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NOTABLE! The Coming Recession (2019-2020?)

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MJ DeMarco

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These are the speculative puts I currently own.
Sorry but I hate to say this, but this is probably the WORST way to play a big market drop. (The 2900 SPX Put)

I will post this so it gives you a chance to re-strategize your bet, and teach other folks here some things on selling (or buying) options. I will also post this in my MEGA option thread on the INSIDE because it is a HUGE lesson.

Here goes...

Buy purchasing an ITM put option, you will be negating the real speculative value of buying put options: NOT the price decline, but the VOLATILITY EXPLOSION.

While your put will enjoy a nice price increase from the SPX decline, it will NOT enjoy a huge VOL expansion.

To demonstrate exactly what I'm talking about in REALITY, not theory, lets assume you made a similar bet on January 26th, 2018 -- a few days RIGHT BEFORE the huge February correction.

THESE ARE ACTUAL REAL HISTORIC NUMBERS BASED ON THOSE DAYS
(Using ThinkorSwim ThinkBack Function)

You buy the 2880 SPX PUT with 62 DTE
========== Total Cost: $5,065 (50.65 X 100)

Screen Shot 2018-09-16 at 10.29.06 AM.png

The right bet is buying 10, 2555 SPX PUTS with 62 DTE

========== Total Cost: $5,050 (5.05 X 10 X 10)

Screen Shot 2018-09-16 at 10.28.27 AM.png

So now you have SPENT the same amount of money on the SAME BET.

Here is how it plays out...
.
.
.
.
.
On February 8th, 2018 in the midst of the market correction, your 2880 SPX PUT would be worth...

Screen Shot 2018-09-16 at 10.26.15 AM.png

Your 50.65 put is now with 288.65 or $28,865
(Total gain: 28,865 - 5065)

TOTAL GAIN: $23,800 - 471% !!


Had you bought 10 of the 2555 SPX Puts (Remember, same total cost!)


Screen Shot 2018-09-16 at 10.26.20 AM.png

Your puts would be worth $73.65 X 10 ... in other words, $73,650 (73.65 x 10 x 100)
(Total Gain: 73650-5050)
TOTAL GAIN: $68,600 - 1,358% !!

**********
By playing (buying!) the WRONG option(s), you will cost yourself $44,800 in gains and nearly two-thirds of your (%) gain that should rightfully be yours!

**********

:jawdrop:


---> SAME BET (The market is going down BIGLY!)
---> SAME COST (I'll risk $5K of FU Money!)
---> SAME OUTCOME (Holy shit, I was right, the market dropped big!)


---> NOT A DIFFERENT RESULT.


This is the power of volatility expansion if you are on the right side of the bet.

Buy the wrong option, and you neuter it.

Additionally, by buying multiple options, you can scale out of your position as the market drops.

With ONE option, you're either ALL IN, OR ALL OUT.


On February 8th, you can sell a portion of your stake to LOCK in GAINS and then ride the rest.

For instance, if you just sold ONE option you'd guarantee yourself a 45% return, even if the other 9 options expired worthless! Cost basis: $5,050, One option: $7,365, Gain 46% ... and then you have 9 options left...

OR sell HALF and let the other HALF ride...

Or sell 8 of the 10 and let the other 2 ride...

With ONE option, you've pretty much castrated your ability to really make big money from the bet. The expected value (EV) on your bet is significantly NEGATIVE, whereas the multiple option bet it will likely be positive.

I hope this information helps you!
 

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MODERATOR NOTE:

THESE POSTS WERE EXTRACTED FROM A CONVERSATION ABOUT "BUYING A HOME."

BECAUSE THEY DICUSS THE POTENTIAL FOR A RECESSION, THEY WERE COPIED AND EXTRACTED INTO A NEW THREAD.


Real estate indicators don't make it seem we're necessarily at a top, but in most recessions, real estate doesn't lead the downturn -- it's a lagging indicator. 2008 was an exception, and because of it, many new investors incorrectly believe that real estate is typically the *cause* of the recession, and generates leading indications of an economic downturn.

But, that's not generally the case (hardly ever, in fact)... Typically, it's the business cycle that gives way first, leading to increased unemployment and wage depression, which ultimately leads to a turn in the real estate industry. Real estate starts to turn a few months after the rest of the economy.

With that said, how is the rest of the economy doing? All indications are that the business cycle we're currently in may be coming to an end. Some of the most reliable indicators:

- Full employment
- Flattening yield curve
- Rising interest rates
- Consumer credit at a peak
- Reduction in GDP (especially immediately after a tax break)
- Wage and real inflation increasing

(Note that the first two -- full employment and an inverting yield curve -- are almost perfect indicators for recession in the United States.)

And if you just look at the statistics, we're currently in the second longest business cycle in recent history, so just based on timing, we should be expecting a turn in the near future.

I know a lot of people disagree with me on this, and I'm the first to say I don't have a crystal ball, but I'm confident enough in my assessment that I have completely reorganized my real estate business based on the current economic conditions and my perceived implications of them.
 

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VanDaleK

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Back during the 2008 recession...housing and jobs were the two factors that concerned me most...and I noticed them both becoming an issue in 2006.

I have a weird addiction to the MLS...and I watched (daily) as every new home listings came on the market for sale. In 2006...I noticed a flattening period where more and more houses were being listed and nothing was selling. I reached out to all of my friends who worked in the mortgage industry...and they assured me everything was fine. Most of my realtor friends said the same. Then finally...I got a hold of a realtor friend who was the most successful out of the bunch...and I sensed tremendous fear in his voice. He said this looks bad. He also said that this could be bad for as long as 10 years. He encouraged me to sell everything I had and rent for a little while...and to tell everyone I knew.

My sister had just listed her place for sale. I encouraged her to dump it and brake even. She was looking for the big payoff, and it sat for months and eventually it got foreclosed on. Another friend was buying, and I told him not to...and that he could buy that same house for half the price in a year or two. He laughed...and said there was a bidding war for that house. He bought anyways...and later got foreclosed on.

