Tag: Recession

All recession related articles are found here. Educative, informative and written clearly.

  • How to trade stocks during the recession?

    How to trade stocks during the recession?

    How to trade stocks during the recession?
    Generally, trading is unquestionably one of the most difficult things but it is maybe the best opportunity to make money.

    By Gorica Gligorijevic

    I’ve been examining for some time now how to trade stocks during recession. Don’t doubt we are in a recession now because we are. Well, this recession isn’t like we know from our previous experiences. The one we are talking about is caused by a pandemic. 

    I know that many experts will argue that the recession would come anyway. That might be true but this one came due to the coronavirus pandemic and thus, it’s somehow different but speaking about how to trade stocks, the principle could be the same. That’s my opinion.

    First of all, let’s make clear one important thing. We all know that the most important market gains occur during short periods of time. What does it mean? It means the market profits aren’t equally spread throughout time.

    How should traders trade stocks during recession? 

    Stock trading in a recession could be very different since there are several opposing schools of thought. Some experts would suggest traders should go short. That is true due to the fact that some companies’ profits could be hurt and lower share prices.

    Yet, there is another group that deems the recession is a “lagging indicator” thus their opinion is contrarian.

    The first school advises traders to be cautious in these circumstances. This means traders should take little or no trading activities. In general, they suggest traders stay away until the end of the recession.

    Is a recession time to buy? 

    Yes, I know that many people have lost a lot but, on the other hand, many profited. So, I concluded that loss and profits during the recession depend on the strategy you use and the assets you trade.

    Take the risk and go short 

    This could be a possible best way to earn a lot of money during the recession when the market downturns. Well, if a downturn never comes you’ll not make money. 

    In a recession, traders usually go short. They short their stocks, some will sell their call options or buy puts.

    These trading activities show that traders expect the price will go down. If that happens traders will increase their gains. The most important for every trader is to set a stop-loss level and take profit level. That will trigger your risk management rules if the price changes direction and goes against your position. These settings will provide you to close the position in small losses. 

    In fact, gains from short positions happen faster.

    Short your stocks if you feel you have an advantage and if you want more direct exposure. Stocks with high beta could be the worst players during recession. These companies have weak balance sheets and the lowest earnings. Such companies could easily be from the tech or biotech sector, but always they are small-caps. 

    They are dropping faster due to traders’ expectations they will no longer exist.

    What else can you do?

    You can go long volatility if you buy a volatility ETF such as VXX. It showed great results in 2018 and in 2019 with sell-offs. If you chose this strategy to trade stocks during recession, keep in mind that you shouldn’t go long volatility for a long time. That could lead you to “decay”.

    Go long volatility for a short time, for example, it could be a month or two but no longer.

    Also, go long gold because it has tendencies to perform very well during recession. Well, gold cannot give you dividends or generate earning but it is a tradable commodity. In the dire economic circumstances, this asset always becomes more valuable. With some gold ETF, you could earn a lot.

    How to make money during recession?

    You couldn’t be more wrong if you think it’s impossible. Pay attention to how long you’re shorting the market. Bear in mind, when you’re buying volatility in the market it can last just one week. On the other hand, if you’re shorting index funds such as the S&P 500, you can do that for up to two years. 

    The point is to have discipline and short for a short time. Otherwise, you’re more likely to lose your money due to your faulty timing. To be honest, the simplest way to make money during a recession is to go long cash or cash equivalents. For example, some low-risk investments could be the right choice.

    Interest rates are currently ultra-low right. You can invest in treasury notes, treasury bills, bonds, money market mutual funds, fixed annuities, preferred stocks, common stocks that pay dividends, or index funds.

    Always have cash reserves. Remember, the latest mentioned are investing opportunities. If you want your money to earn a higher return on, you do have different options. Don’t be afraid to day trade, it can generate a lot of money right now.

    What’s the best strategy to trade stocks during a recession?

    Learning to trade is unquestionably one of the most difficult things. It can be terrifying and frustrating in the beginning. I want to say to new traders that attempt to enter this field, never try to figure out everything at once. You’ll be overwhelmed by the information and that can only confuse you. Make small progress every day, trade a little each day, and learn.

    Remember, it is 100 percent sure that it is possible to make a  lot of money during recession. The thing needed for trading is here – the price fluctuation. So, it is almost the same when there are no recessions or downturns. For stock trading price fluctuation is essential. 

    You must have a strong risk management strategy, and not more than two trading strategies. Never be impatient, just wait for A+ setups. You must have a trading plan, it’s impossible to just jump in a trade.

