424 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?

  • Tree Man June 21, 2017, 2:02 pm

    Do not confuse an economic collapse with a market crash. They don’t always coincide. While the current stock bull market seems long relative to previous ones, there is no reason why it can’t double all previous runs in length. Stock investors should not put too much confidence in historic returns. As soon as one knows what will happen, the market will prove us wrong.

    Reply
  • FinancePatriot June 21, 2017, 2:09 pm

    This intuitively makes sense to me. As a soon to be early retiree, I have been divesting two years of living expenses into safe investments, while times are good. Planners should always be rewarded, and I bet in the future I will look back to this move into bonds as genius. For now though, it just seems like the right thing to do since I can’t time the markets with any certainty.

    Reply
  • Vj June 21, 2017, 2:10 pm

    Excellent post as always.

    Couple of questions on how we prepare

    1. Am heavy in stocks / targeting to FIRE in next couple of years. Does it make sense now to balance my portfolio to 50:50 stocks / bonds? And be back to 90:10 ish ratio when recession hits and we get into lower PE ratios ?

    2. Is it good to buy rental properties NOW? Means, sell stocks and buy rentals? Is it worth the capital gain tax we end up paying?

    I know its not easy answer – can’t help thinking about it.

    Reply
    • Felipe June 21, 2017, 2:23 pm

      I will answer your question as a fellow mustachian sharing my thoughts on your questions, not an advisor of any kind.

      1) This is a form of market timing and a fool’s errand as it is nearly impossible to predict both when to buy and when to sell. That said, in 2000/2001 Mr. Bogle reallocated to 75 Bonds-25 Stocks since bonds paid out so much more and were more stable, he felt it was ridiculous to keep so much stock in those times when it was obvious which was better valued.

      2) Depends on how much tax you have and how much net cash flow the rentals will give you. On VTSAX, the current earnings yield is slightly below 4%. But if I listened to all the doom and gloomers, I would have missed out on a huge amount of gains. I’m happy I didn’t sell and simply kept dca into the index. Taking on more leverage right now sounds risky and a recession means there is a decent chance that properties in your neighborhood will drop in purchase price.

      All that said, I went from 100%stocks to 75% stock-25% bonds recently. I don’t have an interest in rental properties.

      Reply
      • Vj June 21, 2017, 2:48 pm

        Thank you Felipe.

        #1, Yes, I agree – no body can perfectly time the market. What I meant here is to make the rebalancing now – as MMM pointed out it with graphs, it seems we are somewhere close to recession. Its more of risk management I guess – rather than trying to time the market and make a fortune.

        Again, even balancing means loss of capital from capital gains tax. I wish there was a way to balance without selling funds in Vanguard :)

        #2, You are right. I do remember doom and gloom theories even in 2013. However now, this definitely seems a different phase of bull market. Everyone seems to be optimistic and thats a concern.

        Reply
  • Edith June 21, 2017, 2:35 pm

    So… this is a bad moment to buy ETF’s? But doesn’t MMM hold a lot of ETF’s? Is he going to put his money into bonds or some other investment until the storm passes? If he doesn’t, will he be able to live off the 4% during the crisis?

    Reply
  • Syed June 21, 2017, 2:43 pm

    I’ve got lots of “20 year money” invested so a recession is just what the doctor ordered. Coincidentally I recently came across an article on LinkedIn talking with economists on why the recession is happening. Their advice was “be afraid. be very afraid.” Mustachian advice is “Rejoice!”

    Reply
  • ks June 21, 2017, 2:50 pm

    yeah, if that overinflated AMZN stock price isn’t a bubble, I don’t know what is. There are only 4 certainties in life: death, taxes, change and volatility.

    Reply
  • Rob June 21, 2017, 3:27 pm

    Why is there a photo of the burrito with an Eagle on it?

    Reply
    • Mr. Money Mustache June 21, 2017, 3:30 pm

      It’s actually one of my wrapping jobs for an Xmas present I was giving to my son. I like shiny and I like Eagles, so I figure a shiny EAGLE would really spruce up the package.

      Reply
      • Ms Blaise June 21, 2017, 5:59 pm

        Hilarious. Ive read 200 plus comments to find out what that image was. I thought it was an enormous joint!

        My lovely man wraps all my presents like “xmas crackers”. meaning, he doesn’t bother with sellotape, just twists the ends and says: “it’s a cracker to celebrate”.