In my area at the time, the last home sold for $315k, but I listed mine for sale for $285k...lower than any other current listing. I had just bought it a year earlier for $235k. I was the last to sell...and everything else sat on the market for months before the market came crashing down.

Then I sat on the sidelines...waiting for my opportunity to jump back into the game and swallow up properties at a bargain...but then my company went out of business. I was let go. No worries...I had year of savings to hold me over...but then I couldn't find a job for the life of me. I couldn't even collect unemployment because I was considered a contractor who made 100% commission. I ended up having to move into my mom's house...with my new wife...who was pregnant with our first child at the time.

I searched for work for 2 YEARS...and nobody was hiring. I practically begged one employer during an interview to hire me for his minimum waged job...that was almost an hour drive away...but he wanted someone who knew how to operate a forklift with shift gears. It still haunts me, till this day, that I was giving up so much control of my life to some stranger that I didn't know...and begged for a job I didn't really want.

I decided this would never happen again. I immersed myself in reading, and educating myself in business, and marketing, and success. I started several businesses because nobody would hire me. Most of them failed, but one kept me afloat for years. I didn't make much. We struggled financially. Then I found the Millionaire Fastlane and discovered everything that was wrong with all of the businesses I tried...and everything wrong with the business I currently owned.

Fast forward to today. I was working at a bank for a while...paid off all my debts...bought a few properties...saved money...and I recently quit to jump back into business again. Interestingly enough...now that I'm going back into business...I'm back here at the Fastlane Forum with you fine folk. :)

Some of my successful colleges suggest that we're overdue for a recession. I totally disregarded that...until I noticed the data myself. The housing market has flattened out. Employment is still looking solid in my area. All I know is that IF another recession comes our way...then I'm going to make the recession my B@#%*. I'm better off financially, mentally, and spiritually than last time...and I'm prepared. It caught me off guard last time around. I intend to profit from those who are panicking.

What side will you be on? Prepared...or panicking?

Best of luck to you all!
 
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JScott

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For anyone interested, I wrote this post on FB today, as a follow-up to my post from last week (which is above)...

NEGATIVE INTEREST RATES

I received a lot of great feedback for my economic post last week, but it generated a lot of questions related to negative interest rates, as that concept has been all over the news the past few weeks. So today, I’m going to tackle the basics of negative interest rates, why they might happen, and why they are very likely to be bad for our economy long-term…

In order to make things simple, this post is going to be a bit long. Sorry about that, but people seem to appreciate when I start with the basics (that's how I like to learn as well!).

So, let’s start with a quick primer on interest rates:

The US Federal Reserve (the Fed) controls interest rates, and they raise/lower rates in order to impact people’s spending and saving. When the economy is struggling, the Fed will lower interest rates – this means that you get less benefit from saving money, more benefit from borrowing money (since interest rates are lower), and encourages Americans to SPEND MORE. This helps our economy. On the other side of things, when the economy is too strong, we start to see inflation (a rise in prices) based on all the spending Americans are doing. So, the Fed increases rates – this encourages savings (savings accounts pay more interest), discourage borrowing (rates are higher), and Americans start to SPEND LESS.

Long story short, lower rates spur the economy; higher rates slow the economy. When entering a recession, the Fed will lower rates to get us out of it.

One important historical economic data point is that during a typical recession, the Fed will have to lower rates by an average of about 5 points to spur the economy out of the recession. But, what happens when rates are lower than 5% when the economic downturn starts? This is the issue that many countries are facing today – rates are under 5%, economies are softening, and governments are forced to lower rates even past the 0% mark in order to try to spur economic growth.

In the US, rates are currently at around 2%. What happens if -- when the downturn comes -- the Fed has to lower rates below 0% to get us out of it? I’m not saying that this will definitely happen in the US, but it certainly could.

So, what does a negative interest rate mean and how could it affect our economy?

I'm assuming we all inherently understand how rates work – when you borrow money, you pay back the amount you borrow plus a little more. That “little more” is based on the interest rate – the lower the rate, the less the “little more” is that you need to pay back. When the interest rate is 0%, you pay back $1 for every $1 you borrow, and there is no “little more” that you have to pay back (no interest!).
But, with negative interest rates, not only does the borrower not have to pay back a “little more,” but the borrower actually pays back LESS than what they borrowed (ignoring fees and such). For example, if I borrow $100 at a negative interest rate, I may only have to pay back the lender $98 or $99 instead of the full $100!

You might be asking, why would a lender loan money in a situation where they aren’t even going to get the full amount back??? The answer is that the lender may not have a better option. If they put that money in the bank, and the bank is paying negative interest, that means that the bank isn’t going to return the full amount of the deposit (instead of paying interest on your savings, negative rates means you’re paying the bank to hold your money). Likewsie with bonds and other "safe" investments.

So, a lender may be happier loaning money at negative .5% than putting that money in a bank account or bonds earning negative .75%. They lose less money that way!

So far, that doesn’t sound too bad… Negative rates helps us as investors because not only do we borrow money cheaply, but we don’t even have to pay back the full amount! But, in reality, it’s not all good. Successful investors tend to have a lot of cash, and they need some place to put that cash. As real estate investors, if we want to take advantage of borrowing at negative interest rates, we need to put our cash somewhere other than the houses we’re buying. But, just like we’re getting negative interest on the money we’re borrowing, many investments are paying negative interest as well. It costs money to keep our cash in the bank, it costs money to put that cash in government or corporate bonds, it costs money to lend, etc.

And while there will still be investments that pay returns above 0%, we may start to see returns that are lower than the risk profile of those investments suggest they should be. In other words, we're not getting the returns we need on those investments to cover the risk of those investments. Meaning that overall, on average, we're losing money on those other investments. Just like with safer negative interest investments

For poorer people, negative rates are even worse. They are seeing their savings eroded away, and the small negative interest they are paying to the bank could be enough to drive them to insolvency. One big effect of very low or negative interest rates is that it drives the inequality gap, hurting poorer people more than it hurts wealthier people. Low rates have already exacerbated the wealth gap over the past decade – that would get much, much worse with negative rates.

