I just read an article on Investopedia titled Industries That Thrive On Recession.

The article looks at the big picture when it comes to trends in a recession.  There are a lot of valuable links in the article as well.

Among the takeaways:

• Discount retailers like Wal-Mart and The Dollar Store do well in a recession because they can leverage the economies of scale provided by their distribution power.  They can negotiate, buy in bulk, and have the added advantage of being known in the marketplace as a low cost provider of goods.
• Sin industries also do well: alcohol, tobacco, and chocolate just to name a few.  Gambling typically suffers.  Microluxuries keep people feeling better as they combat the stress, pressure, and anxiety of the economy.
• Service Industries take a beating as many people look to do things themselves to save money.  Some industries see an upswing in business: home renovators, auto repair shops, and technicians that maintain company infrastructure like machines, computers, etc.
• Some plot along: garbage removal, pharmaceuticals, tax preparers and others like them because they are seen as needs, not wants.
• And of course, many businesses use a recession as an opportunity to start a business or grow an existing business to take market share away from competitors.  McDonald’s did this in the 1970′s during a period of stagflation (slow growth with a healthy dose of inflation) and Toyota did it during the 1990′s when it began building production plants in the U.S. as the Big Three were hurting (things haven’t changed much since then have they?)

How Do You Use This Info to Help YOU?

1. When looking at the macroeconomic picture, see what changes are taking place and where trends are heading.
2. Fnd a way to position yourself in front of a trend so you rise with it.  Keep in mind the old cliche: “a rising tide floats all boats.”

An article in BusinessWeek two years ago was extremely relevant even today.  It talked about what’s happening in the business world with small entrepreneurs and the future demographics of business owners in an article titled Entrepreneurship in 2017 .

They found that 20 million out of 26 million small business owners don’t have any employees. These people believe themselves to be hobbyists or freelancers, not entrepreneurs. 

What do you see as being the future of entrepreneurship 10 years from now?  Will there be a dramatic shift towards freelancers and consultants?  How many of the Fortune 500 companies will still be around?

Leave your comments below and share your view on what you think will happen!

“Cause when you’re up, you’re up,
And when you’re down, you’re down.
And when you’re only halfway up,
You’re neither up nor down.” – Song, The Noble Duke of York

I remember singing a version of this song at Scout camp when I was younger. Seems to be fitting with the current economic times we’re living in.

I’m going to try and explain how things went up, and why they are coming down so fast.

The Multiplier Effect

It’s called the “Multiplier Effect” in economics. Now don’t go falling asleep…bare with me.

Simply put, when someone spends money, they make someone else money. That person then goes and spends that money, helping someone else to make money.

Person #1 —-spends—-> Person #2 —-spends—-> Person #3

Around and around the money goes, increasing the perceived wealth of everyone as more dollars eventually flow back into building bigger buildings, investors invest back into companies to help them grow and hire more workers, and entertainment spending increases as people have more discretionary income to spend.

The Negative Multiplier Effect

This works the same in reverse. If someone stops spending money, whoever they would have bought from loses business. This means less money for them to spend on goods and services, and the ripple effect will continue downward.

Person #1 —-doesn’t spend—-> Person #2 —-doesn’t spend—-> Person #3

Before our world was so inter-connected, this happened usually on a country-by-country basis.

Now, it’s happening globally.

So where will the bottom be? How do we know when the downward slide is over? We’ll find out sooner or later.

The best way to imagine this in your mind is to think of a floor, with building blocks stacked on top of it. These blocks are arranged to make several building structures. It’s easy to start building the blocks up, and it happens gradually.

If you take your arm and hit them, however, they fall down quickly.

Underneath each market in the world, there is a “floor”…a price where the value to someone makes it worthwhile to buy. Only when the free market is allowed to find this floor – in housing, investing, and consumption spending – will we begin to build (grow) again…starting the next bubble and eventual pop.

This up-and-down bubbling and bursting is called the “Business Cycle” and it will continue to occur. The difference between now and previous bubbles…the world is the most inter-connected it’s ever been. Imagine if you had to try and blow a bubble with gum the size of this problem…you’d have to write to Bubble Yum and ask for an entire plant full!

How Will This Affect My Money?

Your money will rise and fall based on what’s happening the global market. Your earnings may be cut or wage increases frozen as a result of companies losing money.

Your stocks will be affected depending on what you invest in and your investment strategy. Mutual funds will suffer greatly.

Your real estate holdings will perhaps decline by a large percentage as well.

Remember : You always make your money when you buy , not when you sell . This goes for all investments, and should be your mantra no matter what the market is doing.

If you have made investing mistakes up until this point, it’s time to start getting smarter by asking questions.

Questions such as:

• What are you invested in?
  • Find out what your mutual funds and 401(k) plans are invested in. Even if it’s a small. Know where you stand.
• How is your industry doing?
  • Will you get fired sometime soon?
  • How are you preparing for a layoff or for your business to stay afloat?
• How many months can I survive without working?
  • Do you have adequate reserves built up to hold you over?

These are just a few questions that will help you get re-focused.

The Trend is Your Friend

One last note: follow trends.