    Trade smart!

  • Shapes of Recession and Recovery – Recognize them

    Shapes of Recession and Recovery – Recognize them

    Shapes of Recession and Recovery How to Recognize them?
    Recession and recovery come in different shapes, some are severe, but some are easier to survive. The examples below aren’t about the current economic situation, they are an explanation of forms in the financial charts.

    By Gorica Gligorijevic

    What are the shapes of the recession and recovery? Since no one can predict when and how the recession will occur it is important to know what can indicate it is coming. Economists have various metrics to conclude whether a recession is expected soon or it is already here. So, we can say there are several indicators that, when they happen together, might indicate that recession is possible. The same comes to the recovery since these graphs and charts can illustrate both the recession and the recovery. That is normal because each recession is followed by the recovery.

    For example, some indicators such as unemployment rates can confirm changes. Also, drops in the stock markets, fewer house sellings, or a drop in GDP may indicate that recession is going to appear.

    But, what are the shapes of the recession and recovery? To explain this. Shapes of the recession and recovery are a concept that economists use to define different kinds of recessions and recovery. The most common shapes are U-shape, V-shape, W-shape, and L-shape.

    Let’s explain each of them.

    What are the V-Shapes of recession and recovery?

    V-shapes of recession and recovery are one of the forms a recession and recovery graph could take. These graphs are economic metrics that measure the strength of the economy, meaning employment rates, GDP, and industrial production.

    When we notice these V-shapes in the graphs we know that the economy has a sharp decline, but the good news is detected too. Analysts know that after that sharp decline a sharp and quick recovery will come. Moreover, when this kind of shape occurs, the recovery will be strong. The consumers’ demand will increase, people will spend more, so the overall economy will be driven by those shifts.

    Let’s examine one example. It was 1953 in the US. The time of recession occurred after great progress in the early 1950s. But economists expected inflation and the Federal Reserve boosted interest rates. This action turned the economy into a recession. In the 3rd quarter of 1953 growth started to slow but one year later it was back at a speed a lot above the trend.
    Hence, the chart for this type of recession and recovery represents a V-shape.

    U-shape of the recession and recovery

    U shapes of the recession and recovery mean that a recession starts with a gradual drop but then rests at that seat for a long time before bounces and moves higher again. This type of economic recession mirrors a U shape in the graphs. A U-shaped recession and recovery express the shape of the graph of the same financial measures, as we mentioned above, for example, employment, GDP, and industrial production. 

    The U shapes of recession and recovery are similar to V shapes but the economy doesn’t have a sharp rebounding. When the economy has a decline in all metrics and spends more time seating at the bottom it is recognized as a U-shaped recession and recovery. Hence, in U-shaped, the economy will experience stagnation. When the economy enters this kind of recession the sides are glazed and slipping is possible. The bottom is like a wet bathtub and the economy could stay in that bathtub for a long time.

    For example, the recession from 1971 to 1978, during the seven years, with a deep bottom from 1973 to 1975, unemployment and inflation were high, growth was very low. The economy started to climb back in 1975 and it took 2 years until it was fully recovered. That is a U-shaped recession.

    W-shaped recession and recovery

    A W-shape of recession and recovery points to an economic cycle of both that mirrors the letter W in charts. All metrics we already mentioned are covered in the charts.
    This kind of shape means a sharp decline in all these metrics after which the sharp rise occurs, and a sharp decline again ending with rising. In the middle of the chart, the central part of the W letter, the bear market rally may occur. Also, recovery can happen but it could last short and might be choked by the further financial crisis. This W-shaped recession is also called a double-dip recession.

    It is characterized by falling into a recession, short recovery with some modest growth for a short time, followed by another fall and eventually recovering. This pattern matches the letter W. The early 1980s recession in the US is a great example of a W-shaped recession. In January 1980 the US economy fell into a recession that persisted to November 1982. In less than two years there were 2 declines and 2 recoveries before the US economy entered the decade of robust growth. 

    The other good example of W-shape is the European debt crisis from 2011 to 2013. Uniting several uncertain circumstances caused this recession, for example, the global economy was very weak after the Great Recession ended two years earlier. The prices of energy were high, investments low, interest rates were high, consumer spending was also low. This recession hit the majority of Eurozone countries.

    L-shaped recession  

    L-shapes of recession and recovery are recognized by a slow rate of recovery. It occurs when we have a sharp decline in the economy but without recovering with the same strength. The economic growth is stagnating, unemployment is rising. When looking at the charts, all indicators form the shape of the letter L.