Next, think about how negative rates would affect big companies in the US? Berkshire Hathaway has over $100B in cash, Apple has over $200B and Facebook has about $50B – how do you think their balance sheets will look when they are losing money on those cash reserves quarter over quarter. And when corporate balance sheets get ugly, our equities markets (i.e., the stock market) starts to get ugly. Negative interest rates could have a massive impact on equity/stock prices.

In addition, negative interest rates run the risk of destroying bank profits. Sure, they get to pay back less than you deposit, but people are much less likely to deposit money at negative interest rates, and more likely to stash it under their mattress or in a hole in their back yard. Negative interest rates are typically very bad for banks, which can cause issues that then trickle into the broader economy. For anyone who understands the idea of “time value of money,” where a dollar today is worth more than a dollar tomorrow, this entire monetary concept will be flipped – a dollar tomorrow will be worth more than a dollar today!

Next, negative interest rates in one country encourages citizens of that country to ship their money to another country or another currency that might be paying a bit more (or is less negative). That hurts the local currency and the local economy. This is part of the reason why the US dollar is so strong right now – lots of foreign investors bringing money into the US and investing in our currency, as our rates are higher than some other places in the world. Without getting too complicated, this is part of the reason why we’ve seen an inversion in the yield curve recently – when a lot of money is flowing into bonds, the “yield” on those bonds will drop (with bonds, more demand means a lower return). With many other countries dropping rates, and in some cases already in negative rate territory, a lot of foreign money is flowing into US government bonds, pushing yields down.

Speaking of other countries, we’re already seeing negative rates in several places. Japan went negative on their rates in 2016, and their economy has been sluggish since (and well before). Part of Europe and Denmark are also in negative territory on their rates. Even closer to home, companies like Apple, McDonalds and Pepsi are already issuing bonds/debt at negative rates, meaning that if you loan these companies money by buying their bonds, you’ll get less back than you invested when the bond expires! But, investors are still happy to put their money there, as they consider it safer than other investments that might pay a little more (or cost a little less).

To put things into perspective, there are a total of about $115 trillion in bonds around the world, both companies and governments. As of right now, $15 trillion of those bonds are paying negative yields! That’s a huge percentage. If the US decides to go negative, that total could skyrocket (about 45% of all non-US bonds are negative yielding right now).

As for how negative interest rates would ultimately affect the economy long-term, the answer is that nobody has any idea. Most economists speculate that things won’t end well, but considering it’s uncharted territory, who knows.
 
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JScott

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No doubt, the economy will turn at some point in the future but I'd bet it won't be nationwide, various indicators in my city for example show that people keep coming here, we're in a housing deficit, and house prices are skyrocketing. This would be different compared to California, or the midwest. What's your thoughts on that?
Regardless of how good housing is looking, at the end of the business cycle, housing will get hit. Recessions (downturns in the business cycle) aren't localized -- while some areas may not get as hard as others, the factors that contribute to the end of the cycle (credit, wages, inflation, etc) have always been pretty uniform nationally.

As an example, in 2008, Atlanta was still growing (and never stopped). They were increasing population both in terms of employment and immigration. Yet, despite the population increase, Atlanta housing was devastated (perhaps the hardest hit market in the country). The reason was that housing demographics changed -- people started to double/triple up, people moved back in with their parents, people moved from houses to apartments, apartments to mobile homes and mobile homes to sleeping on a friend's couch.

Population increased, but housing got crushed. That's because housing is driven by a lot of factors in addition to population. It's driven by wage growth/reduction, it's driven by inflation, it's driven by credit factors, it's driven by property class, it's driven by topography/geographic constraints, etc.

I'm certainly not saying that the next downturn will be anything like 2008 (my guess is it won't), but that doesn't change the fact that the end of the business cycle nearly always impacts real estate, and will impact real estate nationwide. Some markets may not get hit as hard as others; some may emerge relatively unscathed. But, all markets will likely take some hit.

As for when it will happen, again, I have no idea. I've made some big bets on sooner rather than later (both in my real estate business and by buying options), but I could certainly be wrong. But, it's going to happen at some point, and real estate will not be immune...in any market.

All that said, I'm not an economist and I've been wrong before, so feel free to ignore absolutely everything I said above... :)
 

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I would love some wisdom from people that have seen 30 years of business cycles with FLF "entrepreneurial eyes"
I don't have that, but from talking to those guys, basically it depends on the nature of the product.

For instance, the recession doesn't affect the rate of people getting broken legs. And if your leg is broken, you don't wait for the recession to end before you get it fixed. Therefore anyone involved in the fixing of legs is unaffected by the recession.

On the other hand, anything in the 'discretionary spending' bracket, be it entertainment, eating out etc, gets nuked.

And services like auto repair actually go up in recessions, because no one wants to buy a new car, so they get old ones fixed. And anyone involved in job-hunting services get a boost (resume-writing, recruiting services) due to unemployment increases.

Supermarkets and bulk retailers also do fine, as people return to them because they can't afford to eat at restaurants now.

So you have to think of what the results of the recession will be.

Amazon FBA, drop-shipping, e-commerce: would depend on the product. If you're selling nappies, not as much of a problem as selling TVs.

Social media marketing: again depends what you're marketing.

Real estate: follow the effects. Renovation services will stop. Foreclosure work will go up. Downsizing will happen. I.e. short fancy houses and long trailer parks.

Day trading: makes no difference as you only need to get the direction right.

SaaS technology: if your SaaS helps people find a job in a recession, you're fine. If it helps people plan their next overseas holiday, you're screwed.
 

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JScott

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So how would you get yourself ready for an incoming recession?
In the spirit of selling shovels, I just finished a video course on "Recession Proof Real Estate Investing" and will be releasing a book on the topic in the next few weeks...

In other words, I'm shoring up and recession proofing my passive income streams... ;)
 

MJ DeMarco

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Cramer just said "now is the time to buy stocks..."

SELL SELL SELL!
 

MJ DeMarco

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that consists of 27 short videos that breaks down the current state of things (as of 2014, anyway)
If you continually peddle doom-and-gloom, eventually you'll be right.

