prices drop, do you sell enough stocks now to set aside a down payment?

    That’s the boat we are in: we keep very little cash on hand and live in an expensive housing market, so if we wanted to position ourselves to buy when house prices drop, it would mean selling >$100K in stocks and then having that much cash just sitting around. I hate that idea, particularly when we aren’t in any rush to buy and may never buy at all, but I also don’t want to have to sell >$100K when stocks are down if we find a great deal on a house. This has been on my mind for a while, and I just don’t know how to think about it. Any thoughts?

    Reply
    • Mr. FC June 23, 2017, 1:34 pm

      My opinion only – if you need the cash on hand to make an offer on a house, this money probably shouldn’t be in the market to begin with for the exact reason you point out – both the value of your down payment and the value of the house are contingent on the same variable (overall economic conditions – generally speaking – will determine the pricing level of each). But in this case you need one to be down (housing prices) and the other to maintain or be up (your investment) in order for you to win.

      In other words, you’re going for a double-win that doesn’t exist. Pick which one you want and make that happen.

      Hope this helps!

      Reply
  • Ash June 21, 2017, 12:38 pm

    I’m 26 years old, living in Canada and have been following you for a couple of months now – You’ve definitely helped me learn a lot more about personal finance. Thank you !! I’ve read a few financial books (Enjoyed A Random walk down wall street and Four Pillars of Investing in particular) and have just opened by discount brokerage account. I have 15,000$ I’d like to invest … I was thinking 50% in index funds and 50% in GIC’s/money market funds or bonds .. but now I know there is probably a correction on the horizon.

    What would be your advice for my case. given the market has had a GREAT run and there is a correction on the horizon. …

    Reply
    • Lynne June 23, 2017, 12:17 pm

      There is ALWAYS a correction on the horizon. If you let that prevent you from investing, you’ll stay on the sidelines forever and miss out on a lot of market gains, long term.

      Go read JL Collins’ stock series. Then read it again. Internalize it, and quit worrying about market timing. :)

      I just invested $60K into the market yesterday in one go (it’s the pension from my last job, which finally got transferred out so I can DIY it), and it is a really big percentage of my current net worth, and sure, maybe the market will start falling tomorrow. It definitely will at some point. But you can’t sit on the sidelines*, and you can’t effectively time the market (almost certainly), so…whatever, I’m putting my cash in when and as I get it, and let the chips fall where they may.

      *Well, okay, you CAN sit on the sidelines. And you probably should, until you go read that stock series. Twice. Then start acting logically. :)

      Reply
  • Scott June 21, 2017, 12:43 pm

    For those that like to predict things, I’d highly recommend two books by Nassim Taleb. Fooled By Randomness and Antifragile. Both should be available at your local library.

    Reply
  • bastringue June 21, 2017, 12:49 pm

    Market tops happen when retail investors are in. “Problem” is the majority of people are not in the stock market YET. Retail investors percentage is still very low. People everywhere believe we are due for a recession, that the market is overvalued, etc. That’s EXACTLY why I believe the stock market will continue to climb that wall of fears.

    Reply
  • Grover June 21, 2017, 12:51 pm

    With tax free funds, I think it pays to use SOME strategy to move into and out of stocks. Keep a core at all time perhaps, but look for historical indications that it is time to “rebalance” to cash or some other investment.
    I actually think the indications to buy are a bit more clear when they occur, but it is currently a time to be LESS invested than usual. The timing of the recession–my vote is 2018-2019.

    In designing a strategy, Antonacci’s momentum is a good start. You can also use historical measures of price / earnings / breadth etc to see what the returns have been in the past for the 12 months following historical similarity to today’s reading. I believe the risk of a 20% or greater decline now is much higher than a 20% advance.

    One other helpful thing is to think about the frequency of % declines:
    5-10% common and not worth worrying about
    15-20% Normal. May be worth having some spare cash when when historical measures are stretched
    25%-40% Unusual. There have been many of the former and relatively few of the latter.
    50-60% Rare. There have been several in the last century. 1929-32, 1974, 2000 in the Nasdaq, 2008 almost…
    Greater than 60%–historic. Great depression and Nasdaq 2000 are the only qualifiers in the US in the last century. Japan and others have experienced these sorts of decline. I think it pays to think about these odds when listening to a commentator call for a historic crash. Not likely.

    Reply
  • WageSlave June 21, 2017, 1:02 pm

    Ignoring all the ways recessions hurt people… I feel like I’ve been in pretty good financial shape for a few years now; I’ve since secretly been interested to see how my finances look during a recession. I more or less know what to expect, but I’m curious to see real numbers (as opposed to theoretical) in my spreadsheets. In some ways, it feels like I’ve built a bridge, designed to withstand an army of tankers passing over it, but so far it’s only been lightly used for pedestrians. I want to see it put to a *real* test.

    I basically have two criteria for FIRE: minimum portfolio size and expected dividend/interest-only returns (my FIRE goal is 100% capital preservation). What’s interesting is that these two items are somewhat at odds with each other. Higher-cost investments (such as today) generally imply lower future returns; but that same rise in prices has raised the value of my portfolio year after year. Now during the recession, I expect my portfolio value to drop but my expected returns to increase. When the next recession hits, all the more reason to tighten the belt and put any extra cash into investments.