If you position yourself in front of an upward trend, you’ll gain. If you’ve fallen behind a winning trend, you’ll continue to lose.

As Einstein said, “you can’t solve today’s problems with yesterday’s thinking.”

The best defense is a great offense. Perhaps it’s time to shed your old ideas and adopt new ones.

There was a great article I read in the New York Times The Frugal Teenager, Ready or Not that talks about the affect the credit crisis is having on younger people.

Many of them grew up during a time period where there was abundance, especially during the 1990′s.  They do not know what it’s like to embrace a world where it is harder to get by.

In the article, it states that American high school graduates are weak in quantitative skills, making them weak with the subject of money.  A 2007 study done for Charles Schwab, 62 percent of teenagers felt they were ready to handle the world of finances after high school.  When asked about their knowledge of certain money topics, most had no clue about some of the basics like check book balancing (although isn’t that outdated with internet banking?).

I hope in the near future that parents will have talks with their children about money and get them to increase their financial awareness .  The sooner they learn about the world of money, the sooner they can focus on building assets, and not acquiring liabilities or unneeded expenses.

According to Businessweek , the amount of our national credit card debt is $950 billion… and a significant amount of it is going to go bad.

Innovest believes that credit-card issuers will take a $41 billion hit from bad debt this year and another $96 billion hit in 2009.

With a $365 billion dollar market for securities backed by credit cards, this means that the losses this year and next will have to be passed through the investment market. About 70% of all credit card debt is sold to big investors…making more losses for pension funds, hedge funds, and others. And people thought it was going to be over by next year: I don’t think so.

In fact, based off what I’ve read in the Wall Street Journal, there seems to be about a 20 year cycle between an up market and a down market. Another words, for 20 or so years, the market will go up, then it will go down and commodities and other investments will rise, with short ups and downs inbetween.

The credit card debt market collapse is just one more concussion for the U.S. economy. The bright spot is that this should make people pay more attention to the subject of money, and increase their financial awareness. And because the business market is cyclical, things will bounce back.

My Recommendations

• If you’re digging a hole, stop digging.
• Cut back where you can, and build a cash reserve if you have not done so.
• Run in the opposite direction of the herd.

In the future, if you have invested your time in gaining financial education , you will be able to act on great investment opportunities that will let you enjoy a greater peace of mind.

Happy learning!

This morning, Lehman Brothers (a 158 year old investment firm) filed for bankruptcy, and Merrill Lynch is selling itself to Bank of America.  These two investment banks are number 2 and 3 out of the top 5 investment banks on Wall Street. The only two that remain are Goldman Sachs and Morgan Stanley.

It seems like the financial meltdown can’t get much worse.

While this may seem like financial Armageddon, there is a positive ray of light behind these events.  First of all, it shows that the financial markets are finally dealing with bigger chunks of the bad debt that’s out there.  Restructuring for the future is a necessary move and will lead to a stronger banking system on the other end.

To see an interview about the situation, watch this:

Fannie Mae and Freddie Mac, two of the nation’s largest companies that back mortgages, were taken over by the Fed as of Sunday 9/7/08.  They provide funding for nearly three quarters of all new-home mortgages according to the Wall Street Journal .  The government will provide nearly $200 billion dollars of capital to keep the two mortgage companies afloat.

What does this mean for your money?

Your dollar is going down in value…again.  The more the government prints, the less yours is worth as they continue to add more supply to the market.  Inflation will rise, and the those who are saving in low-yielding investments are having your wealth taken away.  I hope the bailouts stop soon, we can’t afford this debt!  For more on the story, see the Wall Street Journal article U.S. Seizes Morgage Giants. .

The rules of money have changed. But how did we get here?

Here is a brief timeline of events that have led the U.S. to be in the financial position that it’s in, and how it’s affecting you.

1913: Federal Reserve Bank Established   Federal Reserve History

- This non-government, non-U.S., privately held bank would now control the monetary system.

August 14, 1935: Social Security Act signed into law

- This is the greatest pyramid scheme ever created. The idea was to provide workers with pay to help offset the expense of old age. The age to get full benefits was 65 when the law was first passed; in 1961, an Amendment lowered the age to 62 to get partial benefits.

1943: Automatic Payroll Tax

- The Federal Government needed money to fund WWII. In order to raise money, a law was passed that allowed taxes to be taken directly out of employees paychecks. This ensured the government got paid first before any wages could be taken home and spent on other things.

1971: Gold Standard Abandoned

- Under President Nixon, the U.S. is taken off the gold standard. No longer is our money backed by anything of real value. It is now a currency , subject to the ups and downs of the marketplace. The only reason it still holds "value" is because we all believe that it does. This will continue as we all play musical chairs…and the person left standing when the music stops will be the one holding a bag with worthless cash.

Watch an interview with Congressman Ron Paul about the monetary situation in the U.S. as a result of this decision: Ron Paul Interviewed by Mike Maroney

1974: Establishment of the 401(k)

- Workers longer life spans began to weigh heavily on the balance sheets of companies. They could not keep financing the lives of people for 15 or more years beyond their retirement. The Employee Retirement Income Security Act (ERISA) was passed to handle this challenge. Workers were now responsible for their own retirement planning: there were no more pensions to bank on. The problem? No financial education in school. This low financial intelligence has lingered through today, as our parents gave many of us old, outdated advice on the subject of money.