Then you can claim in your marketing "I called it!"

Myself and @JScott have been calling this in the last few months, not the last few years.

Calling the next World Series winner during spring training is impressive.

Calling a winner that will win "sometime within the next decade", not so much.

Not dismissing what he says or predicts, just pointing out the old "a broken clock is right twice a day".

When people make predictions, they always seem to have open-ended time frames.

Don't say XYZ will go down 10%.

Say XYZ will go down 10% by December 2018.

Everyone does the former, leaving their predictions infinitely plausible. How convenient, eh?
 

MJ DeMarco

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Who says forums don't make you money?

If you followed my late summer projections and acted upon them, you should minimally be able to buy a new Mercedes by now, and if you did more than minimum, perhaps a fleet of them.
 

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MJ DeMarco

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I was thinking about this the other day...

About the market's continual run up and how negative interest rates was playing a role.

It was a scene I saw before but couldn't exactly pinpoint it. It was a scenario that felt familiar.

Then I figured it out.

Instead of trying to explain it via written word, here it is drawn:

IMG_0978.JPG
 
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JScott

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Any thoughts on the effect on the real estate market? I was preparing to close on a house for investment purposes, but this kinda has me thinking.
Btw, here's something I posted on Facebook this morning that sums up my thoughts on how to hedge a real estate downturn -- it's long, but posting it in case anyone finds it useful...

---------------------------

I was talking to an investor yesterday on the phone, and he half jokingly said to me, "I wish we could buy insurance for our flips that would pay out if the market crashed."

I explained to him that this basically exists. And I will explain it here in a bit more detail than necessary, so that you can apply this in other parts of your investing and business life as well (I promise to get to the take away eventually. )

The important thing to understand is that when it comes to asset classes -- different things you can invest in -- there's a statistical measure called "correlation."

When two asset classes have a high correlation, they tend to move up and down together. When one goes up, the other goes up. When one goes down, the other goes down. For example, gold and silver have a high positive correlation.

Asset classes can also have negative correlations. Meaning that when one goes up, the other tends to go down and vice versa. Gold and stocks, for example. When stocks drop, gold temps to go up. When stocks go up, gold tends to drop in value.

Which brings us back to the insurance discussion. When you buy insurance, insurance companies are very particular about how they invest that money. And they will often try to invest in assets that are negatively correlated to the insurance product.

For example, it's in the insurance company's best interest to take your hurricane insurance premium and invest it in something that will go up if there is severe weather (if they're at risk for lots of big payouts, they're at least making money on the investment of the premiums). This is called hedging, and ensures that the insurance company doesn't lose money both on a drop in asset value *and* having to pay out claims at the same time.

So, this brings us back to the question of how we can be insuring our active real estate investments from a market drop. Basically, if we invest in assets that are negatively correlated to the real estate market, we are providing our own insurance against a market drop.

So, that leads us to the question:

What asset class is the most negatively correlated to the real estate market going up?

And the answer is:

The real estate market going down.

In other words, if we make a bet on the real estate market going down, we can hedge against losing money with our active real estate investments should the market actually go down.

The other consideration is that we want to make a *long-shot* bet on the real estate market going down. By doing that, we spend a very little amount of money but get a big payoff if there is a catastrophic event. In other words, in most cases, we will lose that small insurance bet. But in a catastrophic situation, we'll get a big payoff.

Imagine if you're making $20,000 per month on real estate flipping. And taking $2,000 a month from that and betting against the catastrophic event. Most months you're going to lose the $2,000, but if and when that catastrophic event comes, your payoff could be $100,000.

It's costing you money every month that you may never get back, but it also lets you sleep well at night knowing that in a worst-case scenario you won't lose everything.

Which brings us to our takeaway...

What is that bet you can make on the real estate market going down that has high enough odds that you only have to spend a little bit to make a lot in a worst-case scenario?

The answer I like (there are probably others) is buying Puts against real estate-related stock options. To break down what that means, a Put is a stock market bet that a stock or fund will drop in value. If you buy a Put the correct way, you can spend a little money that you will typically lose completely, but in the case of a big drop in value of the stock or fund, would be worth a whole lot.

My favorite specific insurance bet is buying Puts in a fund called XHB. This is a fund that tracks the performance of homebuilders. If the real estate market starts to get hit, this fund typically falls quickly.

Every month, I take about 2% of my total perceived exposure in my active real estate holdings and I buy long-shot Puts for this homebuilder fund. Every month for the last year or so I have completely lost this bet, but I know that if the real estate market ever collapses, that that could pay off 20 or 30 times or more.

Just like any insurance, I will probably lose money on these bets long-term. But the key is that I will only be losing a little bit each month as opposed to a whole lot at once, smoothing my cash flow and my risk.

By the way, while it wasn't expected, the downturn in the market over the past week had a big impact on XHB, and I actually recouped much of my investment from the past year.

Keep in mind, this is not meant as investment advice. This is purely education and hopefully enough information to help you do your own additional research to figure out if and how you can protect yourself if you're concerned about any negative events in the real estate market or other markets you might invest in.
 

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I learned from Unscripted that investing is a mostly fruitless endeavor until you have significant capital from a fastlane to leverage first, so maybe I should just focus on building that fastlane and forget the rest?
Build a business. Your time is much better spent on how to learn how to turn $1000 into $1,000,000 with business assets and net income VERSUS learning how to turn $1000 into $1,100 (Slowlane yield: 10%)
 

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Looking at a similar scenario this time?

Or are you taking a different approach?
The economy in general looks to be at a tipping point, but if there is something I am 100% certain of, it is that I cannot predict the future.

With credit card, auto, and student loan debt at or near all-time highs as well as government debt with a seemingly "print to infinity" monetary policy in place, all the pieces are in place for a hard crash.

Right now we just need a trigger for a crash.

It could be the trade with between the US and China.

It could be something similar to Lehman Bros crashing in 2008 that triggered the spiral down.

Who knows when? However, I don't think the question is "if", only "when".

