Since I left my day job in 2012, I've been constantly preparing for economic devastation. I had to because I no longer had a safety net. My plan was to take a leap of faith and succeed. It would have been too embarrassing to ask for my old job back if I had failed.
Besides, going through the 2008 financial crisis was not something I ever wanted to experience again. For those who were still in school during our previous economic meltdown, be thankful!
Psychologically, if you can prepare for doom, you will likely be happier and less stressed if the time comes. Then when the economy inevitably rebounds, you'll feel blessed to be making easy money again.
If the worst never comes, you'll also feel grateful. Sure, you'll have to contend with not getting as rich as you could have due to having a more defensive portfolio. However, you'll still feel like you're winning.
If the Fed doesn't stop raising rates by the end of 2023, let us look at the bright side of economic devastation!
Economic Devastation Leads To Less Road Traffic
One of the things I loved most about early retirement was not having to commute. Trying to squeeze onto a packed bus for 25 minutes each way was never fun. Even after I started making good money, I couldn't force myself to pay $20 for a cab ride home when the bus only cost $2.
From 2012 – 2021, I enjoyed the bliss of no longer having to commute during rush-hour traffic. However, once my boy began a new preschool in the fall of 2021, my least favorite activity returned.
Today, I spend between 40 – 50 minutes commuting during the weekdays. I leave the house by 8:15 am and pick him up between 3:30 pm and 5 pm.
During the commute, there will inevitably be a double-parked car making traffic worse. If it's not a double-parked car, it's a driver that cuts me off or blasts through a stop sign. Every two or three weeks I see a car accident. City driving is stressful!
The only way to get cars off the road is to create a deep recession. Fewer jobs will lead to less traffic. If supply chain issues can also cause car prices and gas prices to soar, even better for reducing traffic. After all these years, sadly, most people still don't follow my 1/10th rule for car buying.
Sure, creating more public transportation infrastructure helps. But SF city planners behind the 1.96 mile Van Ness bus project took 27 years to complete at a cost of $346 million! Nobody has time to wait that long.
When the dotcom bubble burst in 2000, downtown San Francisco became a ghost town in 2001. I could go to any restaurant or bar without a reservation. Sadly, people are now returning to San Francisco and many other big cities according to a latest LinkedIn jobs report.
Economic Devastation Leads To A More Fulfilling Career
Imagine you are a smart person who went to a top university.
You dreamt of going into publishing because you love books. Once you learn all about the publishing industry, you hope to one day become a published author yourself. However, because your parents spent $300,000 on your college education, you feel the need to get the highest-paying job possible upon graduation.
Instead of taking a $55,000 editorial assistant job at Penguin Random House in New York City, you accept a job at Facebook in Menlo Park making $180,000. Big tech, management consulting, and banking are where your “best and brightest” classmates go because these industries pay the most and have the most prestigious firms.
You love the perks at Facebook. But as an English major, you feel out of place. Instead of acquiring and editing the next great personal finance book, you spend your days optimizing online ad conversion rates.
For three years, you're making and saving lots of money working at Facebook. Even though you don't give two licks about Zuckerberg's metaverse, you pretend that you do. Then a bear market tanks your company's stock by 70%, wiping away five years of progress.
You Get Paid To Take A Chance On Your Dreams
Realizing it might take at least three years for Facebook's share price to get back to its all-time high, you decide to take a leap of faith and pursue your dreams.
Instead of just quitting to start your new adventure, you resourcefully engineer your own layoff. The money you gain from your severance package provides a valuable runway for you to launch.
Even if your dreams don't come true of eventually becoming a professional writer once you learn the publishing industry, you will at least feel content for having tried.
How many of us work at jobs we don't like just for the money, prestige, and benefits? Black swan events, like the pandemic, force us to weigh what truly matters when money is no longer the main driving factor.
If you're ready to start your own adventure, please read my guidebook How To Negotiate A Severance Package: Never Quit, Get Laid Off.
Economic Devastation Gives Our Children A Better Investment Entry Point
Although a recession usually hurts our wealth, it gives our children an opportunity to build more wealth.
