Yes, when it comes to the economy, it has been hard in the past decade, and it continues to be hard.
Only now is the Fed seriously beginning to talk about raising interest rates again, many people are without jobs, and others face crippling debt.
So, ideally, what do you do not just to survive, but thrive during such times?
One: Even if the Market is Behaving Strangely, Don’t Freak Out
It is in the nature of the stock market to move up and down, sometimes quite unpredictably.
However, that doesn’t mean that you want to sell out the second it drops.
Here’s a small illustration:
You know how awful everyone says the stock market has been, lately?
Well, observe the following chart of the S&P 500 for the past decade:
See that awful canyon of a dip in 2008?
See all the smaller, but not insignificant peaks and valleys?
Those probably made all sorts of people very nervous at the time that they were happening.
Yet, do you observe something else?
The right-hand side, representing the most recent months, is way higher than the left-hand side, which represents the farthest time back.
In spite of all those peaks and valleys and truly terrible dips, the market has ultimately gone up.
It is, in fact, the tendency of the market to go up over time.
If you sell off everything the second that times get tough, you miss out on that growth.
Joe Baker of Alcus Financial Group concurs.
He says that people get scared, ask themselves if the market is crashing and if they should shift their 401(k) over to a money market.
The answer is no; they shouldn’t. Not unless they need the cash very, very soon—say, within a couple of years.
Most recessions last a maximum of six months before the S&P 500 begins to turn itself around.
Only really big meltdowns last longer, and those take something more like 19 months.
It’s still less than two years before investors have all their money back, and sometimes more.
So, don’t panic.
Hang in there for the long haul, and you’re quite likely to turn a profit.
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This one is a tall order for everybody.
There’s always something we want that we really can’t afford to buy right now, credit cards notwithstanding.
It might be a Jaguar, or an expensive designer dress, or that miniatures army of Chaos Space Marines.
Whatever it is—and it can be different things for different people—there is only really one answer to handling the situation.
Don’t buy it. It’s the hardest thing to do, especially when you’ve got more than enough credit available to do it, but still say no and don’t buy it.
Your future self will thank you for your self-control.
Three: Ask Yourself if You Can Pay Cash, and if You Can’t, Don’t Buy It.
Our society penalizes people for having no credit—your credit score goes into whether you can rent a house, how much you’re charged for a cellular phone account, and sometimes even whether you can get a particular job.
So it sounds like odd advice in this culture, but if you can’t afford to pay cash for something, you really can’t afford to pay credit for it either.
You see, there are these magical things called interest rates, and whenever you carry a debt, they kick in and eat up even more of your money than you were already spending.
For small amounts of money this isn’t so bad, but for big debts like mortgages or auto loans, the differences can be huge.
And don’t forget that those huge purchases devalue over time, sometimes to the point where you end up paying more than the item is worth.
Long story short; don’t buy a house or a car at a bad time just because the bank will loan you the money.
You may well live to regret it.
Four: Make your portfolio as idiot-proof as possible
Don’t put all your investments in the same stock. Just don’t do it. This is very good advice, but not that many people follow it.
Hewitt Associates found that for every five workers enrolled in a 401(k) plan, three didn’t re-balance their portfolios once between 2000 and 2004. This is a common oversight that can lead to a skewed portfolio.
A skewed portfolio leads to greater risk for you, the investor.
Remember to take certain factors into account when diversifying. Two of the biggies are risk tolerance and age.
People in the 20-40 range should be investing most of their assets in equities while people in the 60-70 range can put up to half of their assets in stocks.
Also, don’t forget that when you’re playing the long game, you can take market downturns as opportunities to buy in.
Brett Horowitz of Evensky and Katz praises those who buy low, saying that it’s looking to the future, which in fact it is, given the market’s tendency to climb over time.
Five: Don’t Let Your Home Imprison You
It is generally agreed upon by experts that when market times get tough, it’s time for homeowners to reevaluate their mortgages.
If you have an adjustable-rate mortgage, it is a sad fact of life that the bank is probably about to pass its financial hurt on to you by resetting your rates considerably higher.
Refinancing to a lower, fixed-rate mortgage is the only option under those circumstances.
The problem is, like with most other credit-related endeavors—you’d better have really good credit, or it’s simply not happening.
If you do have a FICO score of at least 680, start shopping around.
Mortgage rates have been moving up and down like an elevator, so try to locate and latch onto the best rate you can find.
It may even be better to take a slightly higher fixed rate mortgage now rather than going with an ARM that could reset to even higher.
Unfortunately, there aren’t as many options for people whose credit is not good, and if you fit in that category, good rates may be hard to find.
Of course, mortgages are more expensive with worse credit anyway:
As illustrated by the chart, people with lower credit scores are already paying more.
