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How to Prosper in an Economic Boom

boom beachWell, here we go again: it’s boom time.

If you’re a US resident with a short memory (or a young adult who only recently started making a living for yourself), you might be under the impression that we live in a country with permanently high unemployment, a slow housing market, and mortgage interest rates that never exceed 3.5%. Sure, you’ve seen the stock market double in price since 2008, but other than that there hasn’t been too much prosperity sloshing around.

The thing is, the ground is rising beneath our feet and we’re right in the middle of a great change. I can predict that with relative certainty, because the economic picture is always changing and cycling back and forth. You don’t always see it in advance, but you definitely see it when looking backwards.

US unemployment, 1947-present (source: Google public data)

US unemployment, 1947-present (source: Google public data)

In 1982, my parents moved us from an expensive suburban area to a cheap little town, to escape the variable interest rate mortgage that had suddenly exploded to 18% on them. As a boy, I remember buying a savings bond worth $1000, that paid out $120 (12% interest) for the next three years.

In 1987, one of my childhood friends told me his dad lost his job as a stockbroker, in the aftermath of the Black Monday crash. The father joked with us he had been unwise to buy his new Lincoln Town Car. But the stock market roared back from that crash rather quickly.. until the 1993 recession sliced a bunch of things in half, including property values in certain areas.

In 1997, I graduated with a Computer Engineering degree, and the job market was in fair condition. I was fortunate to get a good job lined up upon graduation, but some of my classmates had to search around for a few months and settle for lower salaries. However, by 1999 the headhunters were ringing the phones in every cubicle and I had an easy time upgrading my career, choosing from a bouquet of seven job offers around the US. After less than a year, I switched jobs again in 2000, enjoying a salary bump and watching the market valuation of Cisco Systems exceed $500 billion (even today after 13 years of revenue growth, the company’s value is about 75% lower).

All this was turned on its head in 2001, when the dot com boom ended, stocks collapsed, companies closed, and many of my software developer peers found themselves unemployed. The housing market in my area turned from fire to ice, with appreciation becoming depreciation and higher-end houses languishing on the market for years. The local high-tech scene was expected to forfeit its gains from the late 90s and remain quiet forever.

Until it wasn’t. By 2005, employment was rising rapidly, the stock market was on a tear, and mansions were being built and sold as fast as the custom house builders could complete them.

Until 2008, when the Great Financial Crisis slammed the brakes on everything. House builders went instantly out of business, giant banks collapsed, millions of people stopped making their mortgage payments, and the entire US economy tipped over like a speeding school bus that missed a corner, screeched noisily along the shoulder throwing sparks and smoke, barely coming to rest in a teetering position at the edge of the Grand Canyon. Surely, THIS was the end of prosperity. Capitalism had failed, and we were in for permanent doom…

..Until now, when the stock indices are breaking records, IPOs are in plentiful supply, and house prices in some markets (including Denver metro) are back above their 2007 peaks. I’ve submitted five offers in on rental houses in my own area over the past year, being outbid mostly by people who, I thought, ended up paying too much for the house.

And we’ve had it pretty mild here in the US: Canada, Australia (and I hear Brazil too) have been in a much bigger boom for many years now, with average-income people stretching to mortgage $700,000 homes, just because that seems to be the thing to do these days.

Is there is a lesson in all of this craziness? Why yes, I believe there is. Since we’re getting started on yet another boom, I thought we might as well prepare ourselves for it, in order to get more out of it.

What to Do in a Boom

Jobs: You start hearing about job opportunities. Your friends get enviable new positions. Maybe some are even offered to you. In magazines and newspapers, you read about entrepreneurs who are making far too much money for doing things you could have damn well thought of and done yourself. Damn!

If you’re ambitious, this is your time. Instead of sitting tight, harvest some of those jobs yourself. Maybe fire out some resumes. Or get a raise. Jump into an expanding division of your company, taking on far more seniority than you’re qualified for. Or switch industries completely, to one where they just can’t find enough qualified people. Get a bunch of new skills, while somebody else is paying you do to it. Hang around with some of those entrepreneur-in-a-magazine-type people, and sniff up some of their contagious optimism.