    In an L-shaped period of economy, there is an abrupt decline made by falling economic growth. In the chart, this represents the line with a sharp decline without the visible possibility of a return to the trend line growth. It is accompanied by a shallow upward incline which means that a long period of stagnation in economic growth is present. In such a situation the recovery can take several years to reach a higher level. 

    The main problem with these kinds of shapes of recession and recovery is that no one can know when the economy will rebound, if ever. Economists consider this shape of recession as the most severe since during these periods the overall underperformance is present. The collapse of the economy,  lack of progress back to full employment after a recession, are the main characteristics of this period. Workers might stay unemployed for a long time or forever, the economy is unable to recover and provide them new jobs, the whole industry could be inactive or underused for a long time. 

    What shape of the recession will be due to the Coronavirus pandemic? 

    Interestingly, almost all economists predict a recession to come. And it is possible to happen because millions of people lost their jobs, markets have been down, factories all over the world have closed. But how long will it last? The answer to this question we can get from the charts but not yet. We can complete the charts only after the end of the economic changes. Will it be bad? No one knows how bad it could be. This pandemic caused a lot of problems, from healthcare and the economy at the whole to the kindergartens. 

    The true answer lies in one of these four letters: V, U, W, and L. Which one will appear to the charts no one knows, it’s too early to say because there is no clear shape yet. For now, all we have is a declining line in the graphs. There are several possible scenarios of how it will end. But there is no dilemma will the recession happens. It is obvious even for the most optimistic people.
    We aim to show you those four letters and what they could mean in case of an economic recovery with hope that we’ll never see a letter L.

    As we can see, the shapes of the recession and recovery could appear in four forms in the charts. What isn’t visible in them are our lives, our feelings, fears, and worries. But it’s individual and each of us has to find an individual way to fight with this uncertainty. Also, that is not the subject of this article.
    The main purpose of this article is to introduce the shapes of recession and recovery and how you can find them in the charts. And, keep in mind, every single recession is followed by the recovery. That’s good to know.

  • The Global Recession – How to Survive?

    The Global Recession – How to Survive?

    The Global Recession Is Here
    Are we deep in the global recession? Yes, we are, and if we are not yet, we will be in a short time. There is no doubt about that.

    By Guy Avtalyon

    It isn’t a question, the global recession is here without a doubt. But how long will it last? Will it be short-living or painful? Is there any chance of recovery by the end of the year? What will come in the aftermath of this recession? What will the world look like when the coronavirus outbreak ends? So many questions!

    The COVID-19 pandemic is making changes to the global economy very quickly. Hence, giving any prediction is extremely challenging. One thing is so obvious, this is a shock with a great impact on the economy. 

    Some economists are expecting the global economy to decline by almost 2%. The GDP is down, unemployment is growing, inflation is rising almost all over the world. It looks like the whole world is on its knees. 

    The rapidity with which this COVID-19 pandemic is growing has required another cycle of huge cuts to any GDP predictions. 

    How can we know the global recession is here?

    First of all, no one expected that the virus would spread this fast and only rare economists warned of the impact of the coronavirus outbreak on the global economy. Today, we can claim with the high level of certainty that we entered the global recession. 

    We have lockdowns across Europe, the US, parts of Asia, and many other countries. That has to be the baseline for any predictions. These lockdowns could degrade GDP across the EU and US, for example, by 7% to 8% this year, experts said. 

    Moreover, the global GDP for this year is equal to the planetary financial crisis. The direct stroke to enterprises and jobs in the first six months of this year will be much worse, stated economists.

    The lockdown policies have prompt and dramatic effects on daily economic activity reducing them daily by about 20% from their regular levels. For example, the three-month crisis with a five-week lockdown period reduces GDP by 20% a day. That means a 7% to 8% drop in quarterly GDP.

    Something is very wrong in the global economy right now

    The coronavirus crisis has sent the global economy into a fall. So many industries have ground to a halt. For example, tourism, restaurants are closed, hotels, air travel. Also, many factories reduced production and fired their workers. Unemployment is rising almost everywhere. Everybody stays at home. Almost the whole world is producing less and we’re spending less. 

    The stock market suffered huge losses and enormous daily changes. The trading has been almost halted. 

