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Recession Coming! Economics 101 (HOW BAD WILL IT GET?)

Apr 09, 2020
Things are likely to get a lot worse before they get better since the CDC officially declared a pandemic on March 11, one by one, cities and states are locking down and ordering people to stay home, as a result, businesses of airlines, restaurants, travel and The retail sector is taking big hits that in and of themselves wouldn't be so bad if it weren't for these four things: First, corporate debt, corporate debt is at the highest levels it has ever been. had in history, and also the drop in oil prices, which is not so good for the United States because it is one of the largest oil producers in the world, also the domino effect that the massive layoffs

will

have on the spending of the consumers, which we haven't even begun to see yet, and fourth, a dysfunctional politics where we have two opposing parties are deadlocked, the Democrats and the Republicans, and they seem to have trouble agreeing on anything, even on times of crisis, so there is a lot going on in the world right now and it is more important than ever to have financial education in the midst of panic and fear Financial education is what allows you to make decisions based on facts and not on emotions, so today I'm here to help you understand what's happening and why it's happening and then use that information to make informed decisions in this video.
recession coming economics 101 how bad will it get
We'll talk about why we're heading into a

recession

, we'll also talk about what factors

will

influence how bad this

recession

becomes and how quickly we could get out of it, and finally, I'll also talk about how to prepare. yourself financially so that you can make it to the other side intact and even benefit from all this madness because as Albert Einstein once said, in the midst of every crisis there is a great opportunity essentially, this video will be some

economics

101 plus practical tips on how to manage your money wisely during recessions, okay, we have a lot to cover, so let's delve into early 2020, which wasn't that long ago, things were as good as they could be, unemployment was at record lows and the market Stock market was hitting new all-time highs and now, after a decade of low interest rates, cheap debt and a huge rise in asset prices, you could say a bubble was forming and it looks like the bubble has finally burst. and the recession is finally here.
recession coming economics 101 how bad will it get

More Interesting Facts About,

recession coming economics 101 how bad will it get...