        Reply
      • Sarah July 1, 2017, 10:52 am

        I interpreted the bird as a crow and the package as a burrito, and since the topic of the post was, in part, market fluctuation and predictions, and contained the question “do you care for a wager on when the next “crisis” will hit…?,” I imagined it could be a burrito held in reserve for all whose predictions turn out to be wrong – that is, they will have to “eat crow.”

        In fact, many could eat it right now, since the next “crisis” has been predicted a hundred times over already – by talking heads, eggheads, and little people alike, and not yet happened.

        Thanks for your awesome blog.

        Reply
  • postscript June 21, 2017, 3:37 pm

    I’m less worried about the government causing a recession than I am about them disappearing the Affordable Care Act and Medicaid. Where will early retirees with pre-existing medical conditions get health insurance?

    Reply
  • Vanesa June 21, 2017, 3:44 pm

    Great article as always.

    So, MMM, should I save in a no-interest-earning, but secure, savings account my paycheck or should I invest it on a Roth IRA, 401K or any other investment account? I’m new to mustachianism XD

    Reply
  • kindoflost June 21, 2017, 3:49 pm

    Many times I have to remind myself that I was lucky to get into investing in 2008 and I am not a genius at all, I am just riding along in a very nice growth wave. Oh and one day I will get around to develop a formula to use the Shiller index to determine the stocks/bond optimal mix.
    Good one.

    Reply
  • Profitable Matters June 21, 2017, 5:16 pm

    I believe that the next recession will hit sometime within the next year (so by June of 2018). It’s definitely been a long time coming, and although past performance doesn’t always predict future results, history seems to be repeating itself with the same signs that have come before previous recessions.

    Reply
  • northerly June 21, 2017, 5:28 pm

    The Bull Markets graph in Jim Collins’s Sell!Sell!Sell! article paints a more optimistic picture comparing past bull runs to now. It’s inflation adjusted and makes the 2009-present bull market seem pretty ho-hum in comparison to 21-29/42-66/82-2000. http://jlcollinsnh.com/2017/04/14/sell-sell-sell-sell/

    Reply
  • Jen June 21, 2017, 6:03 pm

    We have $900,000 sitting in cash, 0 debt, a paid off mortgage, and live below our means. We’re in our early 50’s, we work periodically. I hate having this much non-productive cash. (Wait, I don’t hate cash, just the non-productive part…) We recently sold some RE, local housing prices are nuts (bad price/rent ratios) and according to some top Realtors I’ve chatted with, our northern Colorado market is beginning to “shift and soften” — so I’m not wanting to reinvest in RE right now. Anyone want to pretend this cash is theirs and tell me what YOU would do with this $900,000? I know it’s mustachian to stay invested; not time the market, but for a wide variety of seemingly logical reasons (including those mentioned in this post), I’d wager that a recession is due to hit within the next 12 months. Wouldn’t it be lovely to have this kind of cash available when stocks and RE eventually go on sale? Or would you ignore the signs of a possible imminent recession, stick to your mustachian ways, and invest this cash in index funds/bonds now?

    Reply
    • Mr. Money Mustache June 21, 2017, 7:18 pm

      If I needed maximum income from that money, I’d grab a few multi-unit buildings in a low-cost area (Missouri, Louisiana) and have them professionally managed. There is no need to have your rentals in the town you happen to live.

      Another great choice (slightly less profit in exchange for 100% less thinking/work) is just get a diversified portfolio – Vanguard or Betterment’s auto-rebalancing stuff. You will IMMEDIATELY start collecting over $20,000 per year in dividends even at today’s prices, and you won’t care about fluctuations in the stock market.

      $900,000 lumps of cash are not a good idea – unless you already have, say, $10M invested productively and are just keeping that cash aside for an investment you are about to make.

      Reply
  • EMML June 21, 2017, 9:03 pm

    Hmm, not sure exactly when. August or October, maybe? I’m thinking the pension crisis/Illinois funding could be a trigger this time around. When is that expected to hit critical mass? There is currently no leadership in Washington to help avert. I predict more of a slow leak, as I don’t see the craziness that I saw with the 2008 crash.

    Reply
  • ZJ Thorne June 22, 2017, 6:24 am

    My career was definitely negatively impacted by the last recession. My area is starting to feel the rumblings of the next one. I’m doing all I can to reduce obligations. I’m worried about what will happen to folks who do nor or can not prepare.