    So, the global recession is here. But what are the full magnitudes of this? It is pretty obvious we cannot know that now and the question is will we be capable of estimating it soon? Some experts are trying to explain the situation in which the global economy is right now. Also, some of them warned before the coronavirus outbreak there is a possibility of the recession to come this year. Of course, no one could predict the coronavirus pandemic. That just gave speed to the downturn. 

    The economic consequences of the exponential spread of the virus is shocking financial markets all over the world. Market volatility exceeded its peak during the global crisis 2009 and equity markets and oil prices falling to their lowest lows.

    Large drops in asset prices and high volatility will impact economic actions, for example, through credit and investment flows. Lower stock prices can grow the debt-to-equity ratio and restrict their access to credit. The logical end can be bankruptcies. Banks can reduce lending because companies’ and customers’ defaults of loans rise. The result in banks’ balance sheets will be worse. Do you understand that the global recession is already here?

    How to survive the global recession?

    Recession is defined as two consecutive quarters with negative economic growth. It can be caused by, for example, monetary panic. That caused the Great Recession, for instance. Also, the recession may come due to the rising oil price which is defined as an economic shock. One of the reasons behind the recession can be something that John Maynard Keynes described as “animal spirits.” We experienced it with the dot-com bubble. Also, the mixture of all three may cause a recession. 

    Today it is coronavirus and lockdowns caused by its outbreak and the focus on health protection due to it. The companies halt, workers are fired, demand and revenue fall. The only thing that increases is our concern on how to overcome the global recession we have now. But there are several ways to decrease the loss.

    In the article “Roaring Out of Recession,” Ranjay Gulati, Nitin Nohria, and Franz Wohlgezogen noticed that through the recessions of 1980, 1990, and 2000, 17% of the 4,700 public companies they examined done terribly: some went private or went bankrupt, or were sold. Nevertheless, 9% of the companies did manage to recover in the next three years after a recession. They succeeded to exceed rivals by 10% or more in the meaning of sales and profits growth. Moreover, their earnings rose regularly and the companies remained to rise.

    May the global recession last for a long time?

    Almost the whole world is caught in the recession caused by the coronavirus pandemic. The fears are growing. As long as people’s physical communication is a possible danger, companies cannot move to regular conditions. And once, when this pandemic ends, maybe the regular condition before the pandemic will not be regular. What if people start to avoid shopping malls, cinemas, theatres, restaurants, crowded concert halls? Even after the virus is contained or the vaccine is available? The economic recovery may take years and years. The global economy is frozen, the global recession is on the scene. But life will bounce back. The coronavirus will be tamed and put under control, and people will come back to their factories, offices, and shopping malls, of course. 

    But even after that, the new world that will begin will be gagged with stress. And, when that will be? No one knows. Millions of people lost their jobs and that affects the societal costs. What if bankruptcies leave the industry in a vulnerable status, exhausted from investment and reforms?

    The families may stay upset and risk-averse. What if this pandemic makes them tend to save? Some social distancing measures could remain indefinitely. If this situation endures and people continue to hesitate to spend, the whole world will have a big problem. Yes, life will bounce back, but psychology cannot just like that. It is more likely the recovery will be very slow and last for a long time.

    Bottom line 

    Developing countries have severe consequences already. The money is running away, commodity prices are falling, oil for example. This scenario is visible in Chile, Mexico, and many other countries. China is a slowdown and that has a great impact on countries where the factories with components are. Europe is in recession, the US is still fighting with the coronavirus pandemic. 

    People are lonely now, but they will be starting to return to normal life. But if they had to spend all their savings, and if they destroyed the credit ratings or declared bankruptcy, then they will not be capable back to normal life. 

    No one can say with a hundred percent certainty how long the global recession will last. We are pretty much sure that the recession started in March in the US but we cannot say when it will end. Well, the recession in the US or the global recession isn’t officially declared nor it can be. We all hope it is a remarkably deep but short-lived recession. 

    If your days are too long try to short them, learn something new, for example. Read the “Two Fold Formula” book, it may give you some interesting ideas. But before you start to implement the new knowledge, test it by using the our preferred trading platform.

    Stay safe! #StayHome

  • Shiller CAPE Ratio – The Measurement Of Market Valuation

    Shiller CAPE Ratio – The Measurement Of Market Valuation

    Shiller CAPE Ratio – The Measurement Of Market Valuation
    The Shiller P/E or the cyclically-adjusted price-to-earnings (CAPE) ratio of a stock market is a market valuation metric that eliminates change of the ratio caused by the difference of profit margins during business cycles. It is the regular metric for evaluating whether a market is overvalued, undervalued, or fairly valued.