According to the National Bureau of Economic Research, a recession is officially defined as a significant decline in economic activity that spreads throughout the economy and lasts more than a few months, typically visible in real GDP, real income, employment, production industrial and wholesale and retail sales, so if GDP and employment are markers of a recession decline, then we are already seeing a lot of that. Personal consumption already represents 70 percent of GDP. Personal consumption is everything that is consumed, food, drinks, services, anything that is not commercial, now of that 70, 45 of that. They are the services, which means eating out, traveling, all those services that you pay for with everyone locked up, a large part of our GDP goes there.
recession coming economics 101 how bad will it get
Banks and economists are publishing all kinds of forecasts for GDP in the second quarter and they range from a drop of ten percent. but according to ubs up to a drop of 24 in the second quarter according to goldman sachs and then there is unemployment with everyone locked down, the travel and hospitality industry has obviously been the hardest hit and the department of labor reported that weekly unemployment insurance claims increased to 281,000 which is an increase of 25 from the previous week and these numbers are only as of March 14 because there is a lag in the data, the weekly jobless claims numbers are released every Thursday and I'm sure the next reading will be much higher.
recession coming economics 101 how bad will it get
Before all this started unemployment was at historic lows of three and a half percent, now the official unemployment figure is released on the first Friday of every month so again there is a delay because I think the next one won't be until April 3, but it will definitely be like that. much higher than three and a half percent because the reality is that the domino effect is just beginning. All the people who are laid off from companies in the hotel and oil industries will all have to reduce their expenses, possibly defaulting on their loans. stop paying rent, etcetera, etcetera, etcetera, eventually businesses that aren't even directly affected by the pandemic will eventually feel the effects because no one exists in a vacuum.
The James Bullard-powered official predicted that unemployment could hit 30 percent in the second quarter. 2020. 30 unemployment which is higher even than during the great depression when unemployment was 24.9 many people seem to think that this will all end very soon, but I think it will last much longer than we would like. and there are a couple of reasons why we have ultra-low interest rates first, extreme drops in economic activity like we're experiencing now can usually be resolved with a quick fix like lowering interest rates, lowering interest rates ago Borrowing money is cheap and helps revive a sluggish economy, but that's in normal times because now, in 2020, we've already had a whole decade of ultra-low interest rates, so cutting them further won't have much effect when they are reduced. rates from eight percent to three percent. that has an impact, but when rates have already stayed near zero for an entire decade and then the Fed cuts rates from near zero to zero, it's not as helpful, which is why when the Fed announced its second rate cut emergency in response to the pandemic in March. 15.
The stock market actually went down, rate cuts usually have the opposite effect. Stock markets rise because lower rates are good for the economy in normal times. The next reason this recession is going to be difficult is that we have record debt-to-income ratios. As of today, governments, people and businesses, especially businesses around the world, have more debt than ever. Having more debt isn't bad in and of itself as long as your income also increases with that debt, it's like racking up a ton of credit card debt because you're eating lobster every night and you're living large and even though your debt gets bigger and bigger and your monthly payments on that debt get bigger and bigger, as long as your salary keeps increasing too you I don't really realize because in theory you could go on like this forever, but as soon as Your income is affected, the party is over and that is exactly what is happening now.
Debt-to-income ratios are even higher than after the 2008-2009 financial crisis. According to the IMF, global corporate debt, which does not include financial companies such as banks, has increased from 84 of GDP to 92 of GDP and in the United States the ratio between corporate debt and GDP has increased from 43 to 47 of GDP according to the Federal Reserve. Now that the world is on lockdown to deal with this pandemic, companies that had a certain amount of income to pay their debt now no longer have that income and will likely not be able to make their payments, especially oil companies.
They are having a hard time because they are dealing with it the double whammy of the pandemic and low oil prices 10 years of ultra-low interest rates encouraged many companies to borrow money, sometimes quite irresponsibly and now that the party is over, there will be consequences that will be felt throughout the economy, companies are now starting to realize that they need to start paying down this debt because it has become unsustainable given that they have less income to pay that debt and now they are left with one of two options The first option is to drastically reduce spending to get more cash to pay off your debts and that will result in mass layoffs, obviously not good for the economy.
Neither option is for companies to default on their debts, which is basically saying, "Hey, we're here." We're not going to pay this back because we just can't regret it so default is really the last resort but when companies start to default your lenders will suffer huge losses when you owe someone money that loan is a liability to you, the borrower, but for the lender. An asset on their balance sheet shows up as an asset and they count on that asset to be there and then when the borrower defaults, suddenly what he thought was an asset disappears overnight.
Imagine this happening on a large scale with all businesses currently suffering from high debt and lower income as a result of this crisis, this will have a domino effect as businesses and lenders go under and the amount of money and credit circulating in the economy is reduced, so debt is a huge problem and deleveraging is never a pleasant process, however, the US government has a lot of power to make this as painless as possible and In reality, the biggest risks come not from the debts themselves, but from the inability of policymakers to do the right things, which brings me to the third reason why I think this recession will last a little longer. what we would like.
