WHAT IS A RECESSION?

In economics, the term economic recession is generally used to describe a situation in

which a country's GDP, or gross domestic product, sustains a negative growth factor for
at least 2 consecutive quarters. Being that the United States is the leader when it comes
to consumption of goods and services; an economic recession here will send
shockwaves across the world, creating a global recession. The only way to truly
recession proof your portfolio during a severe global recession is to move your money
to cash or US treasury instruments.
Just as there is an agency to define the measure of inflation; the official agency in
charge of declaring an economic recession is the National Bureau of Economic
Research (NBER). NBER's definition of recession is a bit vaguer than the standard one
that was described above; they define recession as a "significant decline in economic
activity lasting more than a few months". For this reason, the official designation of
recession may not come until after we are in a recession for six months or even longer.
We provided the loose definition of the term economic recession above because it is
defined differently by different economists. Some economists also suggest that an
economic recession occurs when the natural growth rate in GDP is less than the average
of 2%.
Typically, a normal recession lasts for approximately 1 year.
Causes of Economic Recession
This is another staunchly debated topic; but the general consensus is that a recession is
primarily caused by the actions taken to control the money supply in the economy. The
Federal Reserve is responsible for maintaining an ideal balance between money supply,
interest rates, and inflation. When the Fed loses the balance in this equation, the
economy can spiral out of control, forcing it to correct itself. This is precisely what we
have seen in 2007, where the Feds monetary policy of injecting tremendous amounts of
money supply into the money market has kept interest rates low and inflation edging
higher. Combine this with the relaxed lending policies which made it easy to borrow
money and you have economic activity which becomes unsustainable, resulting in the
economy coming to a near halt.
It is also said that economic recession can be caused by factors that stunt short term
growth in the economy, such as spiking oil prices or war. However, these are mostly
short term in nature and tend to correct themselves in a quicker manner than the full
blown recessions that have occurred in the past.
Effects of Economic Recession
An economic recession can usually be spotted before it happens. There is a tendency to
see the economic landscape changing in quarters preceding the actual onset. While the
growth in GDP will still be present, it will show signs of sputtering and you will see
higher levels of unemployment, decline in housing prices, decline in the stock market,
and business expansion plans being put on hold.
When the economy sees extended periods of economic recession, the economy can be
referred to as being in an economic depression.
Recession Proof Portfolios
A severe global recession can wipe out a significant portion of your retirement savings
account. It is important that when you spot signs of an impending recession that you
make moves to preserve your capital. Recession proof stocks may not even do the
trick. There is a saying, “throw the baby out with the bathwater”. In severe cases, as
the one we saw in 2007 to 2009, there was no place to hide. Every stock went down,
regardless of whether it should have or not. This is typically what happens during a
global collapse. In times of heightened crisis, the only safe haven is cash or US
treasury securities. During a mild economic recession, you can focus on being invested
in recession proof sectors in the market such as gold & silver, agriculture, bonds, and
consumer staple stocks such as Pepsi and Kellogg.