Lightspeed Venture Partners recently wrote a Medium post called “The Upside of a Downturn”. As a leading venture capital firm that’s backed over 400 companies including Snap, GrubHub, and The Honest Company, they have broad visibility into the economy. Their post starts out with this: 

The boom times of the last decade are unambiguously over. 

Ouch.  

Jamie Dimon, CEO of JPMorgan Chase, made similar comments at a financial conference in May, saying: 

You know, I said there’s storm clouds but I’m going to change it … it’s a hurricane . . . You’d better brace yourself . . . JPMorgan is bracing ourselves and we’re going to be very conservative with our balance sheet. 

These quotes come from elites. Yes, we spend a lot of time strategizing about owning your future before the elites buy it up and rent it back to you. In this case though, Main Streeters are wise to listen to their warnings. If elites are bracing for an uncertain economic future, we should too.  

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Facing Reality So We Can Prepare 

The recession has already started (read our explanation here). CEOs and economists increasingly agree on this. And there’s lots of evidence to support it. 

This recession won’t be like the COVID crash though. During the pandemic, Main Street businesses were forced to shut down while “essential” businesses like Amazon, Netflix, and Peloton experienced rapid growth. Main Street got crushed while Wall Street prospered.  

However, this downturn will hit everyone. It already is. For example, Amazon scaled back expansion plans, Netflix lost subscribers and began layoffs, and Peloton is trying to survive as an independent company. Their fortunes have flipped.  

Also, unlike the COVID crash, we won’t get bailed out by government helicopter money. With inflation sky high, that option is off the table for now. It would only create more inflation.   

Panicking doesn’t do any good. Preparation does. Businesses always find ways to make it through. To weather the recession, it pays to think like one. What are some of the cues that businesses give us?  

Get Lean Immediately 

The first thing businesses do is get lean. They don’t wait for the squeeze to happen, they get out in front of it. Nobody is celebrating layoffs here, they are devastating for anyone who has experienced them. We’re just acknowledging one of the key strategies companies use to make sure they can stay alive through tough times.  

Some recent announcements that demonstrate this strategy and also provide clues as to where the economy is headed: 

• Redfin cut 6% of workforce 

• Coinbase cut 18% of workforce 

• Tesla is in hiring freeze 

• Carvana cut 12% of workforce 

• Better laid off 4,000 employees 

The list goes on. Expect losses to accelerate in the mortgage sector, where JPMorgan Chase just laid off 1,000 workers and many banks are sure to follow. These layoffs are a signal that you can use to plan ahead.  

It’s not just big companies getting lean either. The same moves are happening in the venture-funded startup world. As noted in the Wall Street Journal: 

“Before you thrive, you have to survive,” Michael Seibel, a managing director at Y Combinator, said in a video for startups posted to YouTube this month. The Silicon Valley accelerator, which aims to help startups thrive and has invested in more than 3,000 companies including Airbnb, is urging founders to cut staff, reduce ad spending and raise prices. 

Now is the time to see where you can cut back. What subscriptions are unnecessary? In what areas might there be waste? Groceries and dining out are always good places to start. Any money saved now is money you have available for a rainy day.  

It’s also helpful to see if you can “raise prices” by exploring ways to make more. You could ask for a raise if you’ve performed well the last couple years. You can look for higher-paying positions in what is still a fairly competitive labor market. Or you can simply offer to put in more time if you get paid by the hour. Many companies might balk at these requests because they fear a recession is coming. But it never hurts to ask.  

Know Your Numbers 

Getting lean will be tough if you don’t know your numbers. Don’t worry, this happens in business too. As Barbara Corcoran of Shark Tank noted in the video below:  

Anybody who’s a business needs to keep a tight handle on their expenses. Lots of my entrepreneurs don’t know what the cost of making that cake was. And they’re sending it out and finding three months later actually the eggs, the milk, and everything went up, that they’re making no profits even though the sales are going up.  