    Reply
  • Renard June 22, 2017, 7:02 am

    Hello Team ‘stash….. a couple of more points to consider:
    First is the 10yr-2yr treasury spread. This sucker goes negative before every recession going to the way back. It has only gone negative (briefly) once and not preceded a recession. Some argue that its value as an indicator has been damaged by the fed induced clamp on interest rates. I have no idea, but it is definitely not trending positive…
    https://fred.stlouisfed.org/series/T10Y2Y

    The second is the simple law of averages. The S&P 500 index is currently around 2400 which is about one standard deviation above the 3 year trailing average of 2000 and almost 2 standard deviations above the 10 year trailing average of 1500. Again, I’m not from Delphi, but man there isn’t a lot of room on graphs that lie beyond 2 standard deviations.

    Would love to hear some discussion on these points.

    Reply
  • Bob June 22, 2017, 7:04 am

    Sparked by speculative bubbles…. hmm, I wonder if Bitcoin / altcoins will be the contender? People buying everything with the word “Coin” in it, just like “.com” or “electronics” in the 1990s-2000s. Very interesting how global this one is going to be, and I think for the first time a purely digital “asset” as opposed to anything physical at all.

    Reply
    • Neil June 23, 2017, 12:23 am

      Seems too niche. Some people are pouring massive resources into cryptocurrencies, but it’s not mainstream. I’m going with: not enough people involved, maybe next time.

      Reply
  • a1pharm June 22, 2017, 7:18 am

    There are 2 obvious bubbles, but I can’t figure out the mechanism that will result in them “popping.”

    The first is health care/health insurance. This is extremely expensive and probably overpriced, but I don’t know what will “pop” this bubble. The ACA repeal efforts won’t result in a pop, and the ACA itself props up the system so it can’t pop.

    The second is higher education. Colleges charge more and more (waaaay more than inflation), new buildings are created, more students that should have gone into trades get weird bachelor degrees and no jobs. I don’t see this popping at a national level, because the federal government prevents this system from popping with student loans.

    Because these 2 bubbles are (seemingly) unable to pop, they may just weigh down the growth of the rest of the economy. As the baby boomers retire en masse, and begin selling their index funds to fund retirement, Gen X and the millenials will be unable to absorb what is being sold. I believe this will reduce stock prices, but not in a dramatic “pop.”

    Reply
  • arcyallen June 22, 2017, 7:41 am

    I remember hearing that expert economists have predicted 5 of the last 4 recessions. I think that sounds about right. But if I had to guess, I’d say Q3 2018 it’ll start next.

    (Fun fact: I guessed the last market bottom on the day it bottomed. Guess is the key word here.)

    Reply
  • Chris B June 22, 2017, 12:23 pm

    As part of recession prepping, I’d recommend the following steps:

    1)Become indispensible at work. Make your move now to a position, department, or company that is recession-resistant. E.g. the company will layoff its wellness coordinator, but not the accounts receivable person.

    2) In case #1 doesn’t pan out, plan to pick up some education during your next forced sabbatical. Identify a certification or degree plan that could be knocked out with 2-12 months of focus, during a time when there aren’t many jobs to chase anyway. Save some EdU money alongside your FU money, and come out of the recession with a promotion.

    3) If you live in a HCOL area, consider moving to a LCOL area. Your savings will keep you afloat longer if necessary, your income-to-expenses ratio will be better, and your FI number will be lower. The concept of LCOL cities having no jobs or economies based on raising pigs and chickens is a media myth. Check out the stats for increases in the unemployment rate during the last recession. Plains and mountain states were fine all along. The South’s structurally high unemployment got only marginally worse. Aside from manufacturing towns, it was the high cost areas that suffered the worst.
    https://www.forbes.com/2009/07/29/unemployment-shape-map-business-washington-map.html

    4) Expect credit offers to disappear at exactly the time you’d like to leverage your home equity to buy bond funds yielding 10%. Don’t get caughtwith a credit card balance or expiring variable rate mortgage.

    Reply
  • BuildMyFI June 22, 2017, 11:49 pm

    Very informative as always MMM. I am 26, in fact, I never experienced the Recession like you said but I did observe how it made a great impact on my family’s members in the last one. At that point, it also affected me because I didn’t want to make the situation worse by asking for expense money on top of my school tuition. I lived super frugally with my $550/mo part-time income and I bugged the office for the entire summer until they gave me that job. Meanwhile, I cleaned house for my landlord to live on free rent.

    Life was hard then, but things got better. When I was 23 and got my first full-time high paid job thanks to my fancy education in engineering, I already visioned how I got myself into a rat race, it’s when I started all the questions about the actual life freedom and tried looking for an answer. Luckily, I landed here, and execute some great actions when I was 24, which can be quickly summarized in 3 words “earn – save – invest”. I would say I built quite a stack now ever since, still very far from the goal being FI though. But I think if the next recession hits, I don’t think my life would be impacted so much because I am debt free and the saving is enough for me to sustain way more than just 6 months.