Of course you could also look at Japan that peaked in the 1990's, and has been in a steady deflation or even stagflation, but no crash.

I pulled out of the stock market a few years ago, 2014 ish, I believe. I pulled out for the same reasons as I don't want to dive in today. I think there is a lot of risk in the equity and bond markets. Of course, look how much I "lost" (or in truth, didn't make) by getting out in 2014. In hindsight, I should have stayed in until early 2018. But as I said, I am 100% certain that I cannot predict the future.

As someone who deals with banks and other financial institutions on a weekly basis, I can say that regulatory compliance has gotten much, much worse around the world.

With FATCA and CRS, financial institutions have seen a dramatic increase in compliance costs that has impacted their businesses, but from the consumer perspective has made things incredibly difficult.

Ironically, this additional regulatory compliance has in part been a response to blockchain technology and cryptocurrency as a way to protect their turf but in fact has boosted the viability and use of the technology having the opposite of the intended effect.

You can even see in the past few days how the equity markets have been diving and the cryptocurrency markets have been going up. A lot of the flow of money out of equities has flowed into crypto.

I bring that up because crypto is definitely part of my hedging and growth strategy. As is real estate, private investments, my own businesses, and cash.

Aside from minor short term inflation, you cannot lose money with cash.

I made a killing in 2008-2012 in the equity markets post-crash, but only because I was very liquid.

I have every intention of diving back in once the crash happens, I just need to be patient......and liquid.
 
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JScott

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Inflation is when the govt. prints more money. they "inflate" the money supply. This then raises prices. This is why people think raising prices is inflation because that's the only way you can see it. However, it is possible to have inflation and decreasing prices.
This just isn't true. By definition (in the world of economics, at least), inflation is specifically the sustained increase in the prices of goods and services over time.

Now, you might be thinking about "reflation," which is monetary policy aimed at stimulating the economy by reversing deflationary trends. When the rate of inflation drops below long-term trend lines, reflation is the price growth back up to the trend line. Reflation is often achieved by increasing the money supply or reducing taxes -- the two best ways to stimulate spending and economic growth.

Basically, inflation and deflation are directional metrics of performance (price growth up or down). Reflation and disinflation are subsets of inflation and deflation, relative to trend lines...and are often driven by monetary policy.

I have learned a lot by listening to Peter Schiff. He knows a ton about Austrian economics.
Peter Schiff sold out a few years ago; he's now peddling precious metals and his message of an imploding dollar and hyperinflation aligns well with his goal of selling his listeners gold and silver. (I assume that's where you got a lot of your thoughts on the next recession being a result of hyperinflation.)

There's too much of a conflict of interest for me to listen to anything Peter Schiff has to say anymore (and I was one of his biggest fans a decade ago).
 

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Any further reading on this I can look at? Sounds intriguing
There isn't. This is just a gut feeling based on market action, global macroeconomics, and geopolitics.

I'm already on the record to say that it will start at the end of August, drift poorly into September, with October being an absolute sh*t-show -- the confirmation that, holy-sh*t, this is reallllly bad.

And then guess what happens in November?
Just to reiterate... my speculation is just that, speculation. However if someone want to make a bet on it, buying some cheap SPX or NDX puts could yield some huge gains. The time to buy these would be NOW because once the move starts and volatility spikes, you won't be able to buy cheap.

Just to give you a TASTE on how cheap puts respond during a correction or a major market move, here is how my cheap puts blew up in value during February's big decline.

Basically 4 cheap SPX puts bought for $450 turned into over $7,800.

Screen Shot 2018-02-05 at 2.37.56 PM.png

So if volatility retreats back to 11 or 12 (it spiked today due to Turkey drama) it could be the time to buy, although I'm still speculating that the decline will start toward the end of August/early Sept.

Just airing my speculation, this is not a recommendation to buy or sell any security.
 
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JScott

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since it’s all the end of the world and everything.. can you share some markets that won’t be affected or might even thrive in an impending/occurring recession?
We've had 33 recessions over the past 160 years... This is hardly the end of the world.

Recessions are a natural part of the economic cycle. Things are actually worse when the cycle doesn't play out as it should and the government intervenes to artificially prop it up (as they've done the past 10 years).

To start, watch this:

View: https://www.youtube.com/watch?v=PHe0bXAIuk0


As for markets that won't be affected by a recession, focus on those markets that don't require credit and are geared towards necessity, not luxury.
 

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All it's doing is inflating the bubble that is the US stock market.

Prices are being bid up by global dollars searching for YIELD on cash.

Not only is this problematic, it will pose a liquidity issue when everyone starts running for the exits.

People have always asked since the last bubble (housing) what's the next bubble?

Now we know. It's the stock market.
 
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People have always asked since the last bubble (housing) what's the next bubble?

Now we know. It's the stock market.
It definitely looks like the stock market is over-valued. From an historical perspective, it's about as overvalued as it's ever been in recent history -- just above the early 2000s bubble.

To throw some data behind it, there is a popular economic data point called The Buffet Indicator (so-called because Warren Buffett believes in it, not because he invented it). It's a measure of the ratio of the total of US equities -- basically, the value of the entire set of major stock markets, often using the Willshire 5000 price index -- and the total output of the US (nominal quarterly GDP is a common measure).

In layman's terms, it's basically a comparison of the stock market value to economic GDP. In theory, the market should rise proportionately to economic growth -- no faster or slower. If the market underpaces or outpaces economic growth, it should eventually "revert to the mean." Sometimes different indexes are used than the ones I mentioned above, but the general ratio of Equities to GDP stays the same.

Historically, the mean for this ratio is somewhere around .9 (or 90%). When the ratio is below about 90%, we typically say that the stock market is under-valued. If it's over 90%, we typically say that the stock market is over-valued.

As of today, the Willshire 5000 is at about 31,960. (Wilshire 5000 Full Cap Price Index)

Nominal Quarterly 3Q19 GDP was 21,525. (Gross Domestic Product)

So, as a rough measure, the Buffett Indicator today is about 148%.