If you don’t know your numbers, now is a great time to start. As they say, what gets measured gets managed. The first step is to track everything using whatever method works best for you. Four options suggested by Ramsey Solutions are: 

• Pencil and Paper 

• Envelope System 

• Excel Spreadsheet 

• Budgeting Apps 

Once you see the numbers, figuring out where you can get lean is often surprisingly easy. Usually, the act of tracking expenses all by itself leads to a reduction in expenses. But if you look at your spending and make some strategic cuts, you can save even more.  

You can use that extra money to build your emergency fund, pay off high-interest debt, or even look for investment opportunities that look promising.  

Prioritize Major Purchases 

Once you know your numbers and have strategized how to get lean, it’s good to look at any major purchases you’re planning. Things like cars, vacations, and home upgrades. You might be flush with cash now, but what happens if you spend that money and then lose a job? Or spend that money and find your house value dropped by $100,000 in just a few months? The key is to list out all the major expenditures and prioritize them. Delaying a car purchase could put thousands of dollars back in your pocket in a year. A delayed or slightly modified vacation might do the same.  

Businesses do this all the time by canceling or delaying projects. By cutting production output. By scaling back inefficient marketing campaigns. When times are good for a business, it makes sense to invest in growth wherever you can find it. When times are uncertain, it pays to prioritize.  

Take Advantage of the Rebound 

Tough times will pass. And the rebound could provide an opportunity of a lifetime. If you tracked your numbers, got lean, built up your savings, and possibly paid down debt – well, you’re in the driver’s seat. 

Take advantage of a lower spending baseline: You’ll have gotten used to spending less. Once inflation subsides, you’ll have more discretionary income that can be saved or invested for the future. It will be like getting a raise. But instead of expanding your standard of living, you can save or invest the excess cash.  

Lower prices: The curse of a recession can also lead to blessing. Everything becomes cheaper. Housing will be more affordable, cars will cost less, and even vacations will likely be less expensive. Any discomfort you felt about delaying major purchases will be repaid when you make those purchases at a lower price with the extra money you saved from getting lean during the recession.  

Investment opportunities: The stock market basically went straight up for the last 6-8 years (with the exception of the brief COVID crash). Price to earnings ratios were above historical averages, meaning stocks were expensive. That causes many investors to sit on the sidelines wondering if the run is over. Nobody wants to buy at the top. Well, wonder no more because you’ll be able to go bargain shopping soon. The stock market already dropped 20% from its January 2022 peak. That’s called a bear market. Bear markets are often accompanied by recessions. The key is that bear markets usually end before the recession is officially over. As explained by Fidelity: 

Historically, the best time to buy stocks is when the NBER (National Bureau of Economic Research) announces the start of a recession. It takes the bureau at least six months to determine if a recession has started; occasionally, it takes longer. The average post-WWII recession lasts 11.1 months. Often, by the time the bureau has figured out the start of the recession, it's close to the end. Many times, investors anticipate the beginning of a recovery long before the NBER does, and stocks begin to rise around the time of the actual economic turnaround. 

We’re not suggesting you time the market and try to pick the bottom. That’s impossible. But perhaps take the opportunity to buy some stocks now that prices have dropped, then be ready to buy more if they go lower, and buy more if they go lower still. Your average price will be a good foundation for riding the next bull market, which are always longer than bear markets.

It's not just stocks that will be on sale. The end of a recession is often a great time to purchase a once-successful business and turn it back around. It’s a good time to start a new business too because suppliers and service providers are more likely to cut good deals. It goes to show there are all kinds of ways to buy low and sell high.  

Stay Safe Out There 

Big businesses use downturns as an opportunity to reset their baseline expenses and plan for strategic investments that will help them grow down the road. We should think this same way.  

While economic uncertainty can be painful, planning ahead can reduce that pain. And when it’s all over we might look back and see how some strategic decisions set a new trajectory for our lives.  

This is the way.  

God bless and God bless America,

-Jeff and Luke