    Shiller CAPE ratio or the cyclically-adjusted price-to-earnings ratio of a stock market is one of the regular metrics if you want to evaluate whether a market is overvalued, undervalued, or fairly valued.

    Shiller CAPE ratio, developed by Robert Shiller, professor of Yale University and Nobel Prize Laureate in economics. This ratio usage increased during the Dotcom Bubble when he claimed the equities were extremely overvalued. And he was right, we know that now. Shiller P/E is actually a modification of the standard P/E ratio of a stock.

    Investors use this Shiller CAPE ratio mostly for the S&P 500 index but it is suitable for any. What is so interesting about the Shiller CAPE ratio? First of all, it is one of several full metrics for the market valuation able to show investors how much of their portfolios should wisely be invested into equities. 

    The ratio is based on the current relationship among the price of equities you pay and the profit you get in return as your earnings.

    For example, if the CAPE ratio is high it could indicate lower returns across the following couple of decades. And opposite, a lower CAPE ratio might be a sign of higher returns across the next couple of decades, as the ratio reverts back to the average.

    Investors use it as a valuation metric to forecast future returns. The metric has become a popular method to get long-term stock market valuations. To be more precise, the Shiller CAPE ratio is the ratio of the S&P 500’s (or some other index) current price divided by the 10-year moving average of earnings adjusted for inflation.
    The formula is:

    CAPE ratio = share price / average earnings over 10 years, adjusted for inflation

    That was the formula but let us explain a bit more how to calculate the Shiller CAPE or also called Shiller’s P/E ratio.
    What you have to do is to use the annual earnings of the company in the last 10 years. Further, adjust the past earnings for inflation.  

    How the Shiller CAPE ratio works

    As an investor, you know that the price is the amount you have to pay, and the value is the amount you get. That’s clear. We have to compare the price to the value and that’s why we have many metrics to do so. One of them is the P/E ratio, read more HERE.

    It is legal that everyone wants to buy a healthy company when the shares are trading at a low P/E ratio. This means you can get lots of earnings for the price you paid. This is valuable for index too. Just take an aggregate price of the shares of the company from, for example, the S&P 500 index for one year and divide that number by the aggregate company’s earnings for that year. You will get an average P/E for the index.

    But it isn’t quite true. For example, during the recession. At the time of the recession stock prices will fall as well as companies’ earnings (okay, they may fall significantly sharper). The problem is that the P/E ratio can rise temporarily. The investors want to buy when this ratio is low but temporary high P/E can send them a fake signal that the market is overpriced. And what is the consequence? Investors wouldn’t buy at the time when it is the best solution.

    So, here is the Shiller CAPE ratio to fix that. Shiller invented a special version of the cyclically-adjusted price-to-earnings ratio to help fix this simple calculation. If we use his CAPE ratio we’ll have a more accurate understanding of the ratio between current price and earnings. This ratio employs the average earnings over the past business cycle, not just one year that may have bad or good earnings.

    The importance of the ratio

    Shiller himself explained this the best. He used 130 years of data and noticed that the returns of the S&P 500 over the next 20 years are fully inversely connected with the CAPE ratio at any observed period. How should we understand this? Well, when the CAPE ratio of the market is high, that means the stocks are overvalued. So, the returns in the next 20 years will be lower. Hence, if the CAPE ratio is low, we can be sure the next 20 years the returns will be satisfying. 

    This is natural and logical. Cheap stocks can increase in price no matter if it is from a growing company’s earnings or a rising P/E ratio. Contrarily, when stocks are expensive and have a high P/E ratio, they don’t have too much space to grow. It is more likely they have more chances to drop when market correction or recession comes.

    How to use the Shiller CAPE ratio

    Shiller warned against using CAPE in short-term trades. The CAPE is more helpful in predicting long-term returns. Siller said in an interview:  “It’s not a timing mechanism, it doesn’t tell you – and I had the same mistake in my mind, to some extent — wait until it goes all the way down to a P/E of 7, or something.”

    But really, you have to combine CAPE with a market diversification algo or some other tool for that. Maybe the most important part is that you never get fully in or fully out of stocks.  As the CAPE is getting lower and lower, you are moving more and more in. We think the CAPE ratio for March this year is 21.12. Check the Shiller P/E ratio HERE

    So, it isn’t super high. We, at Traders-Paradise, think the stocks should be an important part of your portfolio. Don’t get out of the stocks and go in cash because the CAPE is at 21. It is smarter to buy less and expect poorer returns in the next several years. Some experts noted that markets are most vulnerable when the Shiller P/E is above 26 like it was in February this year. Some stats show that investors respecting Shiller’s ratio are doing better.