Back in 2008, my line manager with two kids told me something funny. He said, “You're lucky you don't make that much. This downturn won't hurt you nearly as bad as it will hurt me!”
At the time I remember thinking, gee thanks. But I understood what he meant. The less you have, the less you have to lose when economic devastation strikes.
Think about the millions of people with no stock holdings. How fortunate to build their net worths just be saving more than they make!
Our kids can buy more shares of the S&P 500 in their Roth IRAs at depressed prices. Parents can feel better contributing to their kids' 529 plans, a portion of which can now be rolled over into a Roth IRA after 15 years starting in 2024.
If the economy gets really bad, maybe you could even pick up a rental property for your newborn at a deep discount. In 18 years, the property will likely have generated tremendous cash flow and be worth much more.
To pay for college, you could take out equity or use the rental income. Either way, life is much easier once your kid has an income-generating asset that also provides shelter.
Investing In Private Growth Companies
Personally, I'm investing in more private growth companies in the artificial intelligence space. Investing in private companies is where you might be able to find the next Google, Meta, Figma, Apple and more.
The most interesting fund I'm allocating new capital toward is the Innovation Fund. The Innovation fund invests in:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. I don't want my kids asking me in 20 years why I didn't invest in AI or work in AI today.
The fund's investment minimum is also only $10, as Fundrise has democratized access to venture capital as well. Most venture capital funds have a $200,000+ minimum.
Economic Devastation Gives Us More Chances To Live In A Nicer Home
Shelter is a fundamental right. Affordable housing, on the other hand, is a big problem in the largest cities. Simply too few homes have been built over the decades to meet demand.
If it wasn't for the pandemic, my family wouldn't be living in a nicer home today. We had bought a fixer in April 2019 with the goal of remodeling it for one year and moving in.
But thanks to the start of lockdowns on March 18, 2020, several months later, I was able to buy a forever home soon after for about 9-10% less than if there weren't lockdowns. Public showings were cancelled and more people were understandably afraid to spend money.
If you've been wanting to buy a home for a while, have job security, and have the funds, a housing crash might be what you want. It's no fun getting into bidding wars and losing. Even if you win, you may feel off for paying more than everyone else.
The same thing goes for those who want to upgrade their homes. If your $500,000 home loses 10% of its value but so does the $1,000,000 upgrade home, you're still winning by $50,000.
In fact, I'm in contract to buy a dream home for 18% what I was willing to pay in 2022. I can't believe my good fortune. With stocks up over 20% since 2022 and this home down 18%, it's a double win and I'm taking advantage.
The best time to own the nicest house you can afford is when your kids are at home. Sure, there might be better entry points to the housing market, but your kids grow up quick.
Economic Devastation Enables The Best To Rise
Warren Buffett's quote is apt, “You only find out who is swimming naked when the tide goes out.”
It's easy to deemphasize merit during good times. When times are good profits are abundant. Companies and institutions have a higher tolerance for inefficiencies to better conform to society's virtuous demands.
When a downturn hits, however, companies are more focused on maximum productivity, maybe even survival! Non-essential programs get cut. Unqualified people no longer get hired. Bottom-tier performers are let go. It's all hands on deck!
The key is to be a strong performer. If you are a strong performer, you are OK with economic devastation because you have a greater chance of surviving. If you can survive a downturn, then you are one of the first to be rewarded when the economy recovers.
Those who lose their jobs during a downturn fall behind. If they remain unemployed or underemployed for one-to-two years, they will likely never catch up to those who survive.
Lean companies with strong balance sheets welcome the shuttering of competitors with bloated staff and weak balance sheets. Some of the most innovative companies are born during deep recessions.
Economic Devastation Blows Up Charlatans
When times are good, from a business person's point of view, it's easier to pretend you're an expert at anything to make money. You could attend the University of Portland for $70,000 a year as a theatre major and position yourself as a finance expert who grew up poor. People will believe you.
But when bad times come, people pay closer attention to substance and are less fooled by marketing. Those who are legitimate experts will outperform when the lights eventually come on at the night club.
