Big Banks Are Preparing for a Major Recession – Are You?
The US economy is officially in recession, and at this point it’s only a question of how deep the recession is. Second quarter GDP figures aren’t out yet but, if the US is at all in the same boat as other countries, a drop of 40-50% wouldn’t be out of line.
The problem we’re facing now is that many people think the worst of the crisis is behind us and that now we’re on the road to recovery. There’s been much talk of a supposed V-shaped recovery, but that seems to be a dream rather than reality.
Many states in the US are already walking back their reopenings, starting to place further restrictions on businesses, and introducing new mask mandates. Businesses that had hoped to be up and running by now are finding themselves still in a holding pattern, and many consumers still have not returned to their old habits.
As a result, the US economy remains depressed, and it could look like that for a long time. To that end, big banks in the US are taking steps to prepare for recession. And based on their preparations, it seems certain they’re expecting a major crisis. Knowing that they’re preparing, what steps have you taken to prepare yourself and your investments against a major recession?
What Banks Are Doing
Wells Fargo, JPMorgan, and Citigroup collectively have put aside nearly $29 billion to help protect them against the possibility of loan defaults. It’s a hefty sum of money, particularly for banks such as Wells Fargo that are showing signs of weakness.
These banks are trying to incorporate the lessons learned from 2008 and setting aside this money to make sure that they’re not having to eat losses in the future when revenue is declining. And if they’re putting aside this much money now, just imagine how bad the problem will be over the next three to six months. You can almost guarantee that the losses they’ll face will exhaust every penny they’ve put aside, and then some.
Why Banks Are Preparing
Banks remember the series of defaults that swept through the economy in 2008 and 2009. They were so bad that Wachovia, one of the largest banks in the country, essentially failed and was taken over by Wells Fargo. Wells Fargo inherited much of Wachovia’s weaknesses, and remains exposed to risky loans. The same goes for JPMorgan and Citigroup, who by their sheer size are exposed to billions of dollars of loans that could go bad.
The economic lockdowns that took place this year have put thousands of businesses at risk of closing. Many analysts are expected anywhere from 25% to 40% of restaurants to close permanently. The percentage of small businesses that will fold will likely also be in the double digits. Nearly half of all US households are considering selling their homes due to financial distress. And we’re just starting to see a wave of defaults that will make 2008 look like nothing.
Mortgages that have moved from current to within 30 days past due have jumped to 3.4% of all mortgages, far surpassing the previous high of 2% set in late 2008. Similarly, the number of mortgages 30 to 59 days past due has also jumped, to over 4.2% of mortgages. Longer delinquencies haven’t jumped yet just because we haven’t seen the full impact of April’s layoffs, but by September the US mortgage market is likely to look far, far worse than the worst part of 2008.
What Does the Future Hold?
As JPMorgan’s Jamie Dimon said, this is not a normal recession. We’re not going to see a normal recession, in which the economy slows down first, then job losses occur, then recovery starts.
Thus far we’ve seen job losses first, with over 30% of the US workforce forced out of work and over 50 million workers filing for unemployment benefits. In fact, the only reason things don’t seem to be worse right now is because the US government has tried to smooth the impact of those layoffs by giving people an extra $600 a week in unemployment payments. Those payments are set to expire at the end of July, after which millions of households will finally face the financial reality of unemployment.
In short, we haven’t seen the worst of it yet. While the numbers look bad, they haven’t yet carried over into the real economy. It will still be weeks or months before the effects of the layoffs and business closures will be fully felt and before the wave of business bankruptcies and mortgage foreclosures gets underway. That’s what banks are preparing for, and that’s what the economy is facing.
How You Can Prepare for Recession
As with any recession, stock markets are a lagging indicator. Remember that before the financial crisis the US officially entered recession in December 2007, while stock markets didn’t hit their lowest point until over a year later. In fact, it wasn’t until September 2008 that most people realized just how bad the financial crisis was.
That was nine months in which businesses and investors denied the reality of the situation and thought the downturn was just a momentary blip. If a similar pattern emerges this time around, that means we won’t see the worst of this recession until later this year and into the beginning of next year.
Investors in 2008 who saw the writing on the wall had months to prepare themselves and defend their investment portfolios. Many didn’t, and ended up seeing losses of over 50% as stock markets plummeted. But others who sought the safety and security of investing in gold rejoiced as their portfolios not only lost less but also gained in value as gold took off in value post-2008. While stocks struggled to regain their pre-crisis levels, gold tripled in price.
This time around, investors have more choices than ever to protect their investment portfolios with gold. That includes a gold IRA, which allows investors to roll over existing retirement assets into a gold investment. If you have a 401(k), 403(b), TSP, IRA, or similar tax-advantaged retirement account and want to keep those tax advantages while simultaneously investing in physical gold coins or bars, a gold IRA may be just what you’re looking for. But you’ll need to act now.
We’re already nearly six months into a recession and things are only going to get worse from here. Investors who haven’t already safeguarded their wealth with gold don’t have much time left before stock markets begin their slide. Will your retirement savings be protected against the worst effects of the recession?