LifestyleBut then save those windfall earnings. This is not the time to buy the new Accord V6 or the 92″ television, or fight with your coworkers to buy a bigger house in a rising market. An economic boom is the time you maximize earning (because the money supply is high), but minimize spending (because prices are likely high due to competition from other buyers). If you have a big house that you’d like to downsize, this is the time to do it. The most avid housing optimizers might even move to a rental during this time.

Investments: Everyone is speculating vigorously on stocks, and the index is at a high valuation. You’ll want to continue your regular investing program, but your asset allocation rules will automatically make you buy fewer stocks and more bonds. And especially look into alternatives like paying off your mortgage early – this is the time to get out of debt, because the getting is easy.

For those interested in their local real estate scene as I am, this can be a frustrating time, as rental houses may become too expensive to provide appropriate returns (I look for monthly rent equal to 1% of the purchase price as a rule of thumb). But this opens up another opportunity: the fix-and-flip. In expensive markets, prices for the same house can vary by $100,000 or more just based on cosmetic condition. If you know how to create residential beauty out of ugliness on an efficient budget, the boom market is the place to ply this trade.

… And eventually, once everybody gets used to the good times, the next bust will arrive.

 What to do in a Bust

Jobs: Now you’re feeling pretty smart about the way you handled the boom. Your friends used it to sign up for car payments and new houses, and yet their jobs are suddenly unstable. You used the proceeds of the boom to pay down debt and invest more, so you are more financially stable than ever. The money may not be flowing so freely, but you are ready for it.  Your reduced stress level at work may even help you keep the job while others are let go, or give you the confidence to jump ship if your own company is sinking.

Lifestyle: The best time to buy a house (or move to a bigger house) is in a poor housing market. The pricing scale usually compresses, meaning expensive houses tend to drop more than cheap ones. So the premium to upgrade is lower. Note that this exactly the opposite of what most consumers do: upgrading whenever the “equity” due to appreciation is large enough to cover a down payment on a bigger house that has appreciated even more.

During a down-market upgrade, there should be no pain felt in selling your previous house at a loss: after all, you are buying the new one at a correspondingly bigger discount. But if your old house makes a suitable rental house, you might even keep it, using it to generate income until the next boom comes.

This is also the time to buy a great used car if you need one, take vacations that might normally be overbooked or overpriced, and get anything else done that is normally difficult when everyone is overbooked.

Investments: The best part of any bust is the spectacular stock market crash that goes along with it. Although this borders on the taboo practice of market timing, I feel every big market crash is a time to joyously go out and buy as many more shares of your index funds as you can. Increase the contributions. Drain the cash reserves. Enjoy the lower valuations and higher dividend yields.

And, man oh man, the rental real estate millionaires that were made during the 2008 housing crash, buying up houses at 75% off from the banks, will become legends of generations to come.

So there’s your Contrarian Soup for the day. You may already feel the boom roaring in. The old you would get excited and start clicking through the BMW website looking for a way to celebrate your promotion. But the new you realizes that the booms are not really there to get you more stuff. They are there to help you become wealthy.

If you spend away the wave of wealth that the boom brings, the eventual bust will feel painful. Instead, hang in there. Keep earning and learning, and ride the wave. The next bust is surely less than 10 years away, and this time, you’ll be ready for it.

 

Further Reading: this Economist article called The Stealth Boom analyzes some of the characteristics of our current boom-in-progress, and explains why we haven’t seen rampant inflation despite the amazing free money that the US Federal reserve system has been temporarily pumping out. The Economist actually suggests even more easing, but I’d personally say we should err on the side of caution and take it easy, given how well things are going already. Time will tell who gets this little wager right.

  • Chipamogli May 10, 2013, 7:08 am

    Somehow I am not convinced that the next boom is starting.. still sluggish in my home country of Canada to which I will return soon. It’s interesting how other countries’ economies are affected (or not affected) by the global reality… here in Chile things are fine and GDP has been growing at 5% annually. However, lately it’s been taking a hit due to the drop in mineral prices (one major industry here is mining).