    Bottom line

    Since Shiller showed that lower ratios signify higher returns for investors over time, his CAPE ratio becomes an important metric for predicting future earnings.

    There are criticisms about the use of the CAPE ratio in predicting earnings. The main matter is that the ratio doesn’t take into account changes in the calculation of earnings. These kinds of changes may turn the ratio and give a negative view of future earnings.

    The CAPE ratio was proved as important for identifying potential bubbles and market crashes. The average of the ratio for the S&P 500 Index was between 15 -16. The highest levels of the ratio have exceeded 31( February 2020). For now, the Shiller CAPE ratio announced market crashes three times during history: Great Depression in 1929, Dotcom crash in 1990, and Financial Crisis 2007 – 2008.

    Opponents of the CAPE ratio claim that it is not quite helpful since it is essentially backward-looking, more than it is forward-looking. Another problem is that the ratio relies on GAAP earnings, which have been changed in recent years. 

    The proponents claim the Shiller P/E ratio is good guidance for investors in determining their investment strategies at various market valuations. 

    Historical data show that when the market is fair or overvalued, it is good to be defensive. When the market is cheap, companies with strong balance sheets can produce great returns in the long run.

  • Recession Fears Overflowed Americans

    Recession Fears Overflowed Americans

    Recession Fears Overflowed Americans
    42% of Americans plan to reduce spending, according to the research held by the Consumer Education team at LendEDU
    32% reported having no money in an emergency fund and 55% of respondents reported having $1,000 or less.
    37% believe their finances are too low to resist a recession 

    By Guy Avtalyon

    Recession fears overflowed not only Americans, but the whole world is also in it too. In late August, the Consumer Education team at the LendEDU conducted a nationally-representative survey of Americans to gauge their sentiment towards the situation of an economic recession. The aim of this nationally-representative survey of Americans to gauge was to better understand how the risk of a recession may change consumer spending and investing habits has been said from the Team. 

    And if you have some fears and concerns about the coming recession, you are in the right club. According to this survey, more than half of Americans are somewhat or completely worried about a recession and willing to change their habits.

    The survey revealed that fears of a recession are modifying habits and, also, that many Americans haven’t positive feelings about their current financial conditions.

    Here are some data from the survey:

    42% of respondents are planning to spend less and save more due to recession fears
    32% of respondents reported having no money in an emergency fund and 55% of respondents reported having $1,000 or less. The median amount was $712.
    37% of respondents believe their finances are too weak to withstand a recession and 22% are unsure.

    HERE IS THE FULL REPORT

    We are all afraid of recession

    Even if we are living in a safe-heaven with a booming economy the question of when, not if, a recession will come. The history isn’t helpful, it is contrary. All we know about recession is scary.
    When it occurs, many people could be in a very hard financial situation. Some of them are still trying to stand on their feet after the Great Recession in 2008. 

    That is our reality. The media are full of reports about recession and how fast we will be faced with it. Massive unemployment, doom, misery, and, of course, the stock market breakdown. That is exactly what media reports say.

    To make clear what the recession is. When the GDP is negative for two or more running quarters. The decline in personal income or corporate profits, or when the employment decreases, also the production or retail sales are falling, we can say we have a recession.

    Many factors may cause a recession. But one thing you have to keep in mind, a recession is only part of the business cycle. And it never lasts forever. The economy will never fall forever.

    Why do recession fears grow?  

    The fears come from a willingness to survive. Sounds controversy, but when you are faced with something you don’t know, or you don’t understand, or you already had a bad experience, you feel fear. But the other side of your brain commands you must survive. So, what are you doing? You are going to find a way to meet your brain’s expectations. Well, when we are afraid of recession the first thing we can do is to cut our expenses if our salaries are decreasing. That means, we have to change our habits. 

    And this LendEDU survey showed exactly that. The majority prefer to change their habits in order to survive a possible recession. 

    But when it comes to their investments some intriguing things arose. On a question from the mentioned survey: “Recently, there has been talk about the possibility of an economic recession. While a recession is far from certain, are you planning to change your investment allocation (ex. stocks, bonds, etc.) or investment preferences?”

    The majority of participants responded that they would not change investment allocation.

