Recessions Are Great Opportunities

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I’ve got bad
news and good news. The bad news: A recession is coming in 2007.
The good news: A recession is coming in 2007.

There is nothing
like a recession to create depression in most people’s minds — good,
old-fashioned emotional depression. But for a self-selected minority,
a recession is the opportunity of a decade — maybe a lifetime.

Most people
watch, helpless, as housing prices fall, the stock market falls,
business income falls, and job opportunity falls.

A few people
take the initiative, redouble their efforts, and position themselves
for the recovery phase, which lasts far longer than the recession.

For the unlucky
few, they get fired. In the midst of a tight job market, they are
sent on their way. But the debt meter keeps ticking: mortgage, phone,
electricity, insurance, etc.

We don’t get
recessions often. In my job market career, there have been only
six: 1970, 1974, 1980, 1981, 1991, 2001. Some analysts would say
1980 and 1981 were really only one. I would agree. They both had
the same cause: tight-money policy by the Federal Reserve System,
begun in 1979, after a dozen years of monetary inflation.

Because the
most recent one was so mild, housing prices continued to rise. What
fell was the personal savings rate. In the past, people have saved
more during recessions. In 2001, not only did they not save more,
they saved less. Fear did not overtake them.

rates close to 10% are a dim memory for most Americans. Unemployment
always hits the manufacturing sector harder than it hits services.
The percentage of the American population involved in manufacturing
has been falling for a generation.

for white, married males is always lower — no more than half — what
it is for single non-white males. So, when we read of rising unemployment,
we who are white, married, and male rarely face the threat of getting
fired. What we face is falling prices of our equity investments.
We see our stock mutual funds fall. Because only the top 20% of
wealth owners own stocks, except in pension funds, this loss affects
a minority of the population. As for pension funds, Americans still
think that somehow, they will be able to retire at someone else’s
expense. They believe, because they have been told, that the stock
market always comes back.

It hasn’t come
back from the fall it took 2000 — not the Standard & Poor’s
500, which reached 1550. But pension fund owners still have faith.
Somehow, something miraculous will happen, and their retirement
dreams will come true.

They won’t,
of course. The next recession will remind a growing number of Americans:
They will not be able to retire.


I think we
are headed for a recession in 2007. The main indicator is the inverted
yield curve: the short-term T-bill rate is above the 10-year T-bond
rate, as well as the 30-year T-bond rate. You
can track this here

This oddity
appears before every recession. It exists because bond investors
are generally a lot wiser than stock investors. They are mainly
institutional buyers and rich buyers. They see what is coming earlier
than stock investors do. When they see recession coming, they are
willing to lock in their money for 30 years rather than get paid
a higher rate for money tied up for 90 days. They think rates are
coming down. They want to lock in high rates.

Why should
interest rates come down? Because rates fall during recessions.
There is reduced demand for loans: fear of debt. There is also money
flowing out of the stock market into CD’s, T-bills, and simple bank
accounts: fear of capital losses. People care more about the return
of their capital more than the return on their capital.

I suggest that
you begin arranging your plans for 2007 on the assumption that unemployment
will rise, consumer demand will fall, and your employer’s income
will decline.

I am not predicting
a depression. The word "depression" applies to the economy
of 1930—39. It doesn’t apply to anything before or since. But
in terms of the psychological condition known as depression, it
applies well to recessions.

Assessing a
recession is the official task of a private research institution,
the National Bureau of Economic Research. It uses a complex formula
to announce, retroactively when or if a recession began and when
it ended.

So, when the
country is in a recession, people aren’t told this officially until
months into it, and maybe only after it has ended, as happened in
2001. But the pain imposed is still just as great, no matter when
the definition is officially applied to the economy.


CEOs of large
corporations still draw their million-dollar salaries, but the value
of their stock options falls. This is where most of their compensation
comes from.

salesmen struggle. They face buyers who say, "Sorry. I’m just
not interested. Things are tight." This is why stockbrokers
have a very hard time in recessions. They rely on year-end bonuses
for most of their income, and the bonuses disappear. Brokerage firms

The merger
& acquisition experts, especially the newcomers, get fired.
Fiat money fuels M&A, and fiat money gets turned off prior to
a recession — as is happening today. In the recession, the merged
firms turn out to be bloated, patched-together absorbers of capital.
The hoped-for synergy fades in a sea of red ink. The poster child
merger of our era was Time-Warner and AOL. In early 2000, just before
the merger took place, I said it would not work. It didn’t. It was
obvious to me at the time. It was not obvious to Ted Turner.

Anyone in the
home-building industry is hit hard in most recessions. That was
not the case in 2001. Residential housing continued to boom, fueled
by cheap mortgage rates and fiat money. But in the next recession,
this scenario is far less likely. There is too great an overhang
of unsold new houses. It is getting larger.

The auto industry
is always hit hard. Ford is already on the ropes, having just borrowed
$18 billion and for the first time having to collateralize the loans
with its factories. GM is in big trouble, as Kerkorian’s recent
sale of his shares indicates. Chrysler is doing better than the
Big Two, but we are still in a boom economy. When a recession hits,
almost nobody really needs to buy a new car. They fix the old one.
They make do. Used cars fall in price, so they can buy a used car
if they must. The next recession will be devastating to what remains
of the American auto industry.

But the average
Joe or Jane is not hit hard. The average American has few savings,
and most are in short-term credit instruments like bank accounts
and money-market funds. Americans see their interest income fall,
but this is marginal in their lives because they have so little
money invested. They do not see their principal fall. They are salaried.
Their employer’s doors stay open.

