The Recession

If you read the newspapers during any recession, one can really get the creeps. And as if there is a race between the media in "Who's The First To Time The End Of The World" they outplay themselves with new disaster scenarios every day. A recession is suddenly the evil of everything; it's the end of the economy; it's the end of days!

Looking at the declining stock markets and the impending recessional effects on global economy, these end-of-the-world headlines fall on fertile ground. The ground of a very normal human emotion. FEAR! And because the media likes to pour more and more fuel into the fire, the fear of investors increases and stock prices drop even more.

But is a recession really that bad like many people are made to believe? How long is the recession going to last? What industries profit during a recession and how can the government prevent another recession?

It's economic basics that a decline is followed by an upswing or even a boom like in the '90s, and then there's a high possibility of a recession. It is impossible for any economy to just grow continuously. And in times of globalization where so many corporations and sectors are cross-linked and intertwined, when one big economy struggles, others can suffer too.

What the media is trying to make out as a huge threat to mankind is nothing but a totally normal phase of the economy. Just the reasons often differ.

This phase is without a doubt very unpleasant! The economy declines, consumer spending declines which causes earnings of companies to decline, unemployment increases, stock prices go down and a look at your portfolio resembles a nightmare! This also answers the question, "how will the recession affect the average consumer?", that a lot of people are asking themselves in such times. But as a general rule it is also a relatively short phase in comparison to the upswings that have always followed after a downswing.

After all, a recession isn't only a nasty decline of the economy. It is also a correction that does away with a lot of exaggerated nonsense and speculative prices that are fundamentally unjustified like the automobile company Volkswagen (VW) when it shot through the roof on account of speculations at the end of October 2008. On Oct. 27 VW gained some 200% intraday and on Oct. 28 another 81.73% peaking at €1005 when Porsche announced that it wants to increase its share in VW to 74%. For a short while, VW became the most expensive corporation in the world.

But then, on Oct. 29 Porsche announced that it was going to sell some of it's VW stocks again thus, VW dropped some 45.29% that day. And guess what? Porsche gained 30.48% because selling VW stocks at prices up to 1000 euros meant a huge chunk of money into Porsches pockets. And all this has absolutely nothing to do with the fundamental value of a company. That's pure speculation, gambling and even stock manipulation.

But most importantly, a recession is also an economic phase that marks the beginning of the next upswing and paves the way for a lot of great investing opportunities.

How Much Longer Is The Recession Going To Last?

In a recession there's no telling when it is going to end and when prices will go up again. A recession length can take several months to several years depending on how strong the recession is and what caused it and why. But sooner or later the markets will rebound again. And then things can go very fast!

And because I know that the situation will eventually turn to the upside again I'm going to look back and take a glance at what happened in the past.

One of many questions are how fast and by how much can stocks rise again after a rebound?

Let's take a quick walk down history road!

On October 9, 2007 the Dow Jones marked it's all-time high of 14,164.53 points. After that it dropped by around 40% due to the credit crunch, housing crisis and the recession that followed. Let's compare this with the last 2 severe bear markets.

From October 14 to October 19, 1987, the major indices of the United States (Dow Jones, Nasdaq, S&P 500) dropped between 30 and 40%. This crash marked the end of a 5 year Bull Market that saw the Dow Jones rise from 776.92 points in August 1982 to a high of 2722.42 points in August 1987.

On October 20, these indices recovered a part of their losses. However, for the next 4 months, they were often subject to fairly large daily variations. But it only took 1 year and 10 months - until 1989 - for the markets to reach a new high with a gain of 37%. 5 years later they almost doubled with a new all-time high.

From March 20, 2000 until October 2002 the Dow Jones also lost 40% due to the burst of the internet bubble - 40% by the way, is also the average drop in the Dow during a recession in the past. The turnaround came in March 2003 and within the year that followed the most important index in the world gained 30%. After 5 years the Dow almost doubled reaching its all-time high of 14,164.53 points. And other bear markets before (1982 - high inflation) and in between (1990 - Gulf War) had similar recoveries.

Of course one can't compare those crises with the present one. But no crisis is like another. They all differ because they all had different reasons! Back in 2000 it was the internet and technology sector that got the markets into trouble and marked the beginning of a recession. And now it's the financial sector that brought about the present recession.

