'The Great Lockdown' vs 'The Great Recession'
Depending on how old you are, you might not have been as affected by The Great Recession of 2008 as you are now in what pundits have dubbed, “The Great Lockdown.”
There are many similarities and differences between the two. By understanding the past, you can help yourself to plan for the future so you can protect you and your family.
2008 Financial Crisis Recap
In 2008, the entire world experienced an economic downturn that brought down the financial system to a degree in which the gross domestic product (GDP) of our country shrunk by 0.1%. While this might not seem like much, the economy in 2019 grew by 2.3% to ~22 Trillion dollars. So a decrease of 0.1% is a loss of $220,000,000,000. In more direct terms, the labor force is roughly 160 million people, so this would mean each person had a net loss of $1,250 from the year before.
The primary reason for the 2008 crash was an extraordinary amount of debt extended by the banks at adjustable interest rates. Someone who got a mortgage in 2006 or 2007 had a low rate locked in for 2 years but would see a rate increase after that 2 year period, sometimes doubling or tripling. While this seems like a ridiculous agreement to sign, banks were giving candy to children and expecting them not to eat it.
So when these rates doubled and tripled overnight, people couldn’t pay their mortgages. And when people stop paying mortgages, banks are not receiving money. When banks don’t take in money, they can’t lend any money. When banks can’t lend any money, businesses cannot expand or even open, to begin with. And when businesses are not operational, there are no jobs to pay people and on and on and on. The downward spiral goes into effect.
Forecast for 2020
The difference between 2009 and the Coronavirus global pandemic is that the Great Recession saw a catastrophic domino effect, one after another, but a domino effect nonetheless. However, today it is as if the entire box of dominos exploded and there are now only pieces spread out all over the room with no resemblance of a game to play at all.
Now looking at forecasts for 2020, economists are reporting the doomiest of doomsdays anyone has ever seen. The International Monetary Fund estimates that the global economy will shrink by 5.9% this year. Yes, 59 times worse than what happened in 2009.
What does that mean for the average consumer? Well, simply said, life will be very different on the other side of this. The forecast for The Great Lockdown is so bad because this is all happening at once.
As we stand today, over 2 BILLION people are on lockdown. When thinking about the United States, over 99 percent of entities are considered small businesses and are in a fight for their lives. This flood of necessity for monetary support has spurred the government to pump over 2.5 trillion dollars into the economy via the CARES Act and the Paycheck Protection Program in an attempt to stop the bleeding. Over the last 5 weeks, more than 25 million people have filed for unemployment while tens of millions more are left hanging in suspense.
There was no planning for this global crisis. So while we can’t look backward to fix this, what can we do today to understand our future needs? It all starts with an internal survey.
The Path Forward
First, it is very important to know your current credit picture. What outstanding obligations do you have on a monthly basis? Rent/Mortgage? Insurance? What are your current debt levels? Do you have multiple credit cards with different interest rates? By painting a picture of these questions, you will better know where to start.
If you have outstanding debt, you will want to know what your credit score is so that you can consolidate your debt and bring down any outstanding interest rates you may have to market levels. Because the economy and stock market have been extremely volatile, large financial institutions will buy government treasury bonds and earn very minimal but safe interest rates on their money. This base metric is the benchmark interest rate for most borrowing activity from mortgages to credit cards.
The more bonds that are purchased, the higher the price goes, and the lower the resulting interest rate is because these options are more attractive so people will pay more, or earn less, to feel safe. Thus, in highly uncertain environments like today, interest rates fall very sharply, which means the average consumer can refinance any debt they might have for a cheaper rate. So your home, your car, your personal or credit card debt can all be refinanced at a lower rate.
By painting a picture of what your currently owe and how much it costs for you to borrow, you can best prepare yourself for periods of lower income.
Impact on Car Insurance
Overnight the vast majority of the 278 million insured cars in America have been forced to remain parked. This has great implications for the average consumer that were not seen in 2009 or frankly ever before in history.
Every year, insurance companies hold a line item on their balance sheet of “unpaid claims”. Translated in English, they expect a certain amount of people to get in accidents and apply an average cost to each accident to budget what their payouts might be for a year. Well, it doesn’t take a rocket scientist to assume that this number will be lower in 2020 than is likely was in 2019.
Insurance companies now have an opportunity to compete for your business. If they were to continue charging you for your insurance and incur fewer expenses, they would all report massive profits at the end of the year. But in the stock market, companies do not want to have volatile swings in earnings. Knowing that they would likely have much less profit the next year which would ultimately cause their stock to go down.
As a result, large car insurance companies are able to offer lower rates to drivers in hopes to increase their market share. Sure, your rate might go back to normal in the future, but in the meantime, you might as well take advantage of the market and lower your car insurance rate as well.
Some lower car insurance rates are saving consumers over $700 per year. This is no joke when that same person might no longer know where their next paycheck is coming from.
Impact on the Stock Market
Speaking of the stock market, you might have noticed that the entire market crashed over the last month and has started to creep back up in the past week or so. The majority of these companies are publicly traded because they are among the largest in their industries and have enough market value to be traded by the public. That said, they all fell at once because the financial world understands that these companies will have less earnings at the end of the quarter or year. Stocks are loosely traded on a ratio of price to earnings and judged against each other based on this ratio. Therefore, if earnings are expected to decrease, their price should also decrease. This does not mean that most companies are at risk of not surviving, it just means that they will make less this period.
What does that mean for you? Even your favorite companies are now buying opportunities because they have all unilaterally been brought down by a factor out of their control, The Great Lockdown. For a counterexample, back in 2017, Lululemon was trading around $50 and the stock went down 10% one quarter because it expanded really fast, adding expenses and taking away profits. I thought about buying this stock because I know that if you go to a gym anywhere in the country, Lululemon is everywhere. Well, I now kick myself for not buying at that time because now Lululemon is trading over $200, a 400% increase.
Is Now a Buying Opportunity?
The same applies to the companies you use every day. There is a market-wide buying opportunity if you expect the brands you are loyal to will survive this pandemic, which most public companies should, especially as the government provides safety nets everywhere we look.
These same benefits were not available to the consumer back in 2009. The economy slowed down very gradually back then and picked back up very gradually as well. Now, when this lockdown ends, we might experience a couple more waves of lockdown, and the restaurants and shops you were used to going to before might not be open immediately, but the impact is expected to recover much faster than before. This means that it is up to you to do your research and know how you can protect yourself and your family today for future uncertainty.