    If anyone ever asked me what I would change if I could go back in time, I told them I would go back to the last recession and bought some index funds for cheap. Well, I couldn’t do it last time because I was young and didn’t know much. Now that I am wiser and as MMM mentioned, hopefully, I can get some discount scoops out of this as I keep my investment stream stable and patiently wait for the next wave to come.

    Reply
  • Neil June 23, 2017, 12:09 am

    Thoughts on adjusting asset allocation, particularly internationally? While the US seems overvalued, much of Asia seems like a better deal. Most of my money is in an employer sponsored plan with limited options, and I’ve been keeping that 70% Canada, 30% US. I’m looking at moving to a 40% Canada, 20% US, 40% international allocation.

    When you’ve talked about indexing, it’s been pretty focused on the US markets, so I’m wondering what your thoughts on that might be.

    Reply
    • Felipe June 23, 2017, 12:39 pm

      International markets come with greater accounting risk, political risk (revolution, invasion, default, corruption, etc.), demographics risk, currency risk, etc.

      I am switching from 2:1 us: international soon but because I am moving abroad so I’ll be spending less usd and more other currencies.

      This depends on where you live is what I’m saying.

      I think Mustache is half us half international from the “We Sold a House” article.

      Reply
  • Jeremy Collins June 23, 2017, 9:19 pm

    Can anyone provide me with more info on why now is a good time to rent in big cities? Thanks!

    Reply
  • Alfonso C. Betancort June 25, 2017, 2:06 pm

    I feel pity you guys. I don’t understand the selfish logic behind of wishing a recession to hit anywhere to profit from other people losses. You should be wishing for a paradigm shift that allows everyone to profit. You are trapped in a win-lose mind scheme, while you should be investing your neurons to find win-win schemes.

    From my own personal finances, I should be one your side because I have never owed a cent to anyone, I have more cash equivalent assets that I would ever need and quite an amount of developed real state. But I strongly dissent of wishing for a general drought so I can sell my stocked water at an insane profit. I am able to recognize I have been “a lucky one” in my life, with willingly hard work, in both, my education since childhood and professional career but not everyone gets the same break for more reasons we cannot imagine nor can judge, and they and their families depend on their daily wages.

    Reply
  • Rory June 25, 2017, 7:48 pm

    Whatever date the next recession occurs is irrelevant, so I won’t venture a guess. What I hope everyone on this blog can appreciate is that far more money is lost anticipating and trying to time a recession than the recession actually causes.

    I’ve been in the finance/investment field for 15 years; not as long as some, but long enough to have seen 3 good recessions. In each, people were crying wolf for years before it went bust, and in many cases pulled out of the market years before it hit. I’ve been guilty of it myself; most recently starting in 2015 I’ve been less than fully invested. Since that point the S&P went from 1450 to 2450 (68%). I told myself then it was starting to get too expensive.

    Most recessions are mild; 10%-25% dips. You can’t miss too many 68% gains.

    So that’s my prediction.

    Reply
  • Sandy June 26, 2017, 8:35 am

    I also feel a recession is on the way within the next couple of years. I live in Denver and I just imagine when housing falls, what will happen to all the new homes they have built in the past few years? (They are still building by the way but they have scaled back as if they also know something is coming). I retired four years ago at age 39. I have a paid off condo and a cash purchase compact car, zero debt and ready to buy anything that is on sale as investment when the recession hits. Just an observation, the houses in Denver used to sell within days, I mean like 4-7 days. Now I see for sale signs sitting on lawns longer and longer. I even see open house signs on weekends where there was no need to have an open house in the past few years, there were multiple buyers for one house most of the time. A condo like mine sold within 4 days just last February. Now there is one for sale at a lower price and it has been on the market for 26 days. So, I am sitting tight and living life meanwhile, waiting to see what comes our way in a couple of years.
    p.s. I was in Longmont yesterday for the first time. Such a nice break from the crazy busy Denver metro area. Was dropping off some donations for a wonderful Wildlife rehab place a little outside of Longmont, and made the best of it by hanging out in Longmont, walking around the main street for a couple of hours where there was a Latino festival going on.

