30 Covid Economy-explained

Welcome to the Financially Free Journey podcast where I aim to dispel the seemingly complex topic of personal finances, money management, debt, savings, investing and even retirement. This podcast is designed to help you feel empowered by increasing your knowledge so you can flex your money muscles!

Today’s episode is all about how COVID has impacted our economy and digging into the nitty gritty of the current state of affairs. You will absolutely walk away from this episode more knowledgeable and feel comfortable making smart money decisions.

Now I have to say that my heart is with those that have been financially impacted by the virus. It’s easy to preach financial preparedness but the reality is that so many people were not prepared for this unexpected disaster and who could have predicted over 20.6 million Americans would lose their jobs this year due to the virus. Our unemployment rates in America toped above 14% this year and levels like that have not been seen since the great depression.

I would be amiss to not include my international listeners who are located in 51 different countries around the globe and talk about the global impact of this virus globally as well.  

Now according to the BBC, 4 out of 5 people’s job have been impacted one way or another due to the virus. This is an international crisis and demystifying our current economy and how COVID has impacted it, is one of the first steps of financial empowerment.

For this episode specifically, I am going to be focusing on the economy in the US but this information can be useful for my international listeners, especially if you are invested in American based businesses.

I posted on Instagram this last week for people to send me questions that they have for a chance to have those questions featured in an upcoming episode. I received some fantastic questions and I am going to try and go through as many of them as I can during this episode. We may have to do a second episode if I can’t get through all of them today!

The first question that I am going to start with that I think will be a great jump off point is “How does our current economy either differ or is the same as 2008 in regards to the stock market”?

First thing, the 2008 recession was very focused on the banking system and specifically the mortgage bubble. The Fed had a lot of wiggle room to use what’s called quantitative easing to help reverse some of the effects of the bad mortgages. Quantitative easing is where the central bank is able to buy government bonds or other financial assets in order to inject money into the economy in order to expand consumer spending. The other thing I should point out is that the 2008 recession was really concentrated in the US. Now move to our 2020 economy, the virus has a global reach and we have had a lot of deflationary factors. Another way that the 2020 COVID economy is different is the role of the central bank and the federal reserve. What is different is fed is funding the banks to be able to buy up tons of bonds and investment grade bonds. One of the biggest dangers we need to look out for is for example, Germany announced that they are going to continue to print money and flood the market to increase spending. The problem with this is if this doesn’t work and the banks can’t save the market, we are in for much worse problems.

This leads into the next questions that I want to highlight. It was asked “Why can’t we just print more money to help with those that are struggling”?

The problem with artificial money circulating around in the market is that some of these large corporations were becoming extremely highly leveraged with essentially cheap money and low taxes which allowed them to buy back their own stocks. What we have been seeing in the market is what is called a liquidity crisis, meaning everybody is trying to raise cash and sell anything that they have in regards to their holdings. And with a lot of the large corporations being highly leveraged, they had to dump a lot of stock. In my opinion, larger corporations are probably going to survive this just fine but a lot of smaller corporations are going to end up having to file bankruptcy due to this.

Now if you keep printing money, the more money that is printed, the more reduced the value of the currency is in general. This means things that are dollar denominated, and the dollar starts to faulter, we can then be starting to talk about an economic situation that no one wants to see and our country hasn’t seen since the 1970’s called “stagflation” with the oil crisis.

Stagflation is essentially where you have a slowing economy but you have a hyper inflation when it comes to prices.

The next question that was asked that I want to make sure to cover today is “as a new investor who has limited investment experience, how much should I be paying attention to the volatility of the market”?

The volatility we are currently seeing in the stock market certainly is not normal and a lot of highly experienced financial advisors will say that they also can’t remember a time that the market was having constant 1000-point swings.

As a new investor or someone with very limited experience investing- maybe your investment experience is really just limited to your 401k, now is not the time to be what people refer to as a passive investor. That means someone who just sits back and rides out the highs and lows of the market. It is critical that you are engaged and educated around what you are invested in. If you don’t work with a professional, you need to consider contacting one to review your 401k and most employers have a service through your 401k’s brokerage firm where they can actively manage your retirement account for you. This is a great option for someone that may not feel confident in actively managing the funds themselves. If you take anything from this episode, I want to make sure you immediately contact your financial advisor or look into setting up an appointment with one to review your current assets and how your leveraged in your retirement portfolio.

The market is correcting and because this is a free market, the market will continue to correct until it gets to what people consider is a fair value for funds. The market was due for a correction and the virus was great like the needle that pricked that balloon. 

The next question is “As a newer investor, I know that the market has been correcting and I am just waiting for the right time to jump back into the market and invest. How will I know when the market has leveled out and it is a good time to start investing again”?

In my opinion and I can only answer this question from a personal stand point- what I will personally be looking for is that there will be a couple things to watch- there are going to be phases to this market correction and reaching fair market value on stocks which will indicate when is a good time to start buying up stocks at a discount. One of the first signs to watch for is the big stocks in large cap like Facebook and google starting to settle out.

 Next go to the small caps- now for those of you that may not know, small cap represents the manufacturing sector of the market and the supply side of the economy. If we are going to see any type of bottom it will most likely be here in small caps because it represents manufacturing and this is where we saw the major market correction way before we saw it in large caps.

I can’t say when we will hit the bottom or when the correction will be done. I do know what I personally am looking for and that as a listener the best thing you can do is contact a professional to review your current investments to see if you’re in the best situation according to your investment strategy.

Wow- we really covered a lot today and I hope that this episode helped shed some light on our current economy and how COVID has impacted it.

If you’re not already, please make sure your following us on Instagram @financiallyfreejourney where I share daily tips and motivation to help you on your financially free journey.

Until next time!

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