During the 2000 bubble, it was at about the same level. And if you believe this ratio is indicative of where the stock market *should* be, then it's probably safe to assume that we're currently overvalued by about 40%.

Here's an historical chart using the same data points (this one was from about three weeks ago):

28856
 

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Btw, here's something I posted on Facebook this morning that sums up my thoughts on how to hedge a real estate downturn -- it's long, but posting it in case anyone finds it useful...

---------------------------

I was talking to an investor yesterday on the phone, and he half jokingly said to me, "I wish we could buy insurance for our flips that would pay out if the market crashed."

I explained to him that this basically exists. And I will explain it here in a bit more detail than necessary, so that you can apply this in other parts of your investing and business life as well (I promise to get to the take away eventually. )

The important thing to understand is that when it comes to asset classes -- different things you can invest in -- there's a statistical measure called "correlation."

When two asset classes have a high correlation, they tend to move up and down together. When one goes up, the other goes up. When one goes down, the other goes down. For example, gold and silver have a high positive correlation.

Asset classes can also have negative correlations. Meaning that when one goes up, the other tends to go down and vice versa. Gold and stocks, for example. When stocks drop, gold temps to go up. When stocks go up, gold tends to drop in value.

Which brings us back to the insurance discussion. When you buy insurance, insurance companies are very particular about how they invest that money. And they will often try to invest in assets that are negatively correlated to the insurance product.

For example, it's in the insurance company's best interest to take your hurricane insurance premium and invest it in something that will go up if there is severe weather (if they're at risk for lots of big payouts, they're at least making money on the investment of the premiums). This is called hedging, and ensures that the insurance company doesn't lose money both on a drop in asset value *and* having to pay out claims at the same time.

So, this brings us back to the question of how we can be insuring our active real estate investments from a market drop. Basically, if we invest in assets that are negatively correlated to the real estate market, we are providing our own insurance against a market drop.

So, that leads us to the question:

What asset class is the most negatively correlated to the real estate market going up?

And the answer is:

The real estate market going down.

In other words, if we make a bet on the real estate market going down, we can hedge against losing money with our active real estate investments should the market actually go down.

The other consideration is that we want to make a *long-shot* bet on the real estate market going down. By doing that, we spend a very little amount of money but get a big payoff if there is a catastrophic event. In other words, in most cases, we will lose that small insurance bet. But in a catastrophic situation, we'll get a big payoff.

Imagine if you're making $20,000 per month on real estate flipping. And taking $2,000 a month from that and betting against the catastrophic event. Most months you're going to lose the $2,000, but if and when that catastrophic event comes, your payoff could be $100,000.

It's costing you money every month that you may never get back, but it also lets you sleep well at night knowing that in a worst-case scenario you won't lose everything.

Which brings us to our takeaway...

What is that bet you can make on the real estate market going down that has high enough odds that you only have to spend a little bit to make a lot in a worst-case scenario?

The answer I like (there are probably others) is buying Puts against real estate-related stock options. To break down what that means, a Put is a stock market bet that a stock or fund will drop in value. If you buy a Put the correct way, you can spend a little money that you will typically lose completely, but in the case of a big drop in value of the stock or fund, would be worth a whole lot.

My favorite specific insurance bet is buying Puts in a fund called XHB. This is a fund that tracks the performance of homebuilders. If the real estate market starts to get hit, this fund typically falls quickly.

Every month, I take about 2% of my total perceived exposure in my active real estate holdings and I buy long-shot Puts for this homebuilder fund. Every month for the last year or so I have completely lost this bet, but I know that if the real estate market ever collapses, that that could pay off 20 or 30 times or more.

Just like any insurance, I will probably lose money on these bets long-term. But the key is that I will only be losing a little bit each month as opposed to a whole lot at once, smoothing my cash flow and my risk.

By the way, while it wasn't expected, the downturn in the market over the past week had a big impact on XHB, and I actually recouped much of my investment from the past year.

Keep in mind, this is not meant as investment advice. This is purely education and hopefully enough information to help you do your own additional research to figure out if and how you can protect yourself if you're concerned about any negative events in the real estate market or other markets you might invest in.
A must read for anyone looking to institute hedges.

This is an excellent write up and illustrates an effective way to hedge risk, not just for real estate, but any type of investment activity. This is exactly what I do in all of my trading accounts, both personal (dividends/paycheck pot stuff) and business (options/trading), except I use the SPX and NDX.

Trust me, it works.

I bought fourteen cent (.14) units to hedge against a decline in my favorite dividend stock, Southern Company (electric co). The cost was $280, now that's worth $6,800. Of course the stock declined, but the wound is less deep, and it allow you to navigate the storm.

Just to let you know how it works, my personal account is down about 4%, without this hedge, it would be down around 8%. In my trading account, I'm actually up and earned a profit on the down draft.

Of course the key is to buy these "units" (cheap puts) when volatility is low and the sun is shining. When things go bad, they will spike like you've never seen because volatility (plus the down move) will cause them to gain 1000s%. You don't want to be buying them when the storm is arriving, or has arrived. In other words, PLAN FOLKS! It's no different than buying life insurance.

I mean the bull market.
I'm not entirely sure about that. I'm still engaging the market with a "Trend Up" bull-market stance. The virus will definitely impact earnings, but I'm not sure if that is enough undertow the end of the bull.
 

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This has turned into an interesting economic discussion...

But I'm also leaning toward a significant event downward. My prediction is it begins at the end of August with October being absolutely brutal.

As such, I've reduced my option sales and short exposure, assuming my dates are off.

Among other things mentioned by @JScott, I come to this conclusion based on that 1) the market has been unable to recover the February correction and 2) Large up days in the S&P is accompanied by below average volume (no conviction) and 3) Netflix is a 350 stock with a 250 PE.
 
