Learn to Love A Recession
Everyone loves recessions, right?
I guess not. But what if I told you that they are necessary and that, if you truly care about the economy, the stock market and your personal finances you would welcome them?
I agree. But it’s true.
Think back to just the last two recessions. In 2008, the stock market fell by over 60% and millions lost their jobs. Is the economy better today (despite being in the throes of high inflation) or 13 years ago?
What about 2001? That recession, in terms of job loss, was staggering. Are we better off today than we were in 2001?
Of course we are.
But does that mean that recessions are good for us? Absolutely!
We’ve talked numerous times over the years that systems on our planet are all made of the same stuff. The stock market movements look very much like a beehive or an ant colony. That’s no accident.
One aspect of life common to just about every form of life on the planet is a period of rest. Look at the trees. Cut a tree down and what do you see?
Those rings represent annular growth. Each light-colored ring is the growing season. And the darker ring is the dormant wintertime. Even evergreen trees, which don’t really lose their leaves, enter a dormant time.
Many creatures on the earth, regardless of latitude, utilize an annual cycle of growth and rest. If you live in a warm climate, deciduous trees still lose their leaves every year. They shouldn’t need to. They don’t have to worry about killing frosts. But they still do.
If you have children, you can attest that their growth was not linear in nature either. My wife and I could always tell when our children were in a growth spurt. These happy-go-lucky children would become moody and they would eat like a velociraptor.
Most of the time, they were normal, well-adjusted small humans. Periods of rest were thankfully long and frequent. Still, it was periods of growth and periods of rest.
Our economy is a macro version of us as humans. Just like the stock market is. Why should we assume that we don’t need periods of rest for our economy just like our bodies or any other organism in nature?
But what does a recession do? How can it help us grow?
To illustrate, let’s go back to the 2001 recession. In fact, let’s start in 1995. The internet was just becoming popular. Technology was growing by leaps and bounds. It was an exciting time.
In the mid-90s, tech companies had an easy time hiring genius level programmers. They were seemingly all over.
Soon, the genius programmers were all working for one start-up or another. So good programmers started being snapped up left and right. There were more of them than geniuses and bigger tech companies that required programmers to grow.
Soon all the good programmers were gone as well. Now companies were hiring just-OK programmers. It happens. You need a project finished. You just need people to type in code. There is a deadline. You just need to reach that deadline.
But what is happening? What one genius programmer could do, it takes 3 good programmers. What one good programmer can do takes 5 OK programmers.
So for every genius programmer you need, you have to hire 15 OK programmers. Your profits start falling. Costs are skyrocketing.
Eventually, the system becomes unstable. The marketplace is devoid of OK programmers and now you’re hiring barely-coherent programmers. And because the category is so popular, you’re paying the barely-coherent ones $80,000 per year. In 1999!
Suddenly, you’re losing money. And for every additional unit sold, you’re actually losing more money. You can’t make anything up on volume because your losses go up as sales go up.
That’s how you get a recession. The costs of business just get too high. In 2001, it was about tech labor. Tech labor was just too high. In 2008, it was real estate. The price of real estate just got too high.
But you’re probably still thinking, “Yeah, but how did any of that help. All those people lost their jobs. Stocks went down. Companies went out of business. How did that help?”
You probably never had to create a website in 1998. I did. The leading program back then was something called Microsoft Frontpage. It was a disaster. If you didn’t use Frontpage, you were programming in HTML language directly.
If you wanted to sell products on your website - called e-commerce, you were creating the entire system from scratch. Wanted a certain look or a database lookup? You’re doing it all yourself.
Compare that to today. You don’t need 40,000 programmers at a tech company anymore. If you need e-commerce, there are numerous companies that can plug and play right into your website. And likely there is one that is a specialist in your product or service area. If you need a design feature, any number of off-the-shelf programs can provide that, on the fly - without you ever having to remember what HTTP stands for. (HyperText Transfer Protocol. . . . I think.)
The problem with economies is they become too inefficient as they grow. A recession gives us a time-out to re-evaluate how we are accomplishing our economic goals. It would have never occurred to anyone in 1998 to build an e-commerce system that could plug into just about any website. Every tech company was focused on hiring more people to push out more lines of code.
We are likely within 2 years of our next recession. Our last one was in 2008 - 13 years ago. That’s too long to go without a reset. (Recessions should occur every 2-5 years or so. Let me say that again - Recessions should occur every 2-5 years.)
So let’s change how we view a recession. Sure, it’s a blow to our portfolios. It’s not fun for any of us.
And for those that lose their jobs due to a change in the economy - it’s definitely no fun for them either. There is definitely a short-term human cost to recessions. But as we’ve seen in the past, employment continues to grow once the next economic cycle begins.
We can’t stop recessions, any more than we can stop Winter from coming in New England. Our best bet is to know that the time of rest is necessary and the first snow means that Spring is around the corner.
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This blog is the opinion of Successful Money Strategies, Inc. and is provided for informational purposes only and is not intended to provide any investment advice or service. Statistics and other figures are accurate at the time of original publishing. Any advice herein should not be acted upon without obtaining specific advice from a licensed professional regarding the reader's own situation or concerns. Always count your change.