    Here are the answers:

    No, I am planning to continue investing per usual (44%)
    Yes, I am planning to invest more conservatively (16.1%)
    Yes, I am planning to invest more aggressively (3.8%)
    Unsure, or none of the above (36.1%) 

    Let’s say that 70% of this 44 % have a well-diversified portfolio. That is in the best case. The other 30% maybe are not informed about how dangerous can be if they don’t change the investment allocation in time of recession or awaiting it.

    Recession fears 

    The stock market can also warn of an approaching recession, but that’s not always the case. The member of the Traders-Paradise team has a witty remark on this, saying that the stock market has guessed ten out of five recessions. Yes, it is a joke but in some cases, the stock market can forecast the recession.

    The inverted yield curve, for instance, can show that there will be a recession but not when. One thing is certain, the market can move but the economy couldn’t be changed overnight. The bad data has to be present in the market for a longer period than one month and not even than you cannot be sure that recession is coming. 

    Claudia Sahm, a Federal Reserve economist suggested a method to detect a recession more quickly. In a new paper, she introduced a system to more quickly detect and react to a recession. The full paper is here

    Who can say for indisputable when the next recession will happen? No-one. But if you have recession fears, you are in the great club. A lot of surveys show that Americans are afraid that a new recession will come soon and they are taking some steps as a response. The recession fears are well-known in the whole world. We all feel fears of a recession. 

    So, Americans, you are not alone.

  • Traders are Worried Due Economic Recession

    Traders are Worried Due Economic Recession

    3 min read

    Economic Recession is Here

    Gorica Gligorijevic

    Investors are worried due to the economic recession. Traders have invested a huge capital into bonds over the past 3 months. Actually, they invested a record $155 billion into bond funds during the past three months.

    So, what’s going on? This activity shows that traders and investors are looking for safe assets and the global crisis is on the door. Traders are purchasing sovereign debts. If they continue as it seems they will, we can be pretty sure we will have a huge recession. This trend isn’t good.

    Investors prefer bonds as increased global economic difficulty induces a need for safety.

    According to data collected by Bank of America Merrill Lynch, investors put a record $155 billion into bonds during the last three months. And we all know what is the safest investment when crisis knocks on the door. The government bonds are the safest assets.

    Worries expressed in money

    In just one week, the week behind, the bonds lured $7.1 billion. For one week only. By the way, it was one of the biggest inflows ever.

    Investors have a risk aversion. They don’t like to see their capital is at risk. And as they recognized the symptoms of this financial illness called the economic recession they started to invest in safer bonds. But their action caused another problem. Everyone in the markets feels anxiety, the trade tensions are rising along with worries the global economy is worsening. 

    The markets are volatile and everyone would like to put money in assets that perform better during the crisis.

    “What we’re seeing from a risk standpoint at this point in the market is really investors that are seeking haven in longer duration US treasuries,” Charlie Ripley, a senior investment strategist for Allianz Investment Management, said Markets Insider in the interview. 

    What does stand behind this traders’ action? 

    Fear! Fear of a coming economic recession. Fear is a powerful force. And that fear is caused by an inverted yield curve. It appears for the first time since 2007, and traders and economists noticed it several days ago. 

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    That’s important because such an inversion has happened before every economic recession since 1950.

    The yield curve is inverted again. Meanwhile, China ramped up its trade war with the US. The previous developments in trade war have pushed companies of an economic slowdown. The new situation added more stress to investors.

    Trump’s “Sorry”?

    President Donald Trump, at a press conference at the Group of Seven summit in Biarritz, France, said he was not concerned that his more volatile attitude toward China would threaten stability in the global economy. 

    “Sorry! It’s the way I negotiate,” he told reporters. “It’s done very well for me over the years. It’s doing very well for the country.”

    This comment occurred after a woozy week of economic announcements from the White House. These reports have caused uncertainty among businesses and investors. 

    Trump said that China asked the US to restart consultations and negotiations. He also said about President Xi Jinping that he is “a great leader who happens to be a brilliant man”. Yes, only a few days before, he called him “enemy”.

    The Global Times, an organ of the Chinese Communist Party, also disputed Trump’s enthusiasm.

    “Based on what I know, Chinese and US top negotiators didn’t hold phone talks in recent days,” the Global Times editor Hu Xijin wrote in a tweet. “The two sides have been keeping contact at the technical level, it doesn’t have significance that President Trump suggested. China didn’t change its position. China won’t cave to US pressure.”

    All of this caused great uncertainty among investors. We will follow what is next.