If you have a risk-appropriate asset allocation, you don't mind if your rival buys stock on margin and loses all his money. If you were evil, you'd actually encourage them to leverage themselves even more when valuations are at extreme levels!
You wouldn't recommend your rival to subscribe to the Financial Samurai newsletter or read a bestselling personal finance book full of tactical advice. Instead, you'd steer them to expert TikTok marketers with no relevant financial background.
Not only will your rival get exposed to risk-inappropriate advice, they might also get sucked into buying $2,000 courses that make them even poorer!
Economic Devastation Is Great For Competing Countries
When the Chinese government decided to institute a Zero COVID policy, politicians from competing countries secretly rejoiced. Although the Chinese government's desire to save lives was admirable, everybody else knew that eradicating COVID in a country with a 1.41 billion population was impossible.
After almost three years of draconian lockdowns, China's economy has suffered greatly. China's 2022 GDP grew at only 3%, compared to a target rate of 5.5%+. Its youth unemployment rate hit almost 20%, resulting in tremendous social unrest.
As a result of China's economic slowdown, other countries and competing businesses have been able to take marketshare. If you're an American patriot, you are thrilled to see three years of huge outperformance in America's stock market, real estate market, and labor market.
Related: How To Make Lots Of Money During The Next Downturn
Economic Devastation Enables You To Finally Live The Good Life
It's better to retire during a bear market than it is during a bull market. If you can retire during bad times, it means your finances are strong. After 13 – 15 months, bear markets usually end. Then your net worth tends to stabilize or get a nice boost.
The opportunity cost of not working hard during a recession is lower. Can you imagine working 60 hours a week for one year only to see your company's share price get cut in half? Therefore, it is only logical you spend more time doing other things that matter.
Personally, I'm looking forward to spending more time with my three-year-old daughter, writing a new book, playing more guitar, and working on my pickleball game.
Psychologically, it feels great to let go of the pursuit of earning maximum money. I've already accepted my net worth will decline between 3-7% in 2023.
Giving in to losing money frees your soul!
Expect The Worst, Hope For The Best
So there you have it! If economic devastation comes again, there are at least some positives. Even if the middle-class is destroyed, there are some upsides as well.
The key is to not be one of the downturn casualties. If you can survive and also take advantage of suppressed asset prices, you'll end up winning big when things eventually get better.
Update: Well what do you know! Thanks to poor management decisions at Silicon Valley Bank and an overly aggressive Fed, the U.S. financial system is on the verge of collapsing once more. A bank run ensued at SVB bc it lost $1.8 billion in its loan book. The FDIC had to backstop all depositors to stop the spread of contagion.
Be prepared for economic calamity as the middle class gets crushed by the Fed. The economic grim reaper is knocking at our doors if the Fed doesn’t stop its rate hikes and pivot. The Fed broke sometime and might continue to. break things because the Governors or so rich, they don't care about the middle class.
Related posts:
Move Over FIRE, Welcome DIRE: Delay, Inherit, Retire, Expire
Reader Questions And Suggestions
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Sam,
When you wrote that “Shelter is a fundamental right” does this mean your fellow citizen must provide housing through taxes or, the lack of interference in either renting or buying a property?
Thanks in advance for the clarification.
Semper FI,
Luis
In as country as rich as ours, it is painful to see homeless people, especially homeless veterans without work. If people cannot afford shelter on their own, yes, I believe those of us who can should help out.
“Economic Devastation Might Be Exactly What We Need To Win”
I thought you already won.
Every year, I start from zero. It helps me stay hungry and focused, especially since I have to care for a family.
I also try and write to help others, and not solely focus on myself.
We must humble ourselves each year!
Hey Sam,
As always, great insights! I am a young professional and my third year anniversary at my company is approaching. I am a bit nervous since I have never worked through a recession, but I agree with you and some other commenters that a recession is not a horrible thing.
The US is losing ground to China. We are going to have demographic issues arise in the upcoming decades, and who knows what else is in store with China and other conflicts.
Point being: We need a recession to send non-competitive companies that have been propped up by low interest rates into the garbage. We need strong, resilient companies to arise for the US to prosper in the long-run and stay strong amidst whatever issues are thrown at the US.
