Tag Archives: recession 2020

2020, Is ‘Recession’ the Economic Doomsday?

Coronavirus plunges eurozone economy into historic recession

France sinks deeper into recession, with 14% GDP hit in 2Q

The U.S. is officially in a recession. Will it actually become a depression?

With these news making into the front, its time we look at What is Recession?, a Depression?, and what can we do about it?

Welcome to riteFinance, this is your host Ritesh and today we are gonna unveil this curtain of fear!

A Recession is a slowdown in economic activities for at least two quarters. Since the economy is in contraction during a recession, so a GDP, Corporate profits and Employments go down.

So what causes a Recession? A fall in consumer confidence and spending referred to as a demand shock, causes a Recession. And what causes a fall in Spending?, well there are multiple factors like the 2008 financial crisis was caused by the Real Estate Bubble Burst causing a Recession, and the current one is caused partially by Lockdowns imposed by economies to prevent the spread of COVID.

Economies all the time goes through a Boom and a Bust cycle, a high rate of growth followed by slowness. These Bust periods are what is referred to as Recession and it can have one or other factor. Recessions are caused usually by irrational exuberance and soar in asset prices during the economic boom when people become so irrational that they think Economy will never reset again. Now, it doesn’t mean Recessions are good, Credit become difficult, Investors lose money, consumer cut spending, a company cut job etc. And if left uncontrolled a Recession can lead to a Depression.

The Economy

A Depression is a severe economic downturn which lasts for years (not months or quarters), and its effect can last up to a decade! Currency devaluation, price deflation and Bank failures can occur during a depression.

While since 1984, world economy is hit by 33 Recessions, the depression we know of is only ‘The Great Depression’ of 1929, which lasted for around 3 years.

Is 2020 Recession the result of Covid?

Well to say so, will only be partially correct. Covid acted like a needle in already inflated bubble. Recessions are not caused by a single event. Rise in corporate debt, economic slow down of 2019, China-US trade war and Brexit were some factors that led to the build up resulting in the current recession.  

With two quarters down, it is sure we are in a Recession. Question remains however In 2020, Are we heading for a Depression?

To answer, we don’t know, no one knows for sure! But no indicator is currently pointing towards a Depression, Economic revival is the priority of many states, focus on innovation and vaccine to reduce if not eliminate COVID is under way. That said, it is likely we will see more costly adjustments, certain setbacks along the way, but a economic revival even though slow will be underway soon in 2021. Will it be a V shape recovery (a steep decline and quick revival)? I think definitely not, it doesn’t look so, but a longer U shape recovery is likely, the Great recession of 2008 which lasted for around 19 months saw a U shape recovery.

Current State of our Economy
State of the Economy

With all this Negativity around, is there a light at the end of the tunnel?

The short answer is Yes!, At least for some.

  • Some Business thrive – Grocery stores, Bankruptcy attorneys, Bars, Maintenance services are usually the one that survive a recession. Definitely this depends on the kind of recession for example Bars which usually thrive in recession as the Binge drinking increases will likely be not in a good shape during Covid given the current health emergency and the government guidelines, also another example can be of Online Retail Marketplace like Amazon that are likely to thrive in current crisis, in-fact Amazon has added more jobs, additional 1,75,000 employees during this crisis .
  • Efficiency Increases – Inefficient Businesses and the one with on-going difficulties are the first to go Bankrupt during a recession. While a Business that can streamline itself, find alternatives and reduce its costs survives easily.  

On an Individual or Consumer level –

  • Change in Mindset – Recession forces you to reflect back on your expenses, cut some unwanted expenditures, look for alternatives, streamline personal finances, and set up an emergency fund, making you more efficient.
  • Crisis as an Opportunity – Every crisis comes with an Opportunity, that is why it is believed more Millionaires are made in crisis than any other time. While it is a harsh reality Recession can create more income inequality due Govt. policies, printing of more money, and can result in inflation, Nevertheless it gives you as an investor to buy some big firms (I mean a piece of them – stocks) in big discounts. Only if you think like a Minority and do your due diligence as an Investor.  We have a few resources to get you started and more coming up soon (watch out for this space).

Link to Resources for the Minority

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

– Warren Buffett (Legendary Investor)

News UpdateGDP Decline in Second Quarter : Spain 18.2%, France 14%, Germany 10%, United States 32.9% (worst economic contraction)

Keep Learning, Keep Investing! Thank you Readers.

Bubble, oh no!

Time for some practical: Pour a cup of dish soap into 6 cups of water & stir it well. That is how Bubbles are formed, now you burst it!

Oh no!, not the Bubble Minku loves. Lets do it again.

Increase the price of an asset significantly surpassing way beyond its true value, and make the majority believe the price will continue to rise at least in the foreseeable future. There you go, that is exactly how Financial Bubbles are formed. Eventually the reality kicks in, and like every bubble it bursts!

Welcome to riteFinance, this is your host SalRite, With some saying the current Stock Market is in Bubble, today lets discuss about Financial Bubbles.

As per the legendary Investor Warren Buffet, Bubbles form when “People see neighbors ‘dumber than they are’ getting rich“.

Financial or Economic Bubble is not a new thing, in fact the official history of the first ever recorded Bubble dates back to as far as mid 1630s, though the term itself was coined around the 1720 AD. To dig a bit deeper, lets understand the five stages of an Economic Bubble with the example of what is known as ‘Tulip Mania’ of mid 1630s.