    Oh, by the way: “And if you happen to think that economic success correlates with the level of brainpower currently in the White House, then, hmm.. you can make some adjustments based on that as well.” A little disappointed with that statement—it could almost be construed as politically correct! :)

    Reply
  • David Ann Arbor June 21, 2017, 1:12 pm

    I have some contrary thoughts. There’s no imminent recession. In fact while you state the job market is great, there’s really no sign of wage inflation pressures. The year over year wage rate grew 2.5%, just a nose ahead of inflation.
    The labor force participation rate of 63% has never recovered to the pre-recession levels of 66%.
    Looking at the various graphs of the zero hedge fund blog, it looks like total household debt is quite a bit below the pre-recession levels when comparing debt to GDP ratios. Moreover, housing debt, which makes up the vast bulk of total household debt, is incurred by those with much higher credit scores than prior to the recession – the result of much tighter lending rules thanks to Frank-Dodd legislation. This housing debt has a very low default rate, and it’s not getting worse.
    Yes the auto lending is a concern. But why do people buy cars? So that they can drive to a paying job. The sub-prime auto lending is very predatory, in which low credit score individuals buy poor quality cars (that break down) at inflated prices with inflated interest rates. The inevitable sub prime auto loan default leads to garnishment of wages. These sub-prime defaults are actually very profitable for these financial companies that go after the sub-prime borrowers
    Student loan debt, mostly not able to be discharged in a bankruptcy, is also a concern. But why do people incur this debt? To get the specialized college skills that seem to be in demand in high tech/medical high paying jobs.

    Yes at some point there will be a recession. The stock market has predicted 9 of the last 5 recessions.

    Reply
  • Sean June 21, 2017, 1:15 pm

    I don’t see anything happening anytime soon. Too many people are in too much debt to change the situation in Canada w/o mass political uprising. Wish it wasn’t so, but this spending party is gonna keep on going here in Canada. I lived through the crash of 1983 and the high interest rates, but those are long gone. I wish they weren’t because saved money earns nothing now. This isnt going to change my thriftiness, but people don’t even talk about a crash in Vancouver as most of the assets are owned offshore.

    Reply
  • Omar Rosales June 21, 2017, 1:20 pm

    MMM is right, a recession is going to happen sooner or later. It’s just the business cycle.

    Right now, real estate is hot in some areas . . . but what happens when the economy tanks, borrowers can’t make payments, and banks cannot sell b/c properties are upside down? I think the key is to always focus on value, maintain your discipline, buy on the dips, and live smartly.

    Hard to say what will trigger the next recession. Could be a wave of retailers that declare bankruptcy – Macy’s, Neiman Marcus. Others will shutter – Sears, JC Penny, K-Mart. Could be stock market crash.

    It will happen. The key to survive is long-term view and stoicism.

    Reply
  • Krislyn Dillard June 21, 2017, 1:27 pm

    Is that an eagle burrito? I should mention that eating endangered animals even with yummy guacamole is probably not a good idea. ;-)

    Reply
  • John June 21, 2017, 1:31 pm

    Recessions are great for dollar cost average savers. Not great for people about to FIRE.

    Reply
  • RAE June 21, 2017, 1:36 pm

    I think you’re right Mr. Money Mustache.
    It’s simply mean reversion: inflated/deflated prices (or P/Es) always come back to their long-term average.

    There’s also the consideration of a supply-demand dynamic. Any market, whether in a boom cycle or bust, exists because of that. So we can expect supply of stocks, ETFs, etc. to increase when a recession occurs.

    Can’t wait to go on a shopping spree!

    Cheers,
    -RAE

    Reply
  • Jared June 21, 2017, 1:39 pm

    I’m just getting ready to invest via maxing out 401K and IRA as well as $80,000 into vanguard index funds. I’ve been reading as much MMM as I possibly can trying to educate myself for the past few months. After reading this post I’m starting to second guess my decision. From what I read it seems as though you shouldn’t try to “time the market”, but I’m basically getting ready to invest everything I have and up to 80% of my income from this point on. Any advice/comments would be appreciated.

    Reply
    • Lazy Radish June 24, 2017, 2:07 pm

      Hi Jared,

      Max out 401k and IRA because of tax advantages. The $80k are bit different, since they represent a large amount of money and are the first time you do serious investing, so there is a psychological element to it.

      When I started investing 4 years ago, I had about $20k which I didn’t want to invest all at once. What I did instead was to split it up into smaller chunks and put them into the market little by little, I think it was $2k every two weeks. That made it a lot easier for me to put money into the market and see it go up and down each day. (Luckily / as expected, it went up in the long run). Nowadays, I’m totally fine investing windfalls in their entirety immediately. Market prices don’t matter to me, I can’t predict them anyways.

      I hope that helps. Good luck.

      PS: I highly recommend Jim Collins’ book The Simple Path to Wealth. Great read, no bullshit.

      Reply
  • Kara June 21, 2017, 1:42 pm

    ‘We’ (as in, our culture here in the US), never seem to learn. I have watched the news on rising personal debt and defaults, and the ever-expanding car loans (both in terms of amount and length of payments) and it all just leaves me shaking my head. Did people learn nothing the last time around? On a bright note, when things go south is always a wonderful time to invest heavily in the stock market (provided you have time on your side to ride it out until the next upswing). I am very grateful to have put my household on a path where all of this noise is just that- noise.

    Reply
  • Russell June 21, 2017, 1:46 pm

    MMM, I’m wondering if you could expand further on your comment as to where to begin directing your money toward: “like rental properties in low-cost cities (where reliable rent is over 1% of total property price per month)”. Are you doing exactly this? I know you have rental property in CO, but are you invested in other areas across the U.S. as well? Perhaps I missed an article about this?

    Reply

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