Back in 2000, the German stock index DAX was even worse off than the Dow Jones. It lost 3 quarters of its value. It collapsed from its all-time high of 8136 points down to 2200. The rebound came slightly later than that of the Dow, but it definitely came, and pretty violently too! A year after its 2200 point low the DAX was up 70% already! And 5 years later it reached its high from the year 2000 again.

One remarkable rebound was seen after the crash of 1982, which was probably the worst recession after the great depression of 1929. The US economy dropped by 2,2% due to the Federal Reserve strongly reducing the supply of money on account of the high inflation back then. But the recovery came much stronger. After 5 years the Dow more than tripled!

What Industries Profit During A Recession ?

Even in negative situations like a crisis or recession there is someone that profits. Like I said in my free report on my website already, would you stop buying groceries just because the economy and stock market is down? I doubt it 'cos we all need to eat, right! So what are the chances of Wall-Mart going out of business. Very little don't you think. Their earnings might be less due to an overall bad market situation. But they will still exist and make money.

Wouldn't people still go to Walgreens or other pharmacies to get their prescriptions and medicine they're in need of? I think they would! Just as much as they would most probably postpone that brand new car they were ogling with because in turbulent times, that's something one doesn't necessarily need immediately and which can be put off for a few months.

That's why the automobile industry is so volatile and always will be. It depends too much on the economy. But companies of industrial sectors that are more independent from the economy and that supply people with their everyday needs are the industries that profit directly during a recession. Especially if those companies are also discounters.

How Can The Government Prevent Another Recession?

It can't! Period. Otherwise we wouldn't have had one single recession anymore after the one in 1929 that turned into a depression. As I said. A recession is part of the game and a totally normal phase of the economy.

Governments can implement tools and measures to reduce the risk of a recession or minimise its depth should it occur. They can also learn from the past and create an environment so that a recession won't be caused twice in the same way. But no one can avoid a recession entirely!

The economy - especially due to globalisation - has become too complex with all kinds of industries being intertwined which makes it virtually impossible to avoid an impending downturn, also because a recession has to do with another elementary component of economics: Supply and demand. If the demand has been met, no matter how much supply there still is, no one's gonna buy anymore until there's a demand again. Although it's not quite that simple, but that's what it basically boils down to.

There Definitely Is Hope!

And as I'm writing all these positive and motivating words, I know that the present recession is painful! Let's face it! And the end of the road has not been reached yet! It's probably going to take a few years again before we see the light at the end of the tunnel. But this doesn't mean that everything is going to collapse and break down forever and that all big corporations are going to be wiped off the face of the earth and rendered worthless.

I know that in the past weeks we have been hearing all kinds of statements that suggest that the economy will not come back; that folks should accept the idea that widespread prosperity as we've known it is over; that retirement accounts will not recover.

All this is utter crap! The game is not over! In mechanics, mathematics, physics, electronics, food production, transportation, biomed, engineering, energy production, increased physical capabilities of the human body and a host of other endeavors that will elevate mankind have not been abandoned. The work, the dreams, the imagination, and the motivation goes on in spite of what a pack of blood scented reporters and analysts are convinced of.

Take the Asian financial crisis in 1997 for example. The world survived that as well! And wow, Sony survived, Toyota survived, Samsung survived...I wonder why if a recession is the end of the world like many so-called experts always proclaim. Bollocks! It isn't! A year later (in 1998) we had the Russian financial crisis. And funny enough, we survived that too!!!

Sooner or later the financial sector will stabilize and normalize again and so will the economy like it always has. So panic is the wrong advice someone could take right now. Just be patient! A recession is just a normal cycle in an free market economy. The next upswing will come!

What To Do With Cash In A Recession?

That's another thing I wrote about in my free report. So if you don't know what to do in a recession, then here are a few possibilities:

You can sell all your assets with the risk of taking a loss and stash everything away under your pillow and wait for better times. Or you can keep investing like I do and average your costs.

Because it is virtually impossible in any phase of the economy to sell at its exact peak and buy at its absolute low, I prefer to stay in. Not even the professionals and big investment gurus can pinpoint these spots.

If you don't sell in a recession and keep investing, you are buying much cheaper than you did when equities were still high. So when the markets turn around again, you'll be back in the green much faster because your average entry or purchasing costs have been lowered.