Once ARMs get thrown in the mix, it gets really ugly.
Dee Lee, the author of “Let’s Talk Money,” compares ARMs to horror movie monsters, and says they’re just about as safe to be around.
There are consumer groups who can help when your credit is a problem.
The Homeownership Preservation Foundation has a 24/7 hotline, (888) 995-4673.
The Homeowner Crisis Resource Center also has professional counselors available at (866) 557-2227.
Six: Get That Resume Ready
Recessions don’t just threaten the economy generally.
They can have a huge effect on your employment—or lack thereof—as well.
If you lose your job, it will be hard to get another.
John Challenger, CEO of Challenger, Gray & Christmas, says that during recessions, corporations are playing the waiting game when it comes to hiring, and won’t want to open new locations or add employees.
And when it comes to keeping the job you have, it isn’t good enough to just work as hard as possible.
Your job may also depend on where in the company you are employed.
If your department is overstaffed, or you are considered support staff, you are in prime layoff territory.
The best position to be in is one that actively adds to a company’s cash flow.
It’s also good if you know how to do a job no one else can, or take up crucial, long-term projects for your employer.
Also, pay attention to whether your boss is on the nice or naughty list with their bosses and connect with those higher up if the latter is the case.
And of course—network, network, network.
If you do lose your job, you need somewhere to go.
Depending on your position, it can take anywhere from two months to five months to find a new situation.
It’s a good idea to keep your resume full of successes and fully updated.
Seven: Focus on Building Savings and Shrinking Debt
This probably seems ridiculously obvious, but it’s a good idea to reduce your bills and build up extra money.
Not only is there the specter of unemployment in an economy like this one, but a lot of the assets that used to be able to help you out have lost value.
An emergency fund is no longer optional.
The recommendation for how much to have in savings runs from three to six months’ worth of expenses.
Not everyone has that savings tucked away, however, especially lower-income families.
As the chart indicates, personal savings have seriously dipped since the seventies.
So if you don’t have money set aside, start saving.
And while you’re at it, start paying down those credit cards.
According to Demos, for every ten households, six don’t pay off their entire balance every month.
The received wisdom is to pay off the most expensive of the cards first.
And count on having higher interest rates if you become delinquent.
Robert Hammer of R.K. Hammer, a consulting firm for bank cards, says that you generally have to pay on time for more than a year before you can ask for lower rates and reasonably hope to get them.
The exception to this rule is if losing a job is what put you behind.
If you find new employment, ask for lower rates and see what happens.
Hammer advises that you may get relief under those circumstances.
Eight: When You’re Already in Debt, Don’t Add to It.
There are some debts that can’t be avoided unless one is independently wealthy.
Houses, for one thing, are very expensive items.
But if you have to take out a mortgage on a home, don’t turn around and add a lot of credit card debt to the mix.
Keep your payments simple—and your stress down—by sticking to just the one debtor.
Budgeting is probably the best thing you can do for yourself here. Figure out what you need and figure out what you don’t need.
Work out how much that daily Starbucks costs you and whether you can easily cut it to save money.
If you can, and the choice is between that and starting to run up credit card debt, ditch the Starbucks and put that money into savings instead. Speaking of which….
Nine: Exercise a Downsizing of Your Own
Don’t buy too expensive a house, or too flashy a car, or too much jewelry.
If anything, live slightly under your means.
Buy a house that’s less expensive than you can afford.
Drive a car that gets you around safely but doesn’t break your budget.
Don’t eat out all the time.
You will be astounded by how much money you can save by doing this, and how much you can put into savings, retirement, and other investments. All it takes is the capacity to tell yourself no when it crosses your mind that you want some luxury item on impulse.
Just the simple—yet unspeakably difficult—action of repeatedly delaying gratification.
Ten: Broaden Your Skill Set
Whether it’s learning new job skills that will earn you more at the company you already work for, or preparing for a job at a new one, gain more skills and increase your competencies.
The more marketable skills you have, the more income you can bring in, and increased income is never a bad thing in a rotten economy.
Some people even choose to work second jobs, however temporarily, just to pad the bank account a little.
This tip is particularly effective when combined with those regarding budgeting and debt control.
If you already have debt, increased income can help you get rid of it.
If you don’t, the increased income can go into savings, so that if a disaster ever happens you don’t have to go into debt to deal with it.
The situation is win-win.
Eleven: In the Same Vein, Look Out for Opportunities to be Entrepreneurial
Start a business that solves a problem for someone.
Clean, fix things, landscape—do any job that requires a skill others don’t have or takes care of something no one really wants to do for themselves. Businesses along those lines can be incredibly lucrative.