The lack of strong leadership in our political system right now. Democrats and Republicans are taking a long time to agree on how they are going to act. We're going to help the millions of Americans who are losing their jobs and right now we have a president who doesn't really provide good guidance or reassurance to the public for recessions and pandemics to happen, but effective leadership and good fiscal stimulus measures that the government implements quickly. and efficiently it will really alleviate a lot of suffering for all of us, so I really hope that Democrats and Republicans can work together and guide us through this economic and health crisis, also compared to some Asian countries, the US response to the pandemic. unfortunately it has been really inadequate so far, the US has only managed to test about 60,000 people and compare this to South Korea where they have administered over 290,000 tests.
South Korea is much smaller, the US population is six times larger than Korea's, so right now we are unfortunately under testing and any estimate of how many cases there are in the US is too low, so Of course, it's no one's fault, there are a multitude of reasons to blame, but it is undeniable that the current administration totally underestimated the severity of the disease and did not take action quickly enough to contain it and all of that will cause social distancing to be very prolonged. more than necessary and will therefore slow the economy much more than necessary now.
Let's talk about the factors that will influence the severity of this recession and how quickly we emerge from it. As of today, the SP 500 is down about 30 percent from the all-time highs of 2008, the stock market is down as much as 52 and during the great depression it was down almost 90 percent from the highs, so right now , at 30 below the highs, I really don't think we've seen the full extent of it yet, of course, we all know that, no matter how bad things are. the recovery always continues so it's a question of when we get out of this mess and a big determinant of how long the recovery will take is how the government responds during the great depression, the government took action but did very little. too late and that's why a recession turned into a depression and it's probably the worst economic crisis we've ever seen in the history of the United States during the financial crisis of 2008 and 9, however the government took action very quickly and took action big and bold many times. monetary stimulus and fiscal stimulus when faced with economic crises governments can take action in two ways monetary stimulus and fiscal stimulus monetary stimulus includes things like cutting interest rates, buying assets, and printing money fiscal stimulus means things like tax cuts programs social bailouts from too big to fail companies and helicopter money, which means issuing checks directly to individuals to help them in this crisis we are experiencing now, the government has already applied tons of monetary stimulus, I really commend them for responding so quickly, so quickly that the Federal Reserve has cut interest rates. rates to zero and they have announced that they will buy bonds in unlimited amounts and print unlimited amounts of money, which will definitely help stabilize things, just as I was saying before, because the debt-to-income ratio is very high because companies are really over leveraged right now and burdened by a lot of debt and now, once they start defaulting and cutting spending and the amount of credit in the economy starts to contract, we will have a lot less money circulating in the economy, the less money there is . is circulating in theeconomy, whether in the form of credit reduction, debt or real cash which is not good for the economy, so the Fed right now is intervening by buying bonds printing money and basically replacing that loss of money and credit that is circulating in the economy. economy.
Once again, the Federal Reserve and its monetary stimulus measures are definitely going to help, however, on the fiscal side, things are not so good, we are still waiting for Congress, at least as of today, March 24 , agree on a plan to help the Americans, so rumors have increased. It's just that the fiscal stimulus bill is going to be between one and two trillion dollars, I'm sure you'll agree on some of it, but I hope that once it comes out it's going to be effective and generous and really help make this economic crisis. as painless and short-lived as possible, another x factor that will determine how bad this recession will be and how long it will last is obviously how soon we get a vaccine and a cure, because once we have a vaccine and a cure, we won't have If we do any of this social distancing it will just be another illness or flu to deal with, at which point life would pretty much go back to normal, but vaccines and cures don't appear overnight and many experts say this will happen. take between 12 and 18 monthsUntil then, lockdowns, quarantine, life and social distancing will probably be something we will all have to get used to, so now let's talk about how you can prepare yourself financially.
The goal here is to get to the other side intact because there will inevitably be a recovery. and you want to get to the other side not only intact but also possibly benefiting from this crisis. Stock market crashes like this don't happen that often and if you're prepared, this could be a once in a lifetime opportunity to make lots and lots of money, so your number one focus right now should be preserving cash. You need to make sure you have enough cash to live on even if your income goes down or God forbid you lose your job and the best way to do that is to make money.
Make sure you have an emergency fund An emergency fund is a savings account with cash set aside that would cover at least three months of living expenses. The general rule of thumb is that you probably want to set aside three to six months of living expenses. in your emergency fund, so if you don't already have one, review your expenses, see where you can cut back and start building your emergency fund, sell old things, cancel some subscriptions, don't eat out anymore, it's okay, never mind, No one really eats out anymore and just saves their money and if you're investing in a 401k or other investment account, stop contributing until you've built your emergency fund because what's the point of adding money to your investments when Don't have any cash? cushion so that you have to sell your investments later if something bad happens and that often ends with you having to sell your investments at the worst possible time.
Any money you're contributing to investment accounts should be money you're okay with and are absolutely sure you won't have to touch for at least 10 years, so once you've built up your emergency fund , then and only then should you start thinking about investing. Also as a side note, if you have been fired, there are a couple. Things you can do First you can file an unemployment insurance claim if you have been laid off you are probably entitled to at least six months of unemployment benefits also if you have student loans credit cards and other debts to pay call your lenders and ask them Knowing what's going on here is not the way to go because most lenders offer some type of relief, especially with everything going on right now, and they will most likely be willing to work with you.