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Question though...seeing how during the 2008 recession I was only in 6th grade I don’t really know what even happens during a recession. Outside of jobs being lost and jobs being harder to find I don’t really know much else. What really goes on? Outside of the famous phrase “it’s a recession” being said 100x a day haha.
Several things:

- Higher unemployment, so many people are out of jobs and struggling;
- Oftentimes there's higher-than-average inflation, so things cost more;
- Tightening of credit -- banks don't want to lend so getting credit cards, mortgages, HELOCs, etc. are harder;
- Consumers have less disposable income, so businesses see fewer customers and sell fewer services/products;
- Assets often go "on sale" -- because people need money, they are willing to part with their assets (everything from real estate to jewelry to art to automobiles) for below market prices;
- People with money (investors) look for safe-havens for their cash, so investments that are "recession proof" often do well;
- People often move to cheaper housing and/or double-up with friends/family, so Class A & B real estate often takes a hit.

I'm sure I've missed some there (maybe some big things), but those are the first things that came to mind...
 

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now reach out to each other on DM and see what the other's story is.
instant Fastlane friends. you are both passionate. both hate to have your time wasted.
hell start skyping. make each other two million dollars and then throw shit at the other one's yacht

how do you think @LightHouse and @GlobalWealth started?
 

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So I browse Hacker News a lot. Something I noticed, there have been a LOT of IPOs lately. Uber, Lyft, and just now some company called Fastly: Fastly S-1 | Hacker News

I've read sections of Benjamin Graham's The Intelligent Investor. Something he mentions are lots of IPOs are a sign of a turning tide. Think about it...if you owned a private company, when's the best time to IPO? When the market is at its peak. That's what happened in the 2000 internet bubble. Keep a watch out for IPOs, it's like a canary in a coal mine.
 

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So... how is this gonna effect us starting our fastlane ventures? Should we even pursue it? Should we change course for something more stable?
To somewhat quote the late Peter2 : Are you going to wait on all the stoplights to be green before you drive to the supermarket?

EDIT - Sorry just realized I was being lazy. Here is the direct quote:

"The time is NEVER right. If you wait for all the lights to turn green before you are heading to town, you are going to stay home the rest of your life."
 
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For those that might be interested, I did a live-stream Q&A for real estate investors the other night, and much of the discussion focused on the economy, economic cycles, where I think we are in the current cycle and the data that supports this view.

Some of the discussion is real estate heavy, but a good chunk is pure economic stuff...

Here's the video for anyone who might be interested -- if you just care about the economics stuff, jump to about 16:30 in Part 1 and continue into Part 2:

Part 1.
View: https://www.youtube.com/watch?v=lhHYoJj7bn0


Part 2.
View: https://www.youtube.com/watch?v=H4Zj6ywLj6I


Part 3.
View: https://www.youtube.com/watch?v=KTYP6oNFkHo
 
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This post has a lot of cleaning up to do. First "economy" is a nebulous term, but is the speaker focused on GDP and GNP, average wage earning, unemployment rate, inflation rate, savings rates, treasury rates, or a single or group of stock markets? So define what you're speaking about otherwise you're just ruminating about the water cooler.
Fair enough...let's looks at each of the indicators you mentioned:

- GDP growth is at around 2.0%, which is historically about average, but given the recent and substantial tax cuts and the large drop in interest rates over the past year, an average GDP is actually a signal for concern. GDP growth was predicted to hit 4% after the last round of tax cuts -- never got about 3.5%, and dropped quickly back to the mid-2% range within a couple quarters.

If trillion dollar tax cuts, trillion dollar deficits and a reduction in interest rates isn't enough to get GDP about historic averages, that's tremendously concerning. Unless you think we can continue to cut taxes, continue to deficit spend and continue to cut rates well below 0%, this is unsustainable.

- GNP isn't a great measure if you're trying to isolate the state of the domestic economy, but if you care about that metric, it's in the same boat as GDP -- growing linearly for about 8 years now, at about historically average rates. GNP would indicate a very average economy right now compared to historic data and averages.

- Wage growth over the past year has fluctuated between 4.5% and 5.5%, which is below the 60 year averaged 6.2%. Additionally, real average hourly earnings as hovered between -0.3% and .3% for much of the past two years, or basically flat. Nothing wrong with wage growth these days, but certainly nothing to write home about. It's below average, but not horrible.

- In terms of unemployment rate, it's been phenomenal. That said, it's a lagging indicator of economic health, so the data is not tremendously telling of where we're headed. That said, there are several unemployment measures that can each tell a different story. The U3 number bottomed out a couple years ago at around 3.6%, and is still there. The U6 number has consistently dropped since 2010. And while job growth is still strong, the 2017-2019 numbers are weaker than the 2014-2016 numbers.

Overall, employment is strong, but job growth is less stellar than in previous years, and again, each of these measures is a lagging indicator, so it doesn't really tell us much about where we are today in the economy.

- Inflation is probably around historic averages, but has missed the Fed's 2% target for several years now, and there's a lot of economists who are concerned about stagflation. Even pumping trillions of dollars of QE into the markets doesn't seem to be helping. I'd say this is a concerning data point, but nothing to be too alarmed about just yet.

- Savings rates are low (around 7.6%) by historic trends, but given that the Fed has dropped the fed funds rate to 1.5%, this isn't surprising. Unfortunately though, consumer debt is at an all time high, as is corporate debt.

If anything, this is a HUGE WARNING SIGN for our economy -- most people aren't in a position to continue to service their debt should there be a financial speedbump, and companies are in the same boat.

- Treasury rates mean a lot of things. But, treasury yields are nearly inverted, indicating that large investors aren't very comfortable with the market right now. They're moving funds from short-term investments to long-term, locking in rates at near 0% because they think it's better than what's to come. And the fed funds rate is at about 1.5%, which is horribly low. In a typical recession, the fed expects to drop rates about 5 points, which in this case, would require us to move to -3% just to fuel stability.

Like the savings rate and debt, this is a HUGE WARNING SIGN for our economy -- we're not positioned for a downturn, and any imminent downturn would likely be long-lasting, as the only option we have is additional QE, which is less effective than interest rate drops.

- Stock market/equities growth appears to be great, unless you're an economist. In which case, it's horribly concerning. Historically, equities growth is proportionate to GDP growth, and over the past several years, equity growth has far outpaced GDP growth. 90% is an historical average ratio between the two, and these days, we're over 150%. In other words, statistically speaking, the stock market is likely 50% over-valued.