All that it takes is a little creativity, and you can come up with things people will pay you to do in no time.
The economy may not change anytime soon, and there isn’t much you can do to change that unfortunate fact of life.
What you can change is what you do about living in this economy.
By following even just some of the steps outlined above, you can give yourself a major advantage over the average person.
Control your debt, start building your savings, and be proactive about your employment.
Be more selective about your indulgences, delay gratification, and keep an eye out for chances to bring in extra income.
It may not be easy, but you can still thrive, even in these tough times.
Dollar Will Plunge 35%, Lose Status As World Reserve Currency
The US dollar is on the verge of a 35% collapse. It could also lose its status as the world’s reserve currency. This is according to Stephen Roach, a senior fellow at Yale University and the former chairman of Morgan Stanley Asia.
The reason, according to Roach, is the slow decoupling of the US from its trade partners. Along with this, another reason is the rise of China. He says China’s structural reform goes away from a manufacturing economy. Instead, it comes into a more service-oriented economy with a stronger consumer base. This could mean the days of the US dollar being the world’s reserve currency are numbered.
Merely suggesting that the US losing its reserve currency status is enough to bring out the critics. In an opinion piece he wrote for Bloomberg, Roach addresses those critics.
“Scorn has long been heaped on those daring to question the supremacy of the U.S. dollar,” he starts. “As the world’s dominant reserve currency…the counter-arguments were strong and highly political, basically boiling down to the so-called TINA defense – that when it comes to the dollar, ‘there is no alternative.'”
The Role of The Dollar
Roach says that even those that believe there is no alternative to the US dollar when it comes to international trade. The same goes for when the financial markets are being shortsighted.
“Alas, the TINA argument doesn’t stop there. The counter to my case for dollar weakness also rests on the reserve status of the U.S. currency as the linchpin of world financial markets. All trading nations, goes the argument, have to hold the dollar as the price for doing business in an increasingly integrated dollar-based world economy.
“Even so, the dollar’s share of official foreign-exchange reserves has declined from a little over 70% in 2000 to a little less than 60% today, according to the Bank for International Settlements. That downtrend could gather momentum in the years ahead, especially with the U.S. currently leading the charge in de-globalization and decoupling. With America’s share of reserves well in excess of its share in world GDP and trade, such a correction might well be inevitable in an increasingly fragmented, multi-polar world.”
The natural instinct for a weak dollar is to buy hard assets like gold. However, Roach says those markets are simply too small. They will not be able to absorb the tsunami of dollars looking for a new home.
“And although cryptocurrencies and gold should benefit from dollar weakness, these markets are too small to absorb major adjustments in world foreign-exchange markets where daily turnover runs around $6.6 trillion.”
Gold and cryptocurrencies are too small to benefit. Although, Roach says he does expect two currencies to strengthen as the dollar weakens: the Chinese renminbi and the euro.
Can It Be Replaced?
“On this basis, a forecast of a weaker dollar requires some combination of a strengthening in China’s renminbi and the euro…
“The China call is very contentious. From the trade war to the coronavirus war to the distinct possibility of a new Cold War, the negative case for China has never been stronger in the U.S. than it is today.”
“The call on the euro is also counterintuitive, especially for a broad consensus of congenital euro-skeptics like me… I now have to concede that reports of the euro’s imminent death have been greatly exaggerated. Time and again, especially over the past 10 years, Europe has risen to the occasion and avoided a catastrophic collapse of its seemingly dysfunctional currency union. From Mario Draghi’s 2012 promise to do “whatever it takes” to save the euro from a sovereign debt crisis to the recent Angela Merkel-Emmanuel Macron commitment to a Next Generation European Union Fund of 750 billion euros ($855 billion) to address the coronavirus crisis, the great European experiment has endured extraordinary adversity… there is unmistakable upside for the most unloved currency in the world.”
Roach ends his article by pointing out that no country has ever devalued its currency and enjoyed prolonged prosperity.
“If TINA is the dollar’s only hope, look out below… Yes, a weaker dollar would boost U.S. competitiveness, but only for a while. Notwithstanding the hubris of American exceptionalism, no leading nation has ever devalued its way to sustained prosperity.”
Fed Keeps 0% Rates Until At Least 2022
Confirming what many expected, the Federal Reserve announced yesterday that it will keep rates at zero percent for the foreseeable future, perhaps well into 2022.
During a press conference, Fed Chairman Jerome Powell said, “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.”
The Fed did acknowledge that economic conditions “have improved” in the last few months. However, none of the members indicated an urgency to raising interest rates. In “dot plots,” each member plots their forecast for interest rates. However, in this case, only two of the 17 members saw a case for hiking rates in 2022.