Yet again, if you've already made a gain of 20, 30 % or more, then it's totally ok if you sell and get out quickly hopefully taking at least a bit of your profits. You can always get back in again at a later stage once the markets have calmed down.

Coping With The Recession

I guess for an individual one of the worst things that can happen in a recession is unemployment, because getting a new job that pays at least your last salary is more difficult than in good times which of course also depends on your qualifications. But generally, that's the way things are im bad times.

And in most cases, with unemployment comes less money and, as if things aren't bad enough already, you probably won't be able to pay the rates for your house anymore so you end up losing that as well. Now that'll be the worst case scenario.

But if things have gotten that bad for someone then there's always professional help that one can seek like debt counselling etc., because what one can do individually depends on each individual situation. So getting into that would go beyond the scope of things here because it involves a lot more than just saying that one must tighten the belt and spend less money because that definitely goes without saying and is no help for anyone that's in financial troubles!

So yes, unemployment will rise, some companies will reduce productions or even close down and a lot of things will not be nice. Ok, Fair enough! We know that! But the chances are extremely high that General Electric will survive, that BASF will survive, that Apple will survive and most other companies too, hence, most people will still keep their jobs earning the same sallary as before! So what big deal is going to change for them and why?

During the last recession between 2000 and 2003 and after 9/11 I still kept my job without any salary cuts. So why should I change my standard of living, the way I live or my spending habits? I still kept on investing, I still kept on going out for dinner, movies etc. and I still kept on donating every month. I had no reasons to panic and change anything! Nada!

The things I hear on TV today makes me want to throw up! There's talk about consumers holding back with spending and buying less things for festive seasons like Christmas that's just around the corner. I just watch this sensless crap with disbelief!

As I just said, if you lost your job and couldn't find another or if you had a salary cut then all this is understandable. But otherwise it's not and doesn't make any sense because this will deepen a recession even more because what keeps an economy going? The flow of money!

And if everyone is now keeping a tight grip around their wallets, it is then no wonder why companies are making less profits and can't grow anymore. It's no wonder why some companies - especially smaller ones without a big financial cushion like GE or Microsoft - run into trouble having to close down even!

This consumer conduct is definitely the wrong way to cope and deal with a recession because it will not alleviate it, but make it worse. Fear is the wrong answer! Panic is not how you get out of a recession!

Now I'm not saying that you must throw your money out the window. It is important and good money management to build a financial cushion for yourself by keeping some cash stashed away safely for bad times. I do that as well.

But those kind of precautions and provisions should already be made long before a recession so when trouble does lurk around the corner, you're prepared and all set. More often than not it's too late to start putting on your safety rope when the bomb has already been dropped.

And, a recession also has its benefits. Also for our wallets! One more reason why refraining from spending is the wrong strategy!

One benefit of an economic recession is that a lot of things are getting cheaper! Just look at petrol prices! In the last 2 years I haven't paid so little for petrol like today.

In many countries, in order to keep customers, all kinds of discounts are springing up like mushrooms which leaves us with more cash in our pockets. And that's how many of us can even profit in a recession. So why stop spending and stop living???

Why 1929 Won't Repeat Itself!

Ok, for some this might be a pretty daring statement. But:

With hindsight we know now that governments and other responsible people and organisations reacted totally wrong!

While companies went broke by the hundreds, banks collapsed, the unemployment exploded, many countries reacted by reducing their expenses and raising taxes. Both of course couldn't help. It only aided in heating up the recession even more turning it into a deep depression.

The governments were also not prepared to help banks with bail-outs like the 700bln bail-out package of the U.S., and so the financial dilemma started to drag many companies into bankruptcy.

Today, governments and federal reserves are way more aware of the risks and perils. And of course there's never a guarantee that the bail-outs and other measures taken are going to be successful. But today problems are approached more valiantly and openly, more prudent and sensibly.

Interest rates were cut and will probably be cut even more. Banks are being supported by bail-outs and there's no talk of governments cutting expenses.

There was a headline in the "Die Zeit" newspaper here in Germany that said "Will The Misery Of 1929 Repeat Itself?" But that was back in 1973 already. And did the miser repeat itself? No! What I want to say with this is that emotions and recessions are just as old as the economy itself. And it will always be a part of it just like the recovery that will follow. Period!

Yours In Successful Trading,
Ricky Schmidt.

http://www.stockbreakthroughs.com

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