The term “inverted yield curve’ is all over the news these days. Most people don’t know what this term means. Even fewer people know why it should matter to them.
Here’s what it means and why you should care.
More importantly, I’m going to tell you what you should do to prosper in this environment.
First, an inverted yield curve is when the yield of a longer US Treasury note (10 years) is lower in than a shorter-term note (2 years). Usually, there’s a healthy spread between the two maturities. That’s understandable.
Today the 2 year is at 1.43% and the 10 year is at 1.55%. So the yield curve is positively sloped by .12%
The real reason this is important is the yield curve has inverted before the past 7 recessions, including the Great Financial Crisis.
But don’t ring the bell for a recession yet as there’s an old saying on Wall Street:
“Inverted yield curves have predicted 10 out of the last 7 recessions.”
The other piece of good news is history tells us it will take a year or two for a recession to come about after a sustained yield curve inversion. So we have an advanced warning of sorts for a possible bad event.
The global economic picture shows that the US consumer is employed and spending like a healthy American. Unfortunately, the rest of the globe is experiencing a pretty anemic economy, especially in Europe.
Consumer psychology is a really important factor in the direction of the economy. You can pretty much watch what your neighbor’s spending habits are to see if a recession is going to happen.
In any case, the risk of recession is worrisome and definitely something to think about and plan for.
Recessions are events when people either make or lose lots of money. I assume you want to be with me in the MAKE group.
Here are 5 Common Sense Things You Can Do Today to Avoid Pain Tomorrow
First, dial up your efforts at work. The slackers get laid off when businesses start to trim “excess” employees. Distinguish yourself as someone who is essential to keep the trains running. Raise your game!
I talk about this a lot in the No Nest Egg Retirement Plan. I call it being the “MVP Employee”.
You can do this easily in these simple ways:
- Come early and stay late
- Engage your boss and his/her boss regularly with thoughtful and strategic questions/ suggestions
- Participate in leadership of a critical project like a tech implementation or anything cross-divisional
- Become the person engaged with outside vendors and/or the media to raise your visibility
- Develop a specialty that is critical to future strategy where you work
It still amazes me after four decades on the job how most people only just show up. Don’t be that person!
In 2007 and 2008, I had over three thousand folks reporting up to me. I had many conversations with the heads of their divisions. We had hours of discussions about names on lists. The traits just mentioned often determined who we kept and who we didn’t to keep. I can truly certify the strategies mentioned work in the corporate world. They also are just common sense.
Second, build your professional network aggressively. Start now to prepare if and when a slowdown comes.
By “network” I mean target the next 5 places you might want (or need) to work. You need to know these businesses cold, from who will be your new boss, to your new colleagues, to your HR entry interviewer.
If you know people at these firms, make plans to get together with them. Have lunch. If you don’t’ know them, get active in industry groups and seek them out. Either way, connect on LinkedIn after you have totally tricked out your profile there. Here’s a great resource to update your LinkedIn profile.
Here’s the takeaway. It’s too late to do this when everyone is in panic mode. People smell fear. When you’re early (like right now) you can be everywhere and it’s not a “tell” that something is terribly wrong. So, start today and be deliberate, consistent and make a plan.
The third thing you should do is to apply for more credit!
The key to obtaining credit is to seek it when it’s available. That’s today and it may not be like this a year from now.
Please notice I did not say that you should draw down on your credit facilities. And you should not burden yourself with payments on credit cards, etc.
I have said many times I believe in holding two years of my personal expenses in cash. But not everybody has planned for this.
I believe strongly this is a great time to pay down any loans you have and build cash. While I’m doing this, not everyone is able to.
But the primary reason to build access to credit is that I believe you need to take care of your family first. And this may require access to a credit facility.
Nobody knows how long it may take to find the next great position should you lose your job. Certainly you may need credit if you lose your job and have an income disruption.
But I also believe that having credit when the markets are in turmoil is timely. I love investing when there is “blood in the streets”. Fortunes are made when people are in full panic mode.
I’ve been an investor for nearly four decades and I’m comfortable using credit when the world is panicking. You may not be. And as I get older, I also get more conservative.
But whether you have an income disruption or see an opportunity you want to chase, credit is accessible now and you should secure what you can.
The fourth thing to do is save more. Tighten your belt. Really dig into your monthly expenses.
Look for ways to cut those pesky recurring charges that just seem to hit your credit card every month. This is something my wife and I just did and it never ceases to amaze me what we find to eliminate.
This is also not the time to make a commitment on something with a payment plan, like a new car. Hold back on this if you can and bank the money you would spend.
The big problem for me is that I’m a spender. I always tell myself that I’ll just earn more. The reality is that’s not usually in my control. This is especially true when your company may be struggling.
My wife is really frugal. She’s a thoughtful spender. You can read about her journey here. I admit to being lazy about my expense controls and I owe her a better effort.
I also feel great after I have just finished a thorough review of my expenses. I’m no longer holding my breath to see what my credit card balance will be at the end of the month.
Try to eliminate 10% (or even 20%) of your expenses. See what you can do. You’ll feel better and be in much better shape if the economy craps out.
Finally, the fifth thing you should do is find a way to create some income.
In the last few months I’ve written about numerous ways to make money, before and during retirement. Pick one and give it a try.
You could start with selling good stuff you’re not using on eBay. Expensive brands work well. We did this and it was like finding money in the couch.
You can also look into freelancing—the fastest way to earn some money. I love this idea because it’s so easy to find a gig to get paid to do. Here’s more information.
You may be fortunate enough to have an expertise you can monetize through coaching or consulting. This could lead to a long-term and lucrative alternate income stream. You can do this part-time in retirement very easily. Here’s great article to get you started on consulting.
When I got serious about looking outside my day job, I struggled at first. I had to come up the learning curve. I didn’t know what I wanted to do or how to do it.
Now this is nearly second nature to me. You may have an easier time. There are lots of resources available to help you find what’s right for you on this site.
In any case, adding a new income source to your bank account is a great feeling. It’s a real accomplishment.
In summary, I’m not a pessimist by nature. I’m a realist and today is a good time to talk about what the world may look like in a year or two. We’ve had an incredible over 10 year run in the economy.
Huge opportunities exist when recessions happen if your mind AND your finances are in the right place.
Be a ’Scout and be prepared. Take the opportunity to think about this now.
What’s your plan?
I’ll keep you updated right here on what I see happening.
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