The decision to keep rates at near-zero percent indefinitely is an attempt to get the economy back to where it was before the coronavirus pandemic. During the said pandemic shut down our country and plunged our economic output by an estimated 50% this quarter.
The outlook from Fed members is for real GDP to contract by 6.5% in 2020. This comes with an unemployment rate of 9.3% by the end of the year. The members are much more optimistic about 2021. Members projecting an unemployment rate down to 6.5% and real GDP reaching 5%.
There are already positive signs, with last week’s controversial jobs report showing 2.5 million jobs were added in May.
Powell cautioned, however, that the millions of jobs lost will unlikely return quickly, if ever.
He says that many businesses may simply not reopen. Alternatively, he also says that jobs eliminated during the pandemic may not exist in the “new world order.”
The Federal Reserve keeping rates low while printing trillions of dollars to help the country recover from the coronavirus pandemic. With this, there are some very real fears that inflation is going to spiral out of control. Many fear that this will soaring well above the Fed’s target of 2%.
Thus far, the Fed members seem unconcerned about the possibility of runaway inflation.
Plans and Expectations
The average Fed member expects inflation (as measured in core personal consumption expenditures) of just 1.0% in 2021, increasing slightly to 1.5% in 2021.
The Fed will also continue to do its part to keep liquidity in the markets by buying up assets including mortgage-backed securities and Treasurys. The FOMC told the New York Fed to keep purchases “at least at the current pace,” which indicates about $80 billion per month for Treasuries and about $40 billion per month for mortgage-backed securities.
These actions along with other quantitative easing measures have inflated the Fed balance sheet to a record $7 trillion, a number that Powell has indicated he is comfortable with.
During a webinar hosted by Princeton University a few weeks ago, Powell said that the Federal Reserve has “crossed a lot of red lines that had not been crossed before and I’m very comfortable that this is that situation in which you do that and then you figure it out afterward.”
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Stocks Rally as Oil, Jobless Claims Rocket Higher
The stock market rally continued yesterday with the Dow Jones Industrial Average jumping 2.24%, the S&P 500 gaining 2.28% and the Nasdaq up 1.72%.
Investors felt optimistic after President Trump tweeted that he had spoken with Saudi Arabian Crown Prince Mohammed bin Salman. Many were hoping that both Saudi Arabia and Russia were willing to end the price war and mutually agree to cut production by at least 10 million barrels per day.
“Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!” Trump tweeted.
However, some experts are doubting the reality of cutting production by such a significant amount.
Edward Marshall, a commodities trader at Global Risk, told The Wall Street Journal, “It’s physically impossible for Saudi Arabia and Russia to get 10 million barrels a day off the market—they’d burst their onshore storage and fill every ship in sight.”
News also broke that Saudi Arabia called for an emergency meeting of OPEC and other oil-producing countries. The country called for a meeting to talk about how they can stabilize the oil market. Prices have been in freefall since the last meeting ended without a production agreement beyond April 1.
This was enough to send oil prices rocketing higher. West Texas Intermediate crude gained as much as 34% intraday before settling at $25.32 per barrel, a 24.7% jump. This is its largest single-day percentage gain in history.
Even with prices moving higher, it may not be enough to prevent bankruptcies in the oil and gas sector. This wave of bankruptcies was kicked off by shale driller Whiting Petroleum Corp. on Wednesday.
Jobless Claims Set Record
The market’s rally yesterday came in spite of some very bad news early in the day. Initial jobless claims for the week ending March 28 came in at 6.6 million. This figure is nearly double the previous week’s then-record of 3.2 million.
To put this number in a historical perspective, prior to the last two weeks, the previous record number of claims in a single week sat at 665,000 in March 2009 during the Great Recession.
To put it simply, this week’s initial jobless claims number was equal to the total claims filed during the entire Great Recession.
Chris Rupkey, chief financial economist for MUFG Banks, wrote in an email, “We knew that massive job losses were coming because of reports that many workers were unable to file a claim for benefits even after waiting on line for hours. Everywhere you look Washington and state governments were not prepared for the rapid spread of the virus and the devastating damage that would be done to the economy if businesses were shut down and workers sent home.”
He added “In a normal recession, job layoffs build over the many months of recession until they peak. In this pandemic-based recession, the job losses are immediate where the economy’s weakest hour is right now.”
Why was the market able to rally despite historically bad jobless claims?
JJ Kinahan, chief market strategist at TD Ameritrade, says it’s possible that the market knows it’s going to get worse. He also mentioned that this number won’t seem as bad in the coming weeks.
“Overall this is a little bit of a victory in and of the fact that it was such a bad number and the market did kind of shake it off. It is also the market preparing for a lot more bad numbers.”
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