    Reply
  • Max June 26, 2017, 10:52 am

    The Federal Reserve creates these toxic asset bubbles and subsequent busts when they supposedly ride to the rescue with ultra-low interest rates. They do far more harm than “under regulated hotshots on Wall Street”. The low rates are a drug that starves yield and basically forces investors to speculate in order to at least make a buck and/or at least beat inflation. Greenspan slashing rates fueled the housing bubble and Bernake slashing rates fueled the current stock, bond, and real estate bubbles. Government-backed mortgages kept the housing bubble going up, government-backed student loans have fueled the student loan bubble. It’s government policy (everyone should own a home/go to college/etc.) and meddling in the economy that causes these asset bubbles to wreak havoc on main street savers and investors. Like a drug addict quitting cold turkey, they need to let the malinvestment and debt work its way through the system like withdrawals so we can have an actually recovery that has a chance at a prosperous future.

    Great article, but I think you have the role of government a little backward in your thinking of who’s to blame for the malinvestment and rampant speculation.

    Reply
  • Zethers June 26, 2017, 11:11 am

    *Looking for advice*

    Thanks to everyone for the wealth of info on the topic!
    I’m a travel ICU nurse and single wage earner for my family with two children under 2 years old(aka chaos, but joyful). We are doing contract work right now, saving money and living simply. In the next 2 years we will “settle down” and the debate I’m having due to the state of the economy is: if/when to purchase a home? I have diverse assets ranging from bonds/gold to aggressive stock(majority) and some young savings accounts for the kids. How can I best plan for the future and bank off of the coming recession? All opinions are appreciated!

    Reply
  • Ross Williams June 26, 2017, 4:29 pm

    It seems to me this misses cause and effect. The 2007 housing bubble burst was one of theconsequences of an economic downturn, not its cause. If you want to understand what causes a recession take a look at North Dakota. Its economy grew as part of a world wide boom behind growing demand for oil. In addition to the direct jobs in the oil fields, there were jobs building housing, businesses was built, transportation facilities were needed, restaurants opened and bars expanded, But that worldwide boom in production along with declining demand eventually created a surplus of oil. That ended the oil jobs, the need for housing, reduced the restaurant and bar customers etc. That is what causes recessions. They are normal corrections from overproduction compared to demand. In particular, the demand that is created for services supporting growing production causes recessions when the growing production is not matched by growing demand. That is why recessions are inevitable. Speculation has nothing to do with it.

    Reply
  • Grant June 26, 2017, 5:39 pm

    As a matter of fact MMM, now would be the WORST time for anyone to sell out of their index funds. The two – four years preceding a recession quite frequently have the best returns thanks to all that speculation you talk about. Think of the 4 straight years of 25%+ returns in the 90s. That upside was well worth the downside of sticking out the bursting of the tech bubble. Sentiment and euphoria may not last forever, but missing out on the upside of the next couple years is surely the best way to hurt your long term gains as an investor.

    As a general rule, you shouldn’t ever sell out of your investments unless you need the money, but in bear market times, really pinching your pennies and putting every dime you have in the markets is the best way to take advantage of the cycle.

    Reply
  • Calin June 26, 2017, 5:45 pm

    I have been looking at FI for a long time and have made changes to my spending and saving since. However, this post made me realize that perhaps I should reduce the amount of savings that I do per paycheck in order to pay off student loans faster. Since I began the FI journey I have been able to eliminate all of my consumer debt so the student loans are my last form of debt.
    Right now I am putting more money into my 401(k) and personal savings (in order to start investing in real estate) than what I put into paying off the student loan, albeit I still pay over the suggested amount. Am I doing this the right way??

    Reply
  • Pencil Thin June 26, 2017, 7:10 pm

    Hi MMM!

    I discovered your blog about a year ago as I was stumbling around on the internet searching for what intelligent people with efficient life philosophies do with all of the money they accumulate. The blog has been a reassurance that I am (mostly) doing the right things as well as a guide for some of the missing pieces, and for that I would like to give thanks! I’d be happy to share details of my story if it there is any interest; it involves growing up in a rural, poverty community, landing a dream job as an engineer designing bicycles (in the bay area, yikes!), and now leading an FI* life with a family of four as I look forward to my 38th birthday.

    All of that out of the way, I’d like to hear ideas for the best preparation given the upcoming crash and my own situation. I have a mortgage free house and the rest of my net worth split between a Vanguard account and my 401k. I’ve seen a few ideas on your blog for investment strategies and I’d like your thoughts on how to manage the money in the two accounts and/or if you’d diversify them differently. Below are a few of the different strategies I’ve seen on the blog (in Vanguard terms):

    1) Everything in VTSAX
    2) 60% VTSAX, 40% VBTLX as you close in on retirement
    3) 25% VTSAX, 25% VBTLX, 25% VTIAX, 25% VSMAX

    I believe there has also been advice to keep a six-month stash for expenses in a money market fund or other short term savings. Please correct me if this recollection is in error.