Which is a HUGE WARNING SIGN for our economy.

Overall the strength of the US economy is stellar.
Wait... I just addressed every single one of the economic indicators you mentioned, and the absolutely best-case takeaway is that things are pretty decent. Certainly not stellar, and certainly not the "best ever" (as you asserted as well).

The more important takeaway is that there are a lot of big warning signs -- inverted yield curve indicating investor concerns, fed rates indicating lack of preparation for a downturn, a low savings rate coupled with historically high consumer and corporate debt, an equities market that is statistically overvalued, and an inflation rate that the Fed admits it can no longer control.

Add to that the trillion dollar deficits, the trillion dollars worth of recent QE, the stagnant manufacturing sector, billions of dollars in necessary bailouts in the agricultural sector, and what we have is a domestic economy that is teetering on the brink of collapse.

On the good side, we have a strong stock market, average GDP growth, which should be well above average after the ridiculous tax cuts and rate cuts, we have job growth that has slowed over the past three years, and we have real wage growth which is below historic averages. And that's the good stuff!

I know that a lot of people want to believe the economy is "the greatest ever!!!" but the fact is, that's not true. And the very data you solicited supports that...

I would agree with the statement the economy is the best it's ever been.
If the economy is "the best it's ever been," why would the Fed need to inject trillions of dollars into the system? Why would we need to cut interest rates? Why would historically big tax cuts not drive GDP to above average growth?

Basically, it's like taking a broken-down Honda Civic, throwing a supercharger on it, and then when it gets to 60 miles per hour, claiming that it's the fastest car ever!

Some people will buy into the spin, but those who actually look at the data realize that that's all it is...spin.

Long story short, stop watching CNN and Fox News and start doing your own research.
 
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It falls to the same fallacy that the Scripted masses subscribe to. It's not necessarily his fault, but it is now, since this should explain a bit. But I make the case his feelings are extremely important and relevant.

The strength that I measure this economy, which by the way is presented to the Joint Chiefs of Staff, POTUS, and several other consumers. I'm not here to impress you, but to impress upon you that the strength is measured in its ability to sustain itself through stress. To measure strength in physiology you measure it against the stressors it is able to sustain--fitness. Strength isn't a good term. I don't use it but the masses do.
Wow, honestly that is the most self-indulgent drivel I have read in a really long time (followed closely by the rest of what you wrote in that post).

When people are saddled with loans, they tend to work longer and not default as much over the wide spread of all the loans, payments trickle in. They pay so much on interest the guarantors really don't care as much for a certain amount of defaults because many folks will be relieved to get some break, then rejuvenated to repay.
While I wasn't going to respond to your post, I thought it was important that I at least give everyone else reading this thread some context on whether what you wrote made any sense or not.

I chose your passage above, as I believe it's the most "interesting" point you made...

Obviously, debt will drive an expansion. Debt (or credit) merely drives future consumption forward, allowing people to spend money that hasn't yet been generated by production. Debt allows us to spur the economy over and above what actual production has thus-far created. That's going to propel an economy short-term.

But, that's not what you're saying above -- you're arguing that overleverage and too much debt (people "saddled with loans" as you put it) is good for the economy. And that is antithetical to nearly all evidence gathered over the past 120 years since this idea of economic cycles emerged.

There's a reason why the economic "business" cycle is also referred to as the "debt cycle" -- this isn't a coincidence. Economies ebb and flow based on debt accumulation (during expansions) and debt discharge (during recession).

If excessive debt were good for the economy, then even more debt should be more good...right? And if that were the case, we would never see mass default of debt or deleveraging? The accumulation of debt would keep powering the economy, making it stronger and stronger until we ran out of credit! But, that's the exact opposite of what happens, isn't it?

There's a reason why the cycle of overleverage leading to inflation leading to tightening monetary policy leading to recession has played out over 30 times in the past 150 -- literally once every five or six years since this nation reached economic maturity.

But, don't take my word for it. There are some very good books written on the topic, by some very reputable people (who are much, much smarter than I am). Here's a book I highly recommend:

Big Debt Crises: Ray Dalio: 9781732689800: Amazon.com: Books

Just because the title by-itself refutes your assertion doesn't mean you shouldn't read it. Again, I think you'd find the history quite eye-opening.

Don't feel like reading a whole book? Here's a 30 minute video summary from the same author:

View: https://www.youtube.com/watch?v=PHe0bXAIuk0&feature=youtu.be

I guess if you want or need to argue that we are currently in the greatest economy ever (to help further your political or financial ideology), it helps if you can make the argument that being the most overleveraged we've ever been is a good thing. But, to date, I haven't heard anyone reputable make the argument that overleverage makes for a good economy.

I don't have the energy to argue with you, but if you decide to write any books on this topic that support your assertions, please let me know, and I'm happy to read them.

Btw, you list your location as Washington, DC area. You don't happen to work for the government, do you? Because that would certainly explain the need to justify "the greatest economy ever!" :rofl:
 
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Is anyone anticipating a strong bounce back, or Will it be more likely thatThere is a substantial period of time to accumulate?
I don't think anyone really knows, but here are my thoughts on that...

Even if 95% of businesses miraculously navigate through this crisis and don't have to shut down permanently, that still leaves 5% that have employees that will have to find new jobs. That 5% can easily increase unemployment from the previous 3.5% to 8% or more.

And that assumes that the 95% of businesses ramp up quickly and don't have to lay off some employees long-term or reduce hours/wages.

Plus, we have to consider how this whole things is going to impact consumers' spending habits. People may realize that saving is important and that there are things they can live without. That reduces demand, and leads to a slower recovery.

Also, consider that corporate debt is at an all time high. I can imagine a lot of businesses succumbing to that, even if they were otherwise well positioned to get back to things.

If this things goes on for more than another month or two, I have a feeling we're going to see a long drawn-out recovery. Think Nike swoosh type pattern for the downturn and recovery...

31413
 

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