  • Why Recession 10 Years Later? We Have Not Learned The Lesson!

    Why Recession 10 Years Later? We Have Not Learned The Lesson!

    Recession 10 Years Later? We Have Not Learned The Lesson!Economic experts and academics agree that there is a real possibility of the US facing a recession by the end of 2020, but how well is the US prepared for it?

    By Gorica Gligorijevic

    Why recession again, how is possible that we didn’t learn the lesson? April 30th will mark the 10th anniversary of Chrysler’s bankruptcy, one of the victims of the Great Recession of 2008/09.
    This recession was started by the largest bankruptcy in history, by the fall of the Lehman Brothers. Which showed, along with the dot-com recession before it, that the excesses of Wall Street can cause severe economic downturns with global repercussions.

    Wall Street was to be blamed for the software stock and housing bubble which brought the US and global economies to their knees.

    Ten years later we are still wondering whether the US and the rest of the world are prepared for another recession.

    And these worries look more pressing with the Fed’s yield curve study’s February 2019 update upping the odds for recession from 14% to 50%.

    In the past couple of years many prominent economists, such as Paul Krugman, have been warning that the US regulators are ill-prepared for the next recession and that their response to the previous one was ill-suited.

    Such voices of concern are now joined by the Economic Policy Institute, Washington, D.C. based think-tank, in a recent report authored by Josh Bivens, the EPI’s director of research.

    Why recession ten years later

    In June of this year recovery from the Great Recession will enter into the 120th month of economic expansion in the US. That way equaling the previous longest period of economic expansion which started in March of 1991. This record-setting is making people wonder when will the next recession hit?

    Bivens state and many other experts agree, that there are real chances for it to happen by the end of 2020.

    With Fed’s also upping their projection of chances one has to ask themselves are the US ready to tackle the next recession?

    While most people think that the next recession will trigger a suboptimal response from policymakers, because of too high public debt and loo low-interest rates, it ain’t so. Though no person can successfully predict a recession, everyone can see their root causes. And the common theme is the fall of the aggregate demand, i.e. a decrease of the economy-wide spending relative to the production capacities.

    EPI’s report goes to show that there are very little risks of the fiscal contraction causing the next recession.

    And due to last year’s tax cuts, which are fiscal expansion measures, this is a no brainer. But that does not remove the risk of monetary contractionary policies, which could be triggered by vanning effects of Trump’s tax cuts, and is evident from the interest rates hikes in recent years.

    Criticism of economic inequality in the US

    EPI’s report can be read as a stern criticism of economic inequality in America, as it exposes direct connection of policymaker’s preference to aid large financial institutions and unwillingness to enact fiscal expansionary policies as a response to the economic downturn.

    Simply put economic inequality and the austerity measures worsen the recession dynamics which are driven by the fall of the aggregate demand.

    Bivens says that Fed’s interest rates hikes have given to regulators sense of normalcy, but robbed them of sense of urgency to provide recovery for all Americans and not just the Wall Street.

    Low- and middle-income households spend a higher percentage of income than rich households, but also have a much higher propensity for spending. With the growing economic inequality being most visible in the stagnating wages of low and middle-income workers, the aggregate demand they could generate is limited, thus putting a severe limit on the recovery from a future recession, as the speed of recovery is depending upon the ability to spend.

    But, according to Bivens, it’s not just household spending inability which will impede the future recovery.

    “A key lesson from the Great Recession is that fiscal policy is the most effective tool for aiding recovery,” he said.

    And for most of the recent recovery, the US government was very shy of the fiscal stimulus out of fears of the level of public debt. When the Fed Chair, Ben Bernanke, took unprecedented action in severely cutting interest rates he sent a very loud message to policymakers that they must do more by providing sustained fiscal stimulus.

    With the recent bipartisan support to declaring the US public debt as a single greatest national security risk, the US economy looks less than ill-prepared for answering to the next recession.

    Update 8/10/19

    Traders-Paradise recently got this email from Andy Kearns, Content Analyst in LendEDU:
    “Quite recently, our team conducted a nationally-representative survey of Americans to gauge their sentiment towards the situation of an economic recession. I believe our findings on how the risk of a recession might change consumer spending and investing habits could be an interesting addition for your readers on this page…You have my permission to use anything from the report that you liked.”
    Thank you, Mr. Kearns.
    So, here you, our readers, will find interactive graphs and charts that display the answers to their survey questions. Also included is an Analysis of Results section so consumers can better understand their findings.

    Here is a link to the full report: