By JUDD MATSUNAGA, Esq.

Many years ago, as an economics major at UCLA, I learned about business cycles. In general, the business cycle consists of four distinct phases: expansion; peak; contraction (aka, recession); and trough. We are constantly in, just coming out of, or about to go into one of these economic phases at all times.

So, if I were to ask you, “What phase of the business cycle are we in now, i.e., the beginning of 2023?,” how would you respond? Chances are you might say “Inflation!!! The price of food, gas, utilities, and other costs of living are sky high as the purchasing power of money falls.” Although not actually a choice above, you’re right (kind of)! High inflation leads to recession.
            
“But why?” you may ask. In the face of soaring inflation, the Fed hikes interest rates in a bid to cool demand and relieve price pressures, raising the risk of a recession. “Say what?” Higher interest rates means less money floating around so inflation stays under control. However, a lower money supply means less business development, raising the risk of an economic contraction, i.e., a recession.

You might hear financial experts on TV talk about a “soft landing” for the economy. A soft landing is where inflation subsides without economic contraction. But unfortunately, as Donald Trump might say, “Fake news.” More than two-thirds of the nearly two dozen institutions interviewed by The Wall Street Journal expect the U.S. economy to contract and fall into the grips of a recession in 2023 (Source: Market Insider, Nov. 17, 2022).
    
Recessions can be difficult to weather, but they’re not uncommon and should be considered in your regular financial planning. In fact, the U.S. has experienced 13 recessions in the last 100 years since the Great Depression. Typically, recessions are accompanied by high unemployment rates. Should unemployment rates rise from the current 3.7% to over 5%, several million Americans will lose their jobs
    
Many U.S. companies have already begun mass layoffs this year. Amazon just recently announced that it plans to lay off more than 18,000 employees as the global economic outlook continues to worsen. Facebook parent Meta recently announced 11,000 job cuts, the largest in the company’s history. Twitter also announced widespread job cuts after Elon Musk bought the company for $44 billion. And the list goes on …

But wait! Although most Americans are bracing for a recession in 2023, institutional investors who control mutual funds, pensions, and insurance companies see a bigger threat looming on the horizon. Now, they must prepare to battle another foe — the two-headed monster of high inflation and economic stagnation called “stagflation.”

The word stagflation is a blending of two words, “stagnant” and “inflation.” To date, the U.S. has only once experienced a serious case of stagflation in the 1970s. The oil embargo, the Islamic revolution in Iran, along with easy monetary policy to lift employment, caused inflation to spiral out of control and threw the economy into disarray.

Match lots of people out of work and sluggish economic growth with high inflation and you’ve got stagflation. Stagflation appears to be knocking on the door again. Most economists, following a series of interest rate rises, persistently high inflation, stock market volatility, and muted economic growth, have now accepted that a downturn is coming, although opinions vary on how savage it will be.

A combination of unique, random factors is mainly to blame. First, there was the COVID-19 pandemic, which led to a look-down and halt in production followed by surging demand once restrictions were lifted. Then Russia invaded Ukraine, causing yet more supply chain issues and leading oil prices to spike. And to top it all off, each of these unlikely, destabilizing events occurred when interest rates were historically low and money was extremely cheap to borrow.

What can be done? As an Eagle Scout, I’ve always liked the proverb “Hope for the best, plan for the worst.” We can all “hope“ (and pray) for the best, i.e., for a “soft landing.” But it would be wise to also plan (prepare) for the worst, i.e., an economic downturn of unemployment while bills and the cost of living keep on rising. Stagnant growth and high inflation are a killer combo that can do great damage to an economy and leave scars for decades to come.

With so much uncertainty in the world today, it is natural to wonder how you and your family will weather the near future. The area that causes the most amount of stress for people in this regard is finances. To help alleviate some stress during periods of economic uncertainty, here are four steps that financial experts recommend to prepare for a recession (Source: www.time.com, “A Recession Is Widely Expected. Here’s How to Prepare,” Dec. 10, 2022).      

1. Focus on budgeting and building an emergency fund

Whether the economy is surging or stalling, it’s important to have enough money set aside so you can still pay your monthly bills in the event of an unexpected job loss or other emergency. Your monthly budget is a good place to start because you can see how much money you’re spending each month, and on what.

“Ask yourself: ‘Where can I reduce monthly outflow?’” advises Robert Gilliland, managing director and senior wealth advisor with Houston-based Concenture Wealth Management. Even cutting out small expenses, such as subscriptions to streaming services, are an easy way to save extra money that can be crucial for building an emergency fund, he adds.

Your goal should be to have an emergency fund that has enough money to cover three to six months worth of expenses. That said, you may want to pad this account with extra money now to factor in the higher cost of living as a result of inflation and the potential for a job loss during a recession, Gilliland says.

2. Prioritize paying off high-interest debt

Shoring up your finances also means tackling debt. “The first thing I would tell people to do is to pay down variable rate debt, like credit card debt,” recommends Marguerita Cheng, a certified financial planner and the founder and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

Be sure to check the interest rate your lender is charging you and have a strategy for paying off debt, even if it takes time. Starting that process now will help you to build up your cash reserves — which will free you up to do other things, like investing in financial markets, Cheng says.

The fate of President Joe Biden’s student loan forgiveness program is still up in the air, though borrowers have received another extension on student loan payments into 2023.

3. If you have savings to invest, be savvy about it

The stock market typically slumps before a recession begins and rebounds before the economy improves, so heading into a recession can be a good time to buy stocks when prices are lower. To reduce your tax obligations, you can also sell some losing investments — or what’s known as tax-loss harvesting.

You may want to re-evaluate your investment strategy to make sure it makes sense for your life situation, Gilliland advises. And rather than just dumping money into the stock market, think about your goals for investing, Cheng says. For example, you may want to set up a 529 plan for education expenses for a child, she adds.

The market is likely to remain volatile as professional investors assess recession odds and it could take some time for stock prices to bounce back from the market’s selloff of more than 17% year-to-date. That’s why it’s important to invest with money you don’t need within the next few years. “It can be a really compelling opportunity to build wealth for longer-term goals like retirement or college,” Cheng says.
    
4. Get creative about saving

Think creatively about other ways to save more money. For example, evaluating your insurance options to make sure you have the best option for your personal circumstances could mean the difference of several hundred dollars each year, Cheng says.

Consider other ways to earn more money — be it asking for a raise or adding another revenue stream through a side hustle. Now is a good time to evaluate your entire financial picture, ahead of a recession, so you’re not caught by surprise.

“These things don’t last forever, so making sure you’re prepared is vitally important,” Gilliland says. Cheng adds: “Just be proactive.”

To conclude, the Times article includes an interesting tip from a former credit counselor, Josh Richner: “I’ll keep my expenses low, my investing on autopilot and continue to find creative ways to increase my income.” I’ve got a couple of “creative ways” for seniors to increase income in these hard times: (1) Reverse mortgages; and (2) In-Home-Supportive-Services (IHSS).

Your kids may have told you not to take out a reverse mortgage on your home. That’s because they hope to inherit your home “free and clear.” But, if paying the bills, or buying the groceries, continue to rise and the savings are dwindling, IT’S YOUR HOME. Did you know that the average price of a home in Los Angeles is $949,000 (according to Zillo.com)?  

Chances are, if you own your own home, you’re sitting on a gold mine. Before you make yourself sick worrying about paying the bills, look into tapping into the equity in your home with a reverse mortgage. Why a reverse mortgage? Because you don’t have to pay it back. Sure, your kids do, but with homes appreciating, you could take out $500,000 and still leave your kids $500,000 in equity.
        
Secondly, if your income is low enough, i.e., $1,500-$1,800 or less, you could get money from In-Home-Supportive-Services (IHSS). First, you have to qualify for Medi-Cal. But since Medi-Cal has increased the Asset Test to qualify, you don’t have to be at poverty level any longer. It’s now relatively simple to qualify and you can get financial assistance while remaining in your own home.

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Judd Matsunaga, Esq., is the founding partner of the Law Offices of Matsunaga & Associates, specializing in estate/Medi-Cal planning, probate, personal injury and real estate law. With offices in Torrance, Hollywood, Sherman Oaks, Pasadena and Fountain Valley, he can be reached at (800) 411-0546. Opinions expressed in this column are not necessarily those of The Rafu Shimpo.

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