    Reply
  • Barb May 10, 2013, 3:29 pm

    Mr. MMM – I have been trying hard for a year to buy some rental properties and it’s not working. They either have owner occupant restrictions, they have 5 offers on them to the point where the price is no longer good, or required so much work that the numbers don’t make sense or they are just not out there. As a person who has had her job cut 7+ times in the last 12 years (no fault of mine), I am trying to generate my own earning potential. I am in Mpls, MN. I am in my later 50s and it’s tough to keep starting over. Any advice?

    Reply
  • Francisco Noriega May 10, 2013, 10:47 pm

    Hi MMM,

    I’m a little confused.. after reading your post, and looking how things like the S&P 500 have done in the last 20 years, I thought that you meant that from 2009-2013 was the bubble, and right now was almost the end of it, and that the crash was soon, but you are saying that it is just the beginning of it??

    Also, I have most of my money in stocks (ETF/ESPP/REIT a few thousand in specific companies). I’m also Betterment for about half of my money. I thought you meant that the crash was coming so I was going to change my allocation to go towards a lot more bonds (and then when the crash happens, change to stock)

    It looks like I misunderstood you though, what is your opinion on how to allocate money right now?

    Reply
    • Mr. Money Mustache May 11, 2013, 9:58 am

      Uh-oh.. misunderstanding here. I’m not trying to predict the stock market – could go up or down, doesn’t matter and we don’t know when the swings will happen. The current stock market headline price is not the same thing as a measure of the health of the economy. In the long run, it simply averages out to keep up with the economy.

      This post is just to remind us the existence of the business cycle itself – right now in the US, employment is on a downward trend and housing prices are going up. This can lead to consumers going crazy, thinking their appreciating house has made them wealthier, so I was encouraging people to take a longer-term view and prepare for eventual busts, that is all.

      Reply
  • English Stache May 15, 2013, 5:15 am

    Boom Times? Based on the comments this seems like a no-brainer for several of your readers. But for me I just can’t get it down. How can I make $ in a boom. I have been beating down debt for the past 3 years paying off a total of 85k. I still have another 43k to go. I am an atty and bw my full-time job and some side work I am pulling in 140k a year. But I hate doing the work. I want to start on the path to a more financially freeing life but am not sure how to make that xtra $? We live in NJ and it is super high cost of living. We are down to 1 car and eventually plan to move to a cheaper area. But are there any suggestions on bringing in that extra cash?

    Reply
  • David May 19, 2013, 9:08 am

    I wonder where we are in the business cycle–boom or bust? IMO, we are in the middle, and dependig on your situation, it could go either way. I read these comments and wonder how many readers of this blog are average run of the mill blue collar workers. I mean by that 50k a year or less. I dont think anyone can put a proper value on where the market should be valued until the Fed stops keeping rates artificially low. When the Fed starts raising the rates even incrementally, we will find out how strong this rally really is. I dont see that happening anytime soon though. Most of my friends are barely making it—some of which is their own fault. So its hard to say either way which way we’re headed, but I must point out, at least in my neck of the woods, all my friends have decent jobs–they work where I work–for the area, and are still struggling.

    Reply
  • Amit C June 5, 2013, 1:09 am

    Nifty point of view.
    btw, you meant Black Monday??!!

    Reply
  • Don Jean November 10, 2015, 10:56 am

    Dear MMM,

    I lavish praise upon you for your “punch in the face” attitude and writing style. Who knew that spreading the good word of economical luxurious living was so controversial.

    QQ, you mention “drain the cash reserves.” In other posts, you have mentioned that you keep little cash on hand preferring to use the a HELOC as your emergency fund. Just how much do you believe is wise to keep in cash–percentage wise or absolute value? Like you, I believe that a market crash is the best kind of SALE sign one can find in the economy. For future dips, I wish to be prepared to take advantage of that incredible buying opportunity.

    Reply
  • Yard Work July 22, 2017, 7:51 pm

    The comments section of this post was more eye opening than the post itself! Look at all these folks trying to predict the future, it’s embarrassing.

    Reply

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