How Do You Survive A Recession? - What To Do

The Stock Market is down 25% since January and is at its lowest level since November of 2020, giving back the last 2 years of gains. If you haven’t checked your 401k recently, you might want to grab a stiff drink before you login.

The question is, are the markets bottoming, or can there be more downside?

Market Update - 10/10/2022

WHAT THE PROS ARE SAYING

Experts are calling this the most interesting time in the history of the markets.

Most crashes have a few sectors that remain positive, between equities, bonds, alts, housing or crypto… but not this time. Everything is down. Lucky us!

JPMorgan CEO Jamie Dimon warns of another possible 20% decrease amid inflation concerns, rapidly increasing interest rates, and the escalating Russia-Ukraine war.

What You Need To Know

The possibility of nuclear escalation, energy shortages in Europe as winter arrives (who are reliant on Russia for nearly 60% of energy), and rising global food insecurity have been discussed for months. As horrible as these issues are, the markets have had 6-7 months to prepare and won’t see them as unexpected events.

A stock’s value is based on a estimate of the companies’ future cash flow. Apple and Tesla stock is expensive because we expect them to sell a bunch of iPhones and Tesla's.

Since stock prices are forward looking, in theory a lot of the concerns above are already priced into the stock market. Similarly, the Fed has been forthright about wanting to control inflation (stuff like gas and food getting more and more expensive) even if it means forcing people out of work (more on this below).

MY THOUGHTS - The Vacuum

This volatility isn’t fun, but it's a sign the markets are starting to normalize. The financial markets have been flooded with cash since 2008. People were incentivized to borrow, borrow, borrow with the Fed moving interest rates to nearly 0%. The Fed chose this policy of "cheap", or "easy money" to inject life into the economy after the great recession.

A decade plus of cheap cash eventually spilled into our broader economy and combined with other monetary policy, like those "Biden Bucks" aka stimulus checks, led to irrational spending e.g., meme stocks, NFTs, excessive Amazon purchases, etc. There’s only so many items available to be bought. Both on Amazon and in the stock market. Too much demand and not enough supply causes larger issues.

Easy Money + Inventory Shortages = Price Increases & Supply Chain Issues

You may have heard The Fed is raising rates in an effort to suck all that money out of the system like a vacuum. Raising rates is only the first domino:

Higher interest rates cause decreased borrowing for businesses, which slows their growth, and leads to hiring freezes & layoffs. This means higher unemployment and people with less to spend, which in turn, reduces demand, increases supply, and eventually lowers the prices of goods and therefore lowers inflation.

Yes, the Fed wants to create unemployment to lower inflation. At least in the short term. What they really want is to protect our currency by ensuring prices and wages reflect reality.

Sorry Googlers, this probably means the end to perks like unlimited food, lunchtime massages and being paid to sit around. Engineers are valuable, but with money being so cheap, tech companies happily overpaid to consolidate talent - even if there was no work for them to do! (Coined as “rest and vest” at Google, it helped Google kill potential competition by literally paying them to do nothing, burying them in offices to “think”.) Wages ballooned to 300k for engineers, with stock packages that could clear $1milion+.

This recession will reset the industry to a sustainable level. We should also probably expect this for other high “skill” jobs that have been over-hired. Especially those with bloated upper management that need to be gutted (I’m looking at you universities and hospitals). Service jobs, however, do not have enough humans to fill all the available jobs as it is. So you can expect wages to stay firm in industries like healthcare, education and restaurants.

I think that's a great sign that wages will start representing the actual value given to society.

WHAT I WOULD DO

This is not financial advice, it's simply information on how I’m managing my portfolio through this stress. I promise you nobody knows what will happen. Anyone screaming on TV or a podcast about having any idea is a liar and/or con artist…

We could very well be bouncing along the bottom, if you’re interested in lowering what you owe in taxes by tax-loss harvesting, this would be a great time to lock in losses before the end of year.

Long-Term

I believe in the old adage that the market always goes up in the long-term, but what does long-term mean?

We’ve had stretches of lost decades where returns are flat or negative. If you don’t need the money play the long game and use this as an opportunity to pick up great companies at cheap prices (and if you DO need it, it shouldn’t be invested anyway).

Short-Term

If you need the money in the short-to-medium term and just want a parking space to try and keep up with inflation, Treasury Bonds, like I Bonds, are attractive for no-risk investors. Corporate Bonds could also be a great option if you’re looking for higher returns. However, I would only look for top rated companies that you know won't go out of business, like Amazon or Apple. Expect something like a 4-5% return for a 9 month hold.

(If you’re comfortable with corporate debt and risk, High Yield is more attractive than it's been in years with returns at 8-9%, but these will have bankruptcy risk).

