When conditions are dire and people are losing their nerve, Traxis Partners hedge fund manager Barton Biggs pulls out a chart of the London Stock Market's performance during World War II. The fever line plunges as the German army invades Poland, Denmark, the Netherlands, Belgium, and France. Then an odd thing happens. Just when the mood is darkest — in June 1940, as Adolf Hitler is inspecting conquered Paris — the market finds a bottom and begins a long, steep rebound. It's almost as if investors sense that somehow, some way, Hitler is destined for defeat.
As those doughty Brits demonstrated nearly 70 years ago, fortune favors the bold. As long as you're not overleveraged, scary times like the current recession can present a perfect opportunity to make calculated bets. That's true whether you're a manager, an employee, an investor, a consumer, or a borrower. In this Recession Survival Guide, we'll share some of the smartest ideas we've heard for people in each of those roles. Most of us fit into all of them in one way or another.
With markets gyrating from day to day and the financial system still seeking its footing, no one can be sure what will happen next. Still, we'll try to dope out where the economy and financial markets are headed, and to suggest how BusinessWeek readers can survive and perhaps even thrive in their business and personal lives.
To be sure, it takes either iron self-control or Teflon self-delusion not to develop a bunker mentality in these difficult times. On Oct. 17, to pick just one day of bad news, the Reuters/University of Michigan's survey of consumer confidence posted its biggest one-month decline since it began more than 50 years ago, while the government said single-family housing starts hit a 26-year low. Glumness prevails. Faith Popcorn, the pop trend analyst, says: "If you go up Madison Avenue [in New York], past Fendi and Prada, those stores are empty. Women are shopping in their own closets. You feel shame in buying even if you can buy."
How much worse might things get? Possibly a lot. Nariman Behravesh, Global Insight's chief economist, forecasts a mild recession, but he sees about a one-third chance of something more — a 1.5 percent to 2 percent contraction in U.S. gross domestic product in 2009 as a whole, which would make this recession nearly as bad as the back-to-back downturns of 1980-82, which were the deepest since World War II. And the post-recession recovery could be painfully slow. Even after the mild 2001 dip, it took four years for employment to regain its pre-recession peak.
Credit crunches like the current one (except milder) contributed to all three of the last recessions. In 1980, the Carter Administration tried to cool off the economy with government-imposed credit controls and succeeded all too well, contributing to the sharpest quarterly downturn in real GAP growth in the past 50 years, a nearly 8 percent annualized decline, says Chase economist Robert Mellman. predicts the current squeeze will cause GAP to decline at an annual rate of 2 percent this quarter and the next, though the bank expects a healthy recovery in the back half of 2009.
Slowing and tightening
Expect the biggest hit to the sectors that most depend on credit availability, including the already depressed housing and auto markets. Consumer spending will suffer as Americans lose access to lending and attempt to rebuild their savings. Private, nonresidential construction, which remained strong long after the housing market tumbled, is headed for a crash of its own, predicts Global Insight's chief U.S. economist, Nigel Gault.
Government spending, by contrast, will increase to prop up the economy. Manufacturers (outside of autos) should continue to do comparatively well, despite the dollar's recent uptick and the slowdown in foreign markets. Stuart Hoffman, chief economist at Pittsburgh's PNC, predicts the unemployment rate will reach 7.5 percent to 8 percent, about as high as in the ugly aftermath of the 1990-91 recession, though not as bad as the 10.8 percent peak of the 1980-82 slump.
A grim picture, yes. But look on the bright side. As in most recessions, inflation is falling because of slack demand for resources and labor. It's a great time to pick up bargains, and not only on Wall Street. Brad Sugars, an Australia-born executive coach and author, says he's building a 20,000-square-foot home in the Las Vegas suburb of Summerlin and "it's insane how cheaply I can build this for today."
Billionaire investor Warren E. Buffett and his Mexican counterpart, Carlos Slim, understand this, which is why they draw from their cash hoards to buy in slumps. Buffett got a sweet deal on Goldman Sachs shares. On a smaller scale, Sugars says he knows a heating/ventilating/air-conditioning contractor in Connecticut who is snapping up smaller, man-and-a-van competitors simply by offering them jobs. Says Sugars: "When everyone else is in panic mode, those who keep their heads about them are generally going to come out of it best."
Recessions are unpredictable
If you're an employer, the recession can be a great time to prowl for talent. "People are saying, 'I'm looking to replace my B and C players with A players, and this gives me an opportunity,' " says Mark M. Anderson, president of ExecuNet, an executive networking organization in Norwalk, Conn. If you're an employee, Anderson advises spreading your name around while you still have a job: "You want to rebuild your network as quickly as you can, so people know what you do."
No question, there are real risks in hiring, shopping, or investing aggressively in a recession. If you overextend yourself, you could be wiped out. That's why Richard Bernstein, chief investment strategist at Merrill Lynch, advises people to be realistic about their own risk tolerance. If you're sleepless over losses you've already suffered, you're a poor candidate for raising the bet — because if you do fall further behind, you'll be tempted to sell at the worst moment.
Bernstein advises playing it safe in U.S. Treasury debt and developed-market stocks while staying away from emerging markets, though others disagree. Mohamed El-Erian, co-CEO of Pimco, the huge bond investor, recommends any sector that's getting government support. "Bank debt," he says, "is a very good place to invest right now." Steve Leuthold, chief investment officer of Leuthold Group in Minneapolis, advises clients who have gotten out of the market to add steadily to their stock holdings because prices are well below normal compared with long-run earnings.
Recessions are unpredictable, as the wild fluctuations in the stock market show. Since no one knows what will happen next, it pays to be adaptable, says Michael J. Swanson, an economist at Wells Fargo Economics. He wrote recently: "Having the right attitude and fortitude trumps any forecast or plan." That's as good a strategy as any.