I think we need to suffer some short-term pain for long-term success, both from a holistic view (the US) and also for individual financial success. As I said, I am probably on the younger end of the spectrum of your readers, so I welcome any criticisms or counterpoints to anything I posted.
Makes sense. The good thing about being young is that whatever losses you doing Kir, you have time to make up for it. And from an absolute dollar amount, you won’t be losing as much as you were in your 40s and beyond.
China, is actually suffering from a demographic, slow down due to its one child policy for so long. It could pose a real big problem for them. United States is also under the replacement population rate.
The key for you is the net work with your bosses and seen your colleagues. You might also want to look into part-time graduate school programs just in case. That’s what I did and it was an awesome decision that was mostly paid for by my employer.
This is a great post. I’ve been wondering recently why everyone is so deathly afraid of a recession?? I think when you say recession most people think of “The Great Depression” in the 1920s when people were literally starving due to lack of food and smoking the resin in their pipes to survive. In today’s age with globalization, minute by minute information and performance tracking, and improved monetary policy, I don’t see another Great Depression anytime soon. For god’s sake we just went through COVID for 3 years and things really didn’t get that bad.
Ok bears are still predicting impending doom, and its easy to be a bear, but bears live in fear all the time. The average length of a recession is a little over 1 year, and recessions on average happen about every 4.5 years, so as a simplified rough estimate Bears are home in a bear market about 22% of the time, and Bulls are home in a bull market about 78% of the time. I naturally have bear tendencies but I envy and strive to be a bull. This article helps support that because recessions are usually short and infrequent, and in fact end up being a good thing. Recessions usually cause people and companies to cut the fat, tighten the belts, and become more efficient. These are all good things.
Like a forest fire that clears the brush and enables new sprouts to grow.
Let’s hope by mid year, things get better or at least not too bad.
Cutting out inefficiencies is a good thing!
Wow – thanks you for this article Sam. First of all, I love your “wink-wink” sense of humor.
Also, I consider your readership to be a pretty savvy bunch and after reading your comments the level of bearish sentiment in the market (put/call ratio exceeds that of 2008 to the put side) is confirmed on this board by your readers. End of world stuff all over the place.
That confirms my strategy to keep averaging back into SPY on significant selloffs – sub 390.
Yes treasuries too, but many signs of market bottom here or near here. And even a whipsaw down another 10-15% can easily be recovered in a week. Then off to the races.
Hi Sam- What are your thoughts on the risks posed by the US potentially breaching the debt limit? Seems like it could actually happen this time and would cause way more chaos than an extended bout of higher interest rates. Are you doing anything to hedge against this (putting more cash aside in FDIC insured bank accounts, buying put options on SPX, etc)?
I don’t think it’s a big deal and I’m not doing anything to hedge. It’s just politics and politicians doing their thing and causing an unnecessary ruckus.
Any sell off due to the debt ceiling debacle should be short-lived. So I have some cash anyway to take advantage.
“ You could attend the University of Portland for $70,000 a year as a theatre major and position yourself as a finance expert who grew up poor.”
Haaaahahahahhaha ah brutal hahahaha.
Good Morning Sam, thanks again for reminding us that bear markets often end in 13-15 months. Just to confirm, we are now about to finish month 13. I thought the bear market started about 1/1/2022.
Yes, so the bear market could end by July 1, 2023 based on historical averages. The Fed will likely stop raising rates after Feb. If not, I expect another 10-15% downside in the S&P 500.
So I think you’re possibly too optimistic. I would guess the downside from here is substantial. I would bet you again that the s&p still has a 15% drop from today’s date in the next 12 months. Do you want to make a bet?
I’m good. Are you shorting the S&P 500? How was your investment performance and net worth performance in 2022?
I got burnt shorting the market during the downturn in 2009…I don’t play stocks. So for 2022 it was best year ever for my business/investment net worth. Concerned about 23…spoken with several bankers and they seem worried. I think S&P down to 2900. My real estate, manufacturing warehouse, dealerships , and distributors in the southeast of the USA are solid. I also own covered RV storage and a grocery store all very solid. A friend is investing big in mobile home parks. If I were 25 again I would plow all my $$ into those.