    Thanks,
    PTS (Pencil Thin Stache)

    *I still work remote for said bicycle company.

    Reply
    • Mystic July 25, 2017, 1:31 pm

      look at all weather portfolio or david brown’s permanent portfolio

      Reply
  • Brian June 26, 2017, 8:05 pm

    Probably already mentioned in somewhere in comments but almost all articles and blog post that I have read(like this post) mention nothing of inflation and many other factors(population, policy, etc.) that play a huge roll in analyzing current debt against past. Also p/e ratio’s of many tech companies inflate the average p/e significantly.

    Also I think that people panic over big numbers based on irrational thinking. It is much easier to justify a price going from 10 to 20 but from 1000 to 2000 seems like such a huge change… yet they are both simply doubled. If we can expect a 7% return (-inflation) then in 30 years the DOW would be around 150,000 and the SP would be 15,000. Over time the market charts are going to look more and more dramatic. At a constant return as time goes the charts will climb the y-axis at a faster rate.

    Reply
  • Data June 27, 2017, 10:16 am

    Have to agree with the article. Been casually browsing shares to buy (I pick undervalued companies). When looking at the price of each chart its literally like “oooh I like this product…omg the price is near its record high!” I think it will probably happen over a couple years, although if its a flash crash I know exactly where to sit and which popcorn brand I’m going to munch on !

    Reply
  • Dylan June 27, 2017, 12:33 pm

    For those of us who are younger and new to the game, how can I prepare for the recession? I am 100% invested in stocks right now. Should I reallocate future investments to include some bonds so that I can rebalance and use the bond money to buy stocks when the stocks eventually go on sale?

    Reply
  • rente39 June 27, 2017, 1:19 pm

    I’m worried we won’t have a recession. Because in this case, early retirement is getting almost impossible for a “normal” family like the high-school teachers in one of MMMs early posts (link below).

    Why is it impossible now? Well, MMM is correct in pointing out that with a Shiller PE of almost 30, stocks are very expensive at the moment. A Shiller PE of 30 is basically forecasting an annual return of 3,33% (1/30). Now subtract 1,33 percent for inflation and taxes, and you end up with real returns of about 2%.

    2% is a lot less then the 5% used in the teachers post. With today’s stock prices, our teachers are in for almost 30 years of working before they can enjoy “early retirement”.

    http://www.mrmoneymustache.com/2011/09/17/the-race-to-retirement-revisited/

    Reply
    • Ryan Anderson June 29, 2017, 1:19 pm

      I think there are new normals in both the stock market and housing. Of course it will continue to fluctuate up and down. But with increased credit usage and aggressive federal reserve policies, all of these assets will stay inflated because the money has to go somewhere. And as long as these policies continue so will the inflated prices and no elected or appointed official wants the ball to drop on their watch. So you will see policy that favors inflation, just not consumer inflation.

      Reply
  • Vijay June 28, 2017, 6:09 pm

    I do not think what is coming for the US is some recession. Look at the link below, which is just the external debt as a percentage of GDP. US is now at a point where just its external debt is almost 100% of its GDP, and the situation is now so bad that if the interest rate reaches just 4%, the outgo of taxable income to address just the interest on these loans would be 800 Billion USD or one third of all taxes collected in a year! This in turn would mean that the US could not even have money left to fill the potholes on its roads. With increasing aged population reducing the workforce and hence taxation net, and increased automation in the horizon for manufacturing, there is pretty little of a future in the current economic environment that I see for the US. The only solution to this that the US has at the moment is devaluation, which is another reason why people with a million dollars in income are leading a broke life in some 6 cities of the US today.

    https://en.wikipedia.org/wiki/List_of_countries_by_external_debt

    Reply
    • HeadedWest June 30, 2017, 5:07 pm

      I think (hope?) the opposite is going to happen, at least with respect to the demographic situation. Right now, and for the past 15 years or so, the segment of the population in their peak earning years (35-50) has been Generation X. We’ve got millions more Millennials than Gen-Xers, though, and the oldest Millennials just turned 35 last year. We have a nice long path to growth ahead of us as 75 million people enter their peak earning years, and only 65 million Gen-Xers drop out.

      http://www.pewresearch.org/fact-tank/2016/04/25/millennials-overtake-baby-boomers/

      I think in the next few years we will have a mild recession and then it will be off to the races again.

