I quit my day job on Friday 3/20/20 and started my “Decennial Retirement” last week, just in time for the coronavirus to shut down the world for several weeks so I will share some thoughts on this crisis mostly from an economic and personal finance perspective along the way.
It’s clear that what the local and world economies are experiencing right now are unprecedented:
To understand why the world economy is in grave peril because of the spread of coronavirus, it helps to grasp one idea that is at once blindingly obvious and sneakily profound. One person’s spending is another person’s income. That, in a single sentence, is what the $87 trillion global economy is. That relationship, between spending and income, consumption and production, is at the core of how a capitalist economy works. It is the basis of a perpetual motion machine. We buy the things we want and need, and in exchange give money to the people who produced those things, who in turn use that money to buy the things they want and need, and so on, forever. What is so deeply worrying about the potential economic ripple effects of the virus is that it requires this perpetual motion machine to come to a near-complete stop across large chunks of the economy, for an indeterminate period of time. No modern economy has experienced anything quite like this. We simply don’t know how the economic machine will respond to the damage that is starting to occur, nor how hard or easy it will be to turn it back on again.
https://www.nytimes.com/2020/03/17/upshot/coronavirus-economy-crisis-demand-shock.html
The chart below, which projects how many people will file for unemployment benefits compared to the last 50 years, helps to explain why this slowdown is so astonishing.
That’s just an incredibly alarming spike in people losing jobs. We’re living in very precarious times as some parts of the world shut down for some time and there are a lot of unknowns, but assuming this isn’t the start of the end of the world, the economy will eventually rebound. The biggest risk in my opinion is the possibility of this slowdown, which has impacted sectors like travel, dining, services and entertainment more heavily than others, spilling over more broadly to other industries and resulting in widespread job losses and bankruptcies that causes a financial crisis that rivals the one from 2008. We’re still a long way from getting there, and you are likely to see some more severe stress signals in other areas of the financial system well before that happens, but this is definitely how an economic collapse can start if there is one.
On a more personal note, the value of my 401k’s were over $100,000 about a month ago and now it’s probably down to about $70,000.
Markets have never unraveled as quickly as they did in the past month. Stocks are falling faster than they did during the financial crisis, the crash of 1987 or the Great Depression.
https://www.wsj.com/articles/stock-market-meltdowns-historic-velocity-bruises-investors-11584955800
The magnitude and speed of this decline in the stock market has been unparalleled, which reflects the very real downside risks in the economy but in spite of some of the very cataclysmic headlines, I don’t plan on making any changes to my 401k, which is allocated 100% in the stock market. I know how volatile the stock market can be in the short term but I also currently believe the coronavirus will either be largely contained in a few months or governments will just choose to let the virus runs its course and deal with consequences as best they can because the alternative of extending quarantines for a prolonged period of time would be worse than the Great Depression.
Some people will be more financially impacted from this slowdown than others but this is why its important to be elite with your money because you just never know what tomorrow brings. If you maximize your income and minimize your expenses, keep your debt low and your savings high, you’ll have a lot less to worry about when these economic downturns occur.