Treasury Bond
holders do very well. Their assets appreciate when long-term interest
rates fall.

Then what is
really so bad about recessions? Mainly, a recession is a matter
of temporarily closed-off opportunities and dreams deferred. Middle
managers have career paths blocked. Promotions are more common in
boom times than in bust times.

But this process
is now inevitable anyway. Americans have no savings to speak of.
Middle managers may have under-funded private pensions. They have
Social Security. Maybe a few of them have $50,000 in mutual funds.
They will not be able to maintain their present lifestyles on the
income generated by these assets. Their wives will resent having
to drop back to the lifestyle of their grandmothers. This is like
going on a permanent diet. Hardly anyone sticks to a diet. So, millions
of middle managers will stay on the job.

When aging
men stay on the job, career openings close. This scenario is going
to mark the next two decades, and maybe longer. The attrition process
will slow. All but the hottest of hot shots will find themselves
locked into their present jobs, unable to move up.

For people
with guaranteed salaries — government employees, mainly — recessions
reinforce their decisions to play it safe in their careers. This
tends to lock them into careers that have minimal prospects for
wealth. These people dream of retirement. But retirement always
proves more expensive than planned because the central bank always
returns to inflation to escape the effects of the recession.

The Great Depression
was not so bad for public school teachers and government employees,
whose salaries gave them a degree of income security. The depression
so scarred the American population that the post-War era was one
in which young people and returning vets dreamed of earning a college
degree, getting that secure job, and buying safety at the expense
of a shot at wealth. The novel and movie, "The Man in the Gray
Flannel Suit," marked these people’s dream. Voters accepted
an expansion of government that would have been inconceivable in
1914 and only barely conceivable in 1930.

On the other
hand, for those few who are nimble and not in debt, recessions are
great opportunities. You can buy low, to sell high at the peak of
the next boom. Businesses can spend more money on advertising at
a time when their competitors are running a tight defensive ship.
It is easier to increase your company’s market share in a recession
than in a boom, when everyone in your industry is growing and spending
big bucks on marketing. Fear and shrinking receipts in an industry
become unique opportunities for companies with cash in reserve and
a marketing strategy suitable for declining consumer demand.


Whether the
next recession is a threat or an opportunity depends on your mental
attitude and your capital base. For most people, a recession is
a threat, though not a catastrophe. But it will reinforce the mentality
of safety. It will undermine most people’s confidence in their ability
to make a major upward move in their careers and lifestyles.

This is why
you would be wise to think through the effects of recession on your
short-term prospects and your long-term prospects. Will you be in
a position to re-position your career? That is, will you be able
to take advantage of the widespread emotional paralysis that will
be induced by the recession? When others are hunkering down, will
you be able to move ahead?

Here is what
I have in mind. Try to identify a growing market that is likely
to grow even faster if times get tough. If you can do this, you
will be in a position to use the recession as a launching pad. Keep
your eyes peeled.

Let me tell
you what I’m planning. I’m working on a CD-ROM/Internet-based high
school curriculum for home schoolers. This is a growing market.
Unlike most markets, a recession will make it grow faster. When
a recession hits, money will get tight. Single-income families that
are presently spending (say) $3,500 a year to send their children
to a private high school will start looking for cheaper alternatives.
I will be able to offer a program for about $400. My main cost will
be marketing. I am good at marketing.

To compete,
I must offer something unique. My curriculum will show a high school
student how to start and run a successful home business. It will
also let the student quiz out of the first year and a half of college
for an additional $800. Then the business will put the student through
college. His family will not pay a dime for college education beyond
the initial $800.

Is this worth
$400 a year for four years? For some families, yes.

Do you understand
my strategy? I will use low-cost digital technology to convert my
information into a marketable product. Price it so that buyers of
much a higher-priced product have an incentive to switch. I will
be able to offer a one-year money-back guarantee. If the freshman
student doesn’t show major progress, the parents can get a full
refund. No private day school can offer this because of teacher
salaries and mortgage costs.

My goal is
not to take market share away from other CD-ROM/Internet-based programs.
My goal is to compete against traditional bricks-and-mortar schools
that cannot possibly compete on the basis of price.

My strategy
will work in boom times. "I’ll teach your child how to start
and run a home-based business." It will also work in a recession,
when family budgets get tight. "Why pay $3,500 a year, when
$400 buys a better education for your teenager?"

I offer this
only as an example. In every field, there are great opportunities,
in good times and bad. But the average Joe or Jane is not actively
looking for these opportunities. They do not perceive the truth
of what Rev. Russell Conwell described a century ago: We are surrounded
by acres of diamonds. If you doubt me, read
what he wrote


Painful as
recessions are, they offer great opportunities. New markets appear,
new incentives appear, and buyers are willing to pay for services
rendered. They will re-structure their monthly budgets to take advantage
of these opportunities. There will be losers, of course: those businesses
that fail to meet consumer demand under the new conditions. But
there will be winners.

If the Federal
Reserve System would stick to its guns and refuse to inflate in
the next recession, the economy could adjust on a permanent basis.
I don’t think this is likely. The FED will inflate once again. This
is what central banks do.

the moment, the FED is not inflating. The yield curve is inverted.
The recession is in the pipeline. You can prepare for it now or
deal with it later.

Don’t let it
blindside you.

12, 2006

North [send him mail] is the
author of Mises
on Money
. Visit
He is also the author of a free 19-volume series, An
Economic Commentary on the Bible

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