      Reply
  • Mark June 29, 2017, 9:55 am

    I’ve considered buying a house or a condo but prices are very inflated in this part of the country. Given high P/E ratios and other market instabilities like medical/student debt loads and catastrophic retail contraction , the current market trajectory is unsustainable.

    My advice is to still contribute to Roths/401ks but defer taxable investments until the storm hits. Stockpiling cash will allow you to take advantage of buying opportunities when the time comes.

    Reply
  • Tass June 29, 2017, 5:22 pm

    Yikes… Brand new reader here, just binged your entire history in 2 weeks – and though I overall find your philosophy inspiring this was a scary one to end on! Not only do I belong to the under-27 crowd who remembers the 2008 recession from the fear of the adults around me more than from my personal experience, but I’m also a graduate student; love your advice on living frugally, but I don’t have the capital (yet) to take advantage of stocks being on sale.

    Guess I’m failing at Outrageous Optimism here… I still have several years of this PhD to go so it’s probably too early to worry about what the job market will look like at the end of it. ;)

    Off to start bike shopping for when we move closer to school next month – cheers!

    Reply
  • Michael June 30, 2017, 12:52 pm

    I only just started building my ETFs this year, but I’ve got about $75k invested so far (hitting ~68% of our income monthly). I intend to hold indefinitely and be FI within 10 years, but this article makes me wonder. Is it ever reasonable to sell “high” so I’m cash flush when the stocks are on sale in a couple years?

    Reply
    • cjdquest July 26, 2017, 9:41 am

      That’s market timing & it usually doesn’t work out. You could miss gains if the crash is still a ways off, plus, you never know exactly when to get back in. If your ETFs are all in stocks (100% stock allocation), and you’re getting cold feet thinking about the ‘white knuckle’ part of the ride ahead in a correction / recession, perhaps rethink your asset allocation to something where you can tolerate the risk. When stocks go on sale, you rebalance to your target allocation will force you to sell bonds to buy the stocks.

      Reply
  • Matt June 30, 2017, 2:36 pm

    MMM with the idea of a recession on the way do you recommend moving money from a total stock market index fund and transferring it to something of lower risk such as a fund more heavily invested in bonds? Or do you believe it is best to keep that money invested in the total stock market index and build up cash reserves in order to buy more shares when it is on sale?

    Reply
  • CopperCups June 30, 2017, 5:04 pm

    Hello! I have a question regarding the “Economic Expansions since WW2” chart. Starting in 1982 the years between recessions seem to make quite a jump in length. Why is that?

    Reply
  • BestPal June 30, 2017, 5:04 pm

    What percentage of net worth should one keep for “when a big one comes”? It’s personal, and the fear of missing out competes with the desire to have some liquid assets on standby when a fire sale opportunity presents itself. What kind of split makes the dear MMM and other members of this forum comfortable in this regard?

    Reply
  • TMc July 1, 2017, 5:30 am

    Hello. Was having a discussion with a co-worker about buying mutual funds right now. And she said she didn’t think it was a good time to buy because of what you suggested. She thinks the shares would be grossly overvalued. What are your thoughts?

    Reply
  • Michael July 2, 2017, 7:58 pm

    Realizing we need to make some financial changes to get on track with our lives and prepare for the inevitable next recession. My wife lost her job during the end of the 2008 recession just before our wedding to boot. We were in excellent financial shape but it ended up being quite the setback for us. She went back to school and got an in demand career and we had a child. We managed to buy a fixer upper in Los Angeles at the last housing bottom in late 2011 on my income alone. Now my wifes income is all gravy. Still we aren’t saving as much as I’d hoped 2 years into her working full time. She’s got about $90k in student loans, but our house appreciated $250k since we purchased it atleast. I missed out on a lot of the stock market run up during her unemployment because I stopped putting into my 401k when we bought the house… but good thing the housing market soared right after. We started socking away about $20k a year in 401k this year again, but still floating about $15k in zero interest credit card debt from the lean years. I have always had an 800 credit score and like to never pay interest. So I got in the habit of bouncing money from zero interest card to zero interest card. We don’t live beyond our means at this point… our mortgage is 12% of our combined income, I drive a paid off 8 year old non luxury sedan and her a 1 year from a paid off Honda. Our biggest expenses are probably eating out… but rather than curtail that I got a credit card that pays out 3x points for eating out. In other words.. rather than change our ways… I try to make our expenses as discounted as possible. Los Angeles is an expensive city and with no family in the area it always feels more expensive… no childcare help is painful.