Why do you put so much trust in your bankers?
I have 7 different bankers I do business with. They are all but one in small markets in 4 different states. They have a good pulse on their local markets. When they start cutting lines of credit or getting out of the home mortgage business I consider those bearish moves. Just my opinion
While healthy recessions and downturns are a welcoming event, this time’s economic destruction will be the last. The FED has no other cards to play, and it’s only a matter of when it all comes tumbling down.
Anybody who has most of their wealth tied into RE and stocks likely saw the peak of their lifetime wealth in Dec 2021. You simply can’t have 15 years of artificially low interest rates and bounce back without out of control inflation and 1929 style market shocks. Both consumers and corporations are reaching the end of their credit lines and cash reserves (if they ever had any) so soon the truth will be more evident.
It sounds generic, but it’s precious metals, crypto (assuming the grid holds), guns, and other non-perishables as the new investment strategies. Traditional strategies are no longer relevant in today’s markets. It’s a skew of gamblers and overleveraged financial entities, and the new generation wants little to do with “boomer” ways of making wealth (RE and stocks). Bogleheads will definitely be the first to be wiped out.
Sorry for the doomer standpoint but I’ve been in finance for 30+ years and I’ve never seen quite a situation as this. In 2008 the FED was at least able to reverse course via interest rates, but this time that’s virtually impossible without the threat of Weimar style inflation. I’d love to hear other takes of course.
“ peak of their lifetime wealth in Dec 2021. ”
I like it! That actually feels very comforting if none of us can never make money from our investments again. It gives us full permission to live it up and not exert so much time to grind anymore. Blessed.
Now we just have to try and hold onto our wealth as much as possible and get rid of debt.
With your belief, I have you decided to kick back more as well?
Kelly – Buy aapl and tsla here and thank me in 12 months.
That’s quite the opposite. In hyperinflation, RE and stocks are the best performers. Those are the kind of assets you want to own if that was to happen.
Mathematically, hyperinflation is a division by zero. If you divide RE and stocks by zero, the result is “infinity”. That’s means those who have RE and stocks will look back at Dec 2021 and will not believe how small their wealth was back then !!
Just some food for thought … ;)
You have to admit though that you speak so definitively, but this is only one potential node. Inflation can also stall, we go through a moderate recession and Fed begins to slowly lower rates again. But what you’re saying (“this is the end of times”), people said in 2008, 2020, etc. Even in 1929.
Also, peak to trough is always stark. But that’s not really realistic – the mass isn’t putting all their money in at once and pulling it all out at once. It goes in over time, gets taken out over time. People talk about getting back to peak after GFC took about 5 years. But if let’s say you invested $1,000 evenly between 2003 and 2007, your total basis is $5k, you were up to $6,700 at peak and if you stopped investing at that point, you were down 50% from your peak net worth but down 34% from your total investment (at trough!), and you get back to your cost basis after 3 years, not 5.
All that to say, I guess, is smoothing out the investments and withdrawals makes these shocks have less of an impact on actual lifestyle (although it feels bad to see your NW half)
I do think we may be seeing a shift away from globalization and that will create some bumps.
I agree with looking on the bright side of economic devastation. If the economy only went up, then how would our children survive? They would get priced out of everything. With recessions and major layoffs, it gives the younger generation of go-getters an opportunity to jump on the bandwagon.
Just as you described in your story, Sam. The downturn of 2008 helped you to get ahead. And the downturn of 2022 will help those young, smart, hardworking people out there catch up.
As for me personally, I’ve been waiting for the economic party to end. Economic downturns is the best time to go shopping!
Well, hopefully the parents would have saved and invested for decades to be able to transfer some wealth to their kids.
The only thing I am waiting for is getting a discount on an even nicer home. I wanted to buy one in March 2022, as I really fell in love with the lot and home size. If the seller will accept a 15% or greater discount, I will buy it!
Also I think a great time to opportunistically vacation! With things turning south, airfare will be less and deals will pop back out, and all without Covid!
