This will be one of my main themes for 2023. It is looking highly likely that the United States will enter a recession in 2023.
The yield curve is highly inverted at this point. When the yield on a 30-year bond is paying less than the yield on a 1-month Treasury, you know there is something wrong.
In the face of this inverted yield curve, the Fed is tightening its monetary policy to fight the inflation that it created. The Fed has been increasing its target federal funds rate, and it has been slowly draining its balance sheet.
The price inflation picture remains unclear for 2023. It is possible that consumer price inflation could come down quite a bit if we hit a hard recession, which will damper consumer spending and demand.
At the same time, it's possible that we could see a major asset deflation without the rate of consumer prices for necessities coming down. For example, food may continue to increase in price in general, while the prices for stocks and houses are going down.
It is important to prepare ahead of time. If you wait until we are in the midst of a recession to change your lifestyle and your mentality, then it will be a much more painful time.
You obviously want to prepare with actionable things, to the degree its possible. You may not have much control over whether you lose your job, although even here you should try to make yourself indispensable to the degree possible.
If you have your own business, you want to take steps to reduce risk, particularly not being over-leveraged.
You also don't want to have any personal debt that has a high interest rate. Of course, you never want this anyway, but it is especially important in a recession. In fact, you don't really want to have any debt, if possible, other than maybe a low interest rate mortgage.
From an investment standpoint, you don't want to be heavy in stocks, as they are likely to tumble overall. There are always a few individual stocks that do well anyway, but good luck picking them.
They say cash is king in a recession, and this is mostly true, as long as it isn't an inflationary recession like the 1970s. No matter what, it is good to have some liquid funds on the sidelines, even when the currency is depreciating at 8% or so per year.
There are many actionable things you can do now to prepare, including reducing your overall spending. But perhaps the most important thing is to prepare mentally.
If you are cutting your spending, even by a few percentage points, and you are anticipating a hard recession ahead, then it will make it easier emotionally on you when it does arrive.
And if the recession never does arrive in 2023, then the worst case is that you will have deprived yourself of a few things and saved a little bit more money or paid down debt.
It is hard for anyone if they all of a sudden have to cut their spending by 10% or more. If you started by cutting even 2%, it will be much easier on you. It's not just because you already started, but because you were anticipating hard times ahead. It is far less emotionally draining.
I know a major correction is coming. Maybe they (the government and the Fed) can somehow kick the can a little farther down the road. Either way, there will be a major adjustment at some point. It would be wise to prepare for what's ahead. You can use the start of the new year to make some minor lifestyle changes.
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