- The problem with 401(k)’s is that they are administered by financial institutions that diversify your investments in mutual funds as a "safe" long-term investing strategy. The problem is, not only are your investments not safe (they are only "diversified" amongst one type of asset class: paper assets), but they are taxed at the highest rate: earned income. So when you get to your retirement day and you think you have a big nest egg: wave goodbye, cause the government needs it’s share of your pie.

Stay up-to-date on here and listen to the financial news to know of what new law changes and other policies are put in place that can affect your money.

Did you know that there are two tiers in our society?

Rich vs. Poor

There is the Rich and the Poor, and the gap is growing faster and faster.  The middle class is being eliminated.  How is this happening?

While there are several variables affecting the loss of the middle class, one chief problem is that the U.S. school system does not teach us enough about the subject of money.  Due to this lack of education, we have a massive rising national deficit and in Q3 of 2005 – a negative savings rate.

What little financial education we do get typically comes from those we know such as friends and family, many of whom are poor managers of their money.

When I worked at a financial services firm, I would ask those my age "do you want to be in the same place your parents are financially?"  Many of them would respond "no," but then would continue to take investing advice from dear old dad or someone else they believed in.  While they do have your best interest at heart, be mindful of where they are coming from.

In the Information Age, what was once considered "smart" advice for money management is now "dumb."

Example: Let’s say that dear old dad tells you you should "save your money," "buy tax-free municipal bonds," or "buy a well-diversified portfolio of mutual funds" for your long-term financial security.

Here are the problems I see with those nuggets of supposed wisdom:

1. He is not preparing you for the possibility of working without trading time for money.  Maybe you aren’t interested in that, and if so, then this is good advice.  If you want to cling to the false idea of job security, hope that the company 401(k) and other benefits will save you, or that the government will take care of you in old age then God bless you.  What he is preparing you for is to continue trading time for money, while "saving" some of your earnings on the side in preparation for retirement…an old Industrial Age idea.
2. Inflation is out of sight.  The cost of food and fuel has sky-rocketed, and these two staples aren’t factored into the core inflation number you hear on the news.  Oops.
   • The reason inflation is out of control is because the Federal Reserve is printing more money and putting it into circulation.  The "Economic Stimulus" we got was really a further tax on the American people, since we are deeply in debt as a nation already and will have to pay back those checks we got with interest at some point in the future.
3. Over time America has to do something to pay down it’s debt.  I’m thinking that will mean tax increases or government services being cut.  I’m seeing signs of this already: local towns in my area, due to budget pressures, are banding together to try and buy materials in bulk to save money, such as sand to put on the roads after plowing this winter.
   • If taxes increase, I would watch your exposure to earned income sources (savings in a savings account, bonds, CD’s, 401(k)’s, and Traditional IRA’s are all subject to earned income taxes) since those will be the easiest sources of income to tax.  Secondly, I would keep an eye out for new law changes that will affect your other investments.  I’m not trying to give you specific advice here, just trying to point illustrate that things will change over time and that’s why it is so important to have your Financial IQ so that you can correct course based off what you see happening in the world.
4. Many people will see their retirement nest eggs depleted by somewhere between 20-30% when they begin withdrawing from their 401(k)’s and IRA’s, since they will be taxed on that earned income.  Not good news.  See a Bureau of Labor Statistics article here .
   • On top of that, when there are millions of people selling shares of stock, as they must by law at age 70 1/2 from their IRA’s, there will be a flood of stocks entering the market with no buyers.  The law of supply and demand seems to dictate a crash when this happens.
   • This domino effect will hurt many people.  As Gen Y finds it harder and harder to stay afloat with high student loan debts, the rising cost of living, and the need to consume left over from their college days, the option to "move in with mom and dad" and have them foot some of the bills just won’t be an option.

We as Gen Y will need a better strategy to achieve our long-term goals.  Part of this is increasing our financial intelligence so that we can understand where our money is best invested.  There are much higher-yielding investment vehicles out there, if you have a greater financial education.

Out of the 3 different types of income (earned, passive, and portfolio), passive and portfolio are the most tax-advantaged.  While the above examples were for earned and portfolio income, passive income from real estate and other intellectual property assets provide the greatest tax shelter.

That sounds like a bold statement, so how does it work?

A 1031 tax-deferred exchange is a law within the tax code that allows real estate investors to move their capital gains in their properties to another roperty without having to incur taxes until a later date.  If you continue to use this strategy, you can continue deferring taxes indefinitely.  For more information, see the IRS rules here: 1031 Exchange .

Conclusion: There are going to be those that don’t worry about paying their bills, and those that do; those that are rich, and those that are poor.  Choose which side you want to be on, and do everything you can to learn the information you need to get there.  The best part is we live in the information age: information is plentiful.

Think the U.S. economy is suffering?  How about the rest of the world?

Find out in this article by columnist Jon Markman about the future of the investing world.

Make sure you’re sitting down for this one…  Worldwide Wipeout Ahead