The latest economic data shows that we are on the cusp of a recession. Inflation is trending negative, not slightly up year over year.
The Fed is going to screw the economy, and I’m here for it with a very large cash and treasury bond position, waiting to pick up deals from the laid off and the overextended.
Got to love our short term treasury bond holdings! I’m going to buy another $25,000 worth of six month treasury bills today. So good at 4.7% guaranteed return.
I am also all in for the short-term treasuries. But I wanted to point out to you and all other readers that Ally Bank just launched a 13-month CD at 4.6%. Deal is good until 2/8/23. True, more taxes than a short-term treasury, but possibly more accessible and easier to lock depending on how much you are looking to deposit.
I find that the new issuance short-term treasuries are good but I want a slightly higher rate, so I have to buy second hand and that requires more money, so a 4.6% CD may work better for me.
Cool. Good to know. Some banks will offer more enticing race to attract more deposits. So it’s up to us to always be on the hunt.
Know your marginal tax bracket and do the calculations.
I interviewed for Upstart several years ago and didn’t get the job. Am I mad at its 80% stock decline? No. I feel like I dodged a bullet! That would have been the biggest waste of my time working there!
Yes, you dodged a bullet. Spending time working hard only to see your stock options decline by 80% would’ve been a real bummer.
I don’t know if we are done with this bear market, but my guess is that it’s not over yet, although the worst may already be behind us.
My best indicator to measure future economic devastation is the actual price of Bitcoin. Since it is worthless, the fact that it has any price above zero shows how much speculation there is in the market. And the fact that it has risen recently (+25% YTD) shows that there should be more economic devastation to come.
I’m looking for Bitcoin to fall below $3,000 (permanently) for an indication that the economic devastation is over. And we are still very far from this level !
There are already three bankrupcies to this date in 2023. Bed Bath & Beyond, Party City and Genesis Global Capital. I expect there are many more to come. It is too early to look for deals. I prefer to focus on quality for the moment.
Personally, I did not made much changes to my investments / assets allocation since early 2021. So I’m still very defensive (food + energy + utilities + telcos). Small changes in 2022 include buying some treasuries @ ~4% and Alibaba when it was at its lowest point in history.
I’m doing well for now. But I prefer to stay cautious. When the economic devastation is this bad, we never know when the market will hurt us. I’ll claim victory when we will be out of this mess.. ! :-)
Define worthless? I can buy stuff with it. So it has utility. Doesn’t that mean it isn’t worthless?
Worthless, meaning it doesn’t have any value in and off itself, you cannot use it to produce income and buy stuff with it.
The only way to buy stuff with your Bitcoin is to get rid of it. Which essentially means it is worthless …
By opposition, a piece of real estate you can lend for a “very high price” is “very worthy”. You can buy stuff with your rent each and every month. Which means your real estate has real value.
I try to look at the positive of a recession, and one of the things I was thinking, it might be a positive is if many to lose their jobs for business owners like myself. We have all been in a very difficult position, finding good people often because many have become entitled, lack work ethic, and have so many options.
If there are less jobs out there maybe it will make hiring easier for those who need it and expand the hiring pool. Not sure if you have heard anything about this from any of your friends.
I just got back from playing two hours of Pickleball after dropping off my daughter at the dentist. While I was playing, I met several 20 to 25 year olds who regularly play during the week. I didn’t get a sense of urgency from them about going back to work.
I know, one of my friends, who always had his employees get poached away by Google and Facebook because they paid so much. But now that Google and Facebook are laying people off, my friend’s company and other smaller companies are having an easier time, retaining talent and hiring people.
A recession can be a positive for nimble, well capitalize companies to grow.
Although I don’t wish job loss or economic devastation on anyone, I would love less road traffic!
I think I’m positioned well enough to survive a bad financial situation but I certainly hope not to end up in that boat. It’s inevitable that we will have several more down cycles in our lifetimes but man they hurt. Watching money vanish into thin air when the markets are down gets me down if I think about it too much. So I try not to watch my investment account too much or it drives me nuts!