    Anyway, just stumbled upon this blog and gonna try to follow some advice. The past few years I stopped concentrating on paying down debt… and put more effort into paying as little or no interest on that debt as possible. Always figured if I was getting a better return on that money in stocks… then paying off that balanced transferred credit card debt could wait. This year I’d like to work to get debt free in credit cards atleast. Cause god forbid the next recession it’s my turn to lose my job. Thought about transferring some student loan debt to a home equity loan. That would cut the interest rate in half because we could write off 45% of the interest in high tax CA. Right now we can’t write off any student loan interest. Anyone thing that’s a risky idea?

    Reply
    • Mr. Money Mustache July 7, 2017, 10:42 am

      Welcome Michael!

      … but dude, I hope you keep reading and learning. You can’t be going out to dinner when you still have credit card and student loan debt! In that situation, it’s a stretch even to buy cheese to put on your home-baked potatoes you need to be eating for dinner every night. And you’ll need to ditch those brand-new cars too. Look for a 2005-ish Hyundai Elantra or similar.

      Once you get these emergency aspects of spending in control, we can talk about what to do next :-)

      Reply
  • SMM July 3, 2017, 9:13 am

    Sometimes I’m just so torn on continuing to engage in DCA every pay period/month OR start hoarding cash and just waiting for the next recession, since we are arguably past due. I heard Ric Edelman on PBS a month or so ago and he said that people who got out of the market and tried to time it have missed out on the biggest gains. So I don’t want to do that either. But of course I do agree that even though times are good for now, it’s more of a reason to be prepared for what may come.

    Reply
  • antilibrary July 4, 2017, 12:41 pm

    MMM,

    Are you familiar with Ray Dalio? He founded what is basically the world’s largest macro hedge fund (something like $150B AUM). Anyway, a couple of years ago he made this short video, “How the Economic Machine Works”. Maybe you’ve seen it before. But if you haven’t watched it before, I think you (and all the other mustachians) will like it a lot. Very logical explanation of a complex system:

    https://www.youtube.com/watch?v=PHe0bXAIuk0

    Not exactly an answer to your question of when the next crisis will hit, but a very useful template nonetheless!

    Reply
  • Bliss July 6, 2017, 6:58 pm

    I have at least 10 years to go for FI. How should I act knowing that we have another market correction? I have been steadily investing in my IRA + 401K, no real estate investments however (ie I rent b/c cost of rent-t0-own for SF Bay is horrible and my rent is $700/mo+util = $900/mo). Earning post taxes is ~65K-75K/yr and I save at least 50% in 401k + savings account. I have probably 25% of my net work in cash and it represents ~3yrs of living expenses. So definitely more cash than I need for safety margin.

    Not sure if I keep the cash at the ready (wouldn’t this be trying to time the market?) for when the market gets deeply discounted? or keep investing steadily… I’ve had this ~25% of net worth in cash since 2009 or so (probably b/c I was laid off in 2009 so was super conservative with having a cash stock).

    thanks for any input!

    Reply
  • N0odles July 7, 2017, 12:32 am

    Since the recession is coming, should I put less into online banking accounts? If people start pulling funds out frantically, I might not have anything left to withdraw. I opened these because they are high yield savings accounts and have invested only what I can stand to lose. P.S. As you can guess, I’m late to the game and am not financially independent yet.

    Reply
    • Mr. Money Mustache July 7, 2017, 10:15 am

      If you’re in the US or any developed country, your money is perfectly safe in the bank. The FDIC exists to prevent negative consequences even in the incredibly unlikely event of a bank run, and other countries have the same mechanisms in place.

      Reply
  • CCW July 9, 2017, 7:06 am

    Done it! Have just tonight finished reading the entire MMM blog from beginning to end after starting on this life-enhancing, perspective-changing ride just under three months ago, absorbing so much brilliant advice and insights from the MM family and from the positive and helpful community that contribute to discussions here. I have always been an anti-consumer at heart but lifestyle inflation had started to creep into our lives and I knew I was looking for something different than the rest of the herd. The improvements we’ve made in such a short space of time have been eye-opening, mainly because they have been so simple to implement for such a great return – our expenses have pretty much halved from three months ago with no noticeable negative impact to our happiness. In fact, I’m actually already feeling happier BECAUSE of these changes. My DW is also on board with our newly formed 10 year plan to reach early retirement and we’re looking forward to all the fun we’re going to have along the way in reaching our goal.

    One question for you MMM, that bike shelter you built looks really good. I’ve been looking to build something similar for our bikes at our house as we don’t have a garage either. What materials did you use for it and how long did it take you to build?

    Reply

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