Alan Greenspan, former head of the Federal Reserve, coined the term “irrational exuberance” back in 1996 to describe how stock market investors were acting during the dot-com bubble. We could be experiencing a similar artificial intelligence (AI) bubble right now, including highly inflated valuations for companies in the AI space. Others would argue we are in an “everything bubble,” where over-eager investors are bidding up the price of stocks in almost every segment, creating multiple bubbles or one big super-sized bubble. At the same time, precious metals, commodities, housing and other assets classes are also rising, contributing to the “everything” in the everything bubble. Irrational exuberance indeed.
While all bubbles pop, sometimes they get stupendously big before they blow. For example, Greenspan pointed out the market’s irrational exuberance four years before the dot-com crash. Conceivably, that means the AI bubble could get much larger before it pops. That’s part of the problem, because the larger it grows, the more people will think the good times will never end.
Fear of Missing Out
It all comes down to FOMO, or fear of missing out. Let’s say you have made a large profit trading in the market. You could sell and sit on your cash, keeping to safe. Or, because you feel the market has momentum, you could keep it invested, hoping to double your profit.
That’s what keeps the bubble growing. People and institutions who don’t want to miss out on the gains.
There are smarter ways to manage your money, but many keep chasing the long shot. Every marketing or advertising message from an investment includes a message that says something like “Past performance is no guarantee of future performance,” but almost no one listens. They want to get on that winning horse, they want to play the tip they got for a “sure thing.”
And it works. For a while at least. People make money. Institutions make money. Traders make money. People who have large gains on paper spend money because they feel wealthy, even though they haven’t locked in those gains. Everybody is happy, until the bottom drops out. Thanks to pre-programmed trading, algorithms, and shorts, that market can drop quickly, which creates panic. When there is panic, everyone sells.
Panic is the end of any exuberance. There is no more FOMO, only losses. And that will kick off a recession like we have not seen since 2008, which many call the “Great Recession.”
A Change in Attitude
You could call a recession a period of irrational fear because the attitude of irrational exuberance reverses itself. Consumers no longer feel wealthy, so they stop buying things. New cars sit on lots and plans for renovations get shelved. Dealers can’t give away a jet ski during a recession because at their core personal water craft are in most cases a frivolous recreational item rather than something you need for survival.
As sales drop, companies cut back on spending, reducing R&D and expansion plans. They also lay off employees, which contributes to the vicious cycle of less spending, leading to lower profits. Unemployment grows, followed by car repossessions and home foreclosures. Homelessness increases. People in their 20s and 30s move back in with their aging parents.
Are we there Yet?
Look around. Credit card debts are at record highs. Car repossessions are increasing. Companies are going bankrupt or closing stores and restaurants. Even Starbucks is laying off employees and insisting that people sitting in their shops buy something.
Are we in the middle of a recession? No, but we are at the top of the hill looking down. At some point, we’ll get pushed over the edge. How well you navigate the trail ahead of you will determine how you fare financially.
The Secret to Surviving a Recession
I have lived through six or seven recessions and was raised by parents born during the Great Depression, so I can say from experience that the best way to survive a recession is to have a steady income throughout it. Usually, this means staying employed, but it can also mean having a business that is recession-resistant or counter-cyclical. Jobs in healthcare or public safety, for example, are generally protected because people need doctors, nurses, police and firefighters regardless of if they have a job. It is much easier to hold off on buying new carpet or replacing that old couch you hate than it is to avoid getting your sports injury or heart attack treated.
With a steady income, you can not only survive the recession, but thrive during it. Recessions are often a time of deflation, or falling prices. You may be able to pick up that jet ski you wanted on the used market for pennies on the dollar when someone who just became unemployed needs to raise cash. You might buy a home from the bank for less than a private seller would offer it. Incentives to buy a new car might include zero interest or a large cash back offer. These are only deals if you have money, which usually means having an income.
Get Rid of Debt
Right now, the U.S. is paying more than a trillion dollars in interest. Don’t get into a similar position where one sixth of your budget is going down the interest drain.
The less you borrow, the less you will have to pay back and the less interest you will owe. It is much easier to survive tough economic times when you know they can’t repo your car because you own it outright. Live within your means. Avoid debt.
Have Preps
Many a prepper has eaten their prepping food while unemployed or out with an illness, and there’s nothing wrong with that.
Maybe you stocked your prepper pantry because you worried about an EMP or another pandemic. Instead, your personal SHTF might be an injury and your long-term disability insurance doesn’t kick in for 90 days or unemployment is only $300 a week, which is less than your house payment. So eat your stored food while you have no income and be grateful for it. You can replenish when you get your cash flow back.
It’s the Economy, Stupid
The good thing about recessions is they come to an end. It’s a cycle, and not only does what goes up come down, but what comes down will eventually go up. You just have to get through to the other side. So save, prep, reduce your debt, don’t get over-extended, and have a secure source of income.
See you on the other side.
Note: Pete is not a financial professional or advisor, and this is not financial advice, just the views of a prepper who has lived though multiple recessions. Pete uses a financial advisor and recommends you do the same.