Short Term	Mid Term	Long Term
Cash	Corporate Bonds	High Yield "Junk" Bonds
Treasury Bonds	High Yield "Junk" Bonds	Equity (Stocks)
AAA Rated Corporate Bonds	Some Equity (Stocks)	Alternative Investments "Alts"

Final Thoughts

Remember, the stock market is just a collection of companies. Seeing all this red means a few of those will go bankrupt, or get close to bankruptcy as funding freezes. As an investor, this will be a great opportunity if you can remove emotion. Evaluate things like management, market power, great business economics, predictability, and price.

Similar to the 2001 Dot Com Crash and the 2008 Great Recession, resilient companies like Google and Amazon, and then Uber and Tesla, will be born in this downturn. Technology always marches forward and in a recession established companies are forced to prioritize cash flow, doubling down on what they do best, killing innovation. This leaves risk takers the opportunity to grow quickly amid less overall competition, less competition for talent and the opportunity for cheaper advertising.

How do we find these winners? Easy. Just go to where the nerds hangout on the weekends…

Crypto & NFTs

The tide set and we’re seeing who's been swimming naked. Many projects made big promises with no ability to deliver. When prices keep climbing, it’s no big deal. Now that people lost money, the lawsuits inevitably follow.

Kim Kardashian was paid $250,000 for a single Instagram post promoting cryptocurrency EthereumMax. It promised to be the next breakthrough in the crypto space, but was basically a scam to raise money that eventually crashed. The SEC fined her $1.26M for her role in misleading followers, which she happily paid without having to admit culpability.

Two things. First, I'm sure this isn't the first time Kim K promotes something that doesn't work. This "product" just happens to be regulated by the US Government. However, this is relevant because I expect this to be to be the start of lawsuit szn. Expect to hear a lot of headlines about fines and arrests for all the grift in the space over the last few years.

Secondly and strangely, SEC commissioner Gary Gensler, whose job it is to regulate stock markets*, broke protocol by going on CNBC to announce the Kim K takedown. The "publicity stunt" apparently pissed off other pencil pushers at the SEC who felt it was self-promotion. Hard to argue as he accompanied his TV appearance with a weird YouTube video, complete with a Jake Paul look-a-like warning investors about influencers. Rumors are he’s trying to position himself to be the next Treasury Secretary. Basically, even the rule enforcers want to be influencers.

(*The SEC also regulates financial advisors and is the reason I need to drop my licenses to be able to share my ideas on the market on this blog.)

WHAT DOES IT MEAN?

There are two main ways to evaluate an investment: quantitatively vs qualitatively. Numbers vs Narrative. The numbers don't look great. The two big coins that define the crypto industry each down ~60% year to date. And if you only listen to the news, you probably think crypto is already dead. That’s the Narrative.

The truth is there’s still a lot of money being funneled into the ecosystem. Legacy brands are still jumping into the NFT wave, new companies are still popping up all the time, and more importantly, startups building actual useful products are being funded.

A company like FileCoin has created free online storage that could take the place of Amazon Web Services. Flow Blockchain is partnered with the NBA, NFL, and The Olympics among others to bring digital collectibles to the masses.

However, demand has cratered in a lot of areas, particularly NFTs.

Decentraland, a metaverse that at one time sold digital plots of land for up to seven figures each and is currently valued at $1.3Billion, reportedly only has 38 daily users. 38! The company disputed the figure, saying they have thousands but it's still not a big number. The narrative was built around this being the next online playground. The reality is the demand was always from investors, NOT users.

I don't want to pick on Decentraland because many other crypto projects displayed the classic case of engineering something that could be cool, without knowing if there was an audience. This Crypto Winter should help focus the industry. Investors will look for true builders who have products that might actually be useful.

THE FUTURE

I’m still extremely bullish on Crypto and NFTs. The technology works, the space is fun, we just don’t know what the final use cases will be.

I think NFTs will be the infrastructure of the internet moving forward, like pipes under a house. We have a huge problem with fake news, digital content (blog posts, podcasts, YouTube videos, etc.) released as NFTs gives us a way to verify original sources and dispute credibility. Tickets to events, legal documents, proof of status will all be converted to NFTs as we continue to move society digitally. Even video games will be built with NFTs, allowing users to buy and resell in-game items.

Unless you’re the kind of person who thinks the internet will disappear, it's logical to assume it will continue to expand. Crypto and NFTs can be thought of as “more internet”, tools to help that expansion. The same way seat belts changed the auto industry, NFTs added to the internet will help shape and legitimize the space moving forward. I think we’d all agree the current form of the internet isn’t working. I’m hopeful verifiable content plays a big role in bringing civility.