You can ask them for reduced monthly payments, interest only has a grace period, there are many options, okay, but let's get back to investing now. I know many of you have wanted to enter the market, but we may be a little nervous about doing so. So you never pulled the trigger, but I'm telling you now and the next few months will be the best time to get in, although I have no idea where the bottom is and the market could go much lower. From here, the fact of the matter is that times like these often present the best opportunities to buy stocks cheaply, so I would gradually start buying in small quantities or at least be prepared to buy in the near future having your money Ready in a brokerage account it takes a few days to open a brokerage account and then transfer your funds, so you want to have all of that in place before the market starts to change.
The best type of brokerage account for beginners is a roth ira. allowing you to not pay any taxes on the investments you have within the roth ira. You can also open a taxable brokerage account, except it doesn't come with any tax benefits and you'll have to pay full taxes on any profits you make on the investments within that account, so it makes a lot more sense to start with tax-free accounts. Before you start investing in taxable accounts and Roth IRA is the place to start. There are many excellent zero dollar commission brokerages that offer roth iras that I personally use. fidelity, but vanguard and schwab are also great options once you have your roth ira with funds open and ready to go, then there are three ways to invest it to take advantage of this market decline.
The first way to do this is to buy individual stocks. There are tons of companies whose stocks have become 30 40 50 even 60 cheaper due to everything going on right now, so if you are willing to do the work of researching companies and analyzing their investment potential, there will be plenty of opportunities. amazing to buy some great ones. companies for sale now, the second way to invest during a recession is to buy index funds because researching individual stocks can be a lot of work, it can be very lucrative, but not everyone is willing or knowledgeable enough to be able to do it, that's why A The vast majority of people are better off buying index funds.
Index funds are a way to buy the entire stock market with a single purchase, for example, rather than trying to choose which of the S P 500 companies will survive and prosper next. In this crisis, you can simply buy an S P 500 index fund because it will contain all the companies in the S P 500, although there will probably be some companies in the mix that fall short of, on average, the S P 500 as a whole. recover and rise again The third and easiest way to invest and benefit from this market decline is to buy a target date fund.
Target date funds are mutual funds that typically hold several different index funds with a mix of stock index funds and bond index funds. Funds are basically a fund of funds and, as such, are even more diversified than owning a single index fund. Additionally, target date funds target specific ages, hence the name target date funds because someone who is five years away from retirement should invest very differently than someone who is 30 years away from retirement and, So target date funds take all of that into consideration so you don't have to decide these things for yourself, all you have to do is buy a fund now and the three methods of investing in investing in individual stocks in Index funds or investing in target date funds are ways you can benefit from this downturn by entering the market when it is down to help you better understand each of these ways of investing.
I have created a Roth Ira investing manual. kit, it's important to understand what you're buying and why, and this free download explains all the ins and outs of stock index funds and target date funds. I have put the link below, get the pdf if you are interested, it is a free download now. Since we're all stuck at home doing social distancing, I'd say it's a perfect time to look into investing and start taking control of your financial future, so get the free download. The link is below. What if you already have investments in that case? Please, please, don't panic, sell, that's the last thing you want to do.
It's a classic beginner investing mistake: buying when things go up and selling when things go down. Look, I know it's not easy to stay calm when the market is going up. Going crazy and watching my investments fall while the stock market sinks is not fun for me either, but a paper loss is not the same as a permanent loss, so you need to understand the difference right now if your investments are in the red. and you still own those investments, which is a loss on paper, in due time those losses will eventually reverse, unless you invested in a company and that company goes bankrupt, but if you are diversified in index funds or in the companies in which you have invested. are financially sound, so history has shown that paper losses eventually turn into games;
However, if you sell now after the market has already taken a nosedive, then you will have turned a paper loss into a permanent loss and you will no longer be in the market when it recovers, meaning you won't have the chance. chance to recover any of your losses because you have already insured them when you sold, so don't panic, selling is never a good idea, no matter how bad it is. The thing for me is that, aside from doing a lot more stock research than usual, I'm not really doing many things different from my usual investing strategies with my index fund portfolio.
I continue to dollar cost average on the first of each month and rebalance once a year. and I am not selling, adjusting or fiddling with it at all and with my stock portfolio I have stepped up my research efforts and am on the hunt for some good deals no matter how bad the economy and therefore the stock market is. values. will eventually survive, people will want to fly, stay in hotels and go to cafes and restaurants again. Always keep this in mind my latest advice: wash your hands, keep your cash and then don't waste the crisis.
I think that pretty much sums it up. Well, what do you think? Speaking of not wasting a crisis while we're all stuck at home doing social distancing, it's a great time to start a little work from home and start making some extra money. I have some interesting ideas for you, so go for it. Make sure you subscribe to my channel and hit the notification bell because next week's video will be about some ways to make extra money while you're stuck at home until then. Thank you very much for watching and I hope you and your loved ones are safe. healthy personally, I have to be very intentional with my thoughts, otherwise I will end up stressing myself out and tripping over all kinds of worst case scenarios in the future, most of which are not going to happen, so let's remember to stay positive, this is a reminder to Me too and I'll see you next week at the same time and in the same place.
See you soon.

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