Stage 1 – Tulip comes to Vienna from Turkey, are soon distributed to Netherlands and becomes a status symbol in Dutch community. With a saturated intense petal color that no other plant had, and a profusion of varieties, Tulip soon becomes a coveted luxury item, increasing its asset value. This stage is referred to as ‘Substitution‘.

Stage 2 – This is when the news of Tulips start spreading, and becomes a topic among the majority . It is now that the Speculative purchases happen, and the bets are placed on the future value. As the flowers grew in popularity, professional growers paid higher and higher prices. Buy now, sell later at a higher price becomes the motive for Investors. This is referred to as ‘TakeOff

Stage 3 – Exuberance – a state of unsustainable euphoria. This is when the asset overshoot its intrinsic value leading to a jump in the portfolio of several. A few lucky/rational Investors sell at this stage, while the majority continue to buy in. At this stage Tulip becomes over-valued. At its peak, value one Tulip bulb was equivalent to a House. By around 1636, the tulip bulb became the fourth leading export product of the Netherlands, after gin, herrings, and cheese. Tulip mania reached its peak during the winter of 1636–37, when some bulbs were reportedly changing hands ten times in a day on paper (it is the time when future markets appeared in Dutch Communities).

Stage 4 – Critical stage – a state where some begin to sell. When the market realizes that an asset is over leveraged and way too over valued, some begin to lose faith and starts selling. This is when they realize there aren’t enough buyers. For Tulip it was the revelation of their true value. In around February of 1637, for the first time in a routine auction no buyers were available for the Tulips. This time coincides with the outbreak of Bubonic Plague in some European Cities. This lead to the 5th and last stage of a Bubble.

Stage 5 – Crash (pop) – Burst of the bubble, and the reset for the economy. In case of Tulip, Bubonic plague probably acted as a needle that led to the demise of its Market. With no buyers available sellers were left with nothing but a flower.

A few hundreds years later, now a Tulip is worth a few bucks and can be ordered online, but nevertheless bubbles keep forming and keep popping. As we humans are irrational beings. This leads to another story, this one more recent.

2008 Housing Bubble

This was the result of irrationality of the masses combined with financial engineering of the elite few, the Bankers. Lots of Subprime loans were made between 2004 to 2006 rising from 8% to around 20% in the United States, at the same time NINJA loans (No Income, No Jobs, and No Assets) grow in popularity and many of the Millennial with lesser Income would write a higher figure in the application, that no one in Banks would verify and they will easily sanction a loan. The greed of the Bankers didn’t stop here they combined all the A, B and C rated loans packaged them into something called CDOs (Collateralized Debt Obligation – a type of structured asset-backed security that include mortgages, loans or bonds), and sold it to the Investment Banks, betting further on loans. As if this wasn’t enough the CDOs were swapped for Insurance what is called as Credit Default Swaps. CDS acted as a financial instrument that could hide these risky investments (to read more on CDOs or CDS click here) Even the rating Agencies like S&P didn’t downgrade the bonds & kept ratings high. Couple this all with Inadequate regulations by the policy makers, and you see a Huge Economic Bubble.

Eventually, the home owners defaulted on their payment, this meant the riskier loans, CDOs hold by Investment Banks all lost their values, and suddenly the whole Financial system collapsed on its weight. Lehman Brothers the fourth largest investment bank in US back then filed for bankruptcy. And the Market corrected itself, not exactly though, the fed came in, and bailed us out. Enforcing strict regulations, and making much required policy changes combined with Quantitative easing kept the US Economy on its track.

Even before 2008 crisis, which is the most recent one (prior to this pandemic) there were several Economic Bubbles. One such was the dot com bubble of 2000, caused by excessive speculation in Internet-related companies. While several big companies like pets.com went out of Business, it was not the end for all, with growth in the technology sector stabilized a few like Amazon.com, eBay saw rise in their Market Share following the crash.

Another Bubble that can be looked at, dates back to 1840s Great Britain. Referred to as Railway Mania, this was the period when the shares of Railway Companies soared in their value, only to be declined later. Following the crash, the larger railway companies such as the Great Western Railway and the nascent Midland began to buy up strategic failed lines at a discounted price to expand their network. So what was the down fall of some, became an Opportunity for others.

Bubbles are primarily of two types –

  1. Equity Based – characterized by easy liquidity, tangible and real assets like tulip mania, railway mania and dot-com bubble.
  2. Debt Based – characterized by intangible or credit based investments with little ability to satisfy growing demand in a non-existent market like United States Housing Bubble (of 2008).

Can we predict these bubbles?

Well, we may not be able to predict accurately nevertheless we can identify it, based on the over leveraged asset price, high risk lending or borrowing practices, and when the people tend to rationalize borrowing, lending and purchase decisions based on expected future price rather than the ability to repay.

What can we learn?

There are few things that these Bubbles teach us –

  1. In every crisis lies an Opportunity, only if one knows how to capitalize on it.
  2. Bubbles are natural, every Economy goes from a Boom & Bust Cycle.
  3. Certain theoretical research models states that bubbles (as long as they do not burst), raise economic efficiency and welfare.
  4. Regulations have a big role to play in an Efficient Market.

If you want to read more about how the Bubbles work, there is a great article you can refer here.

Thanks for Reading, Lets us know what you think about the current Stock Market scenario in the comments below? Do follow us for more @ritefinance