Are You Skinny Dipping?

“When the tide goes out, you can tell who’s been skinny dipping,” goes one of Warren Buffet’s all-time best one-liners. As a middle-aged specimen, I identify more with chunky dunkin’ these days, but again, this is a personal finance article, not a treatise on nude aquatic recreation.  That’s next week.

Tide History

The last time the tide really went out for most Americans was arguably the 2007-2009 financial and housing meltdown. Banks gave NINJA (No Income, No Job? Approved) home loans to anyone with a pulse, helping create a credit bubble.  Too many people took on too much leverage with too little caution.

When the tide went out (markets crashed for those of you not following the metaphor) those skinny dipping were the people who couldn’t afford their mortgage(s) because houses, stocks, credit, and jobs all crashed simultaneously. They couldn’t cover their obligations and many were devastated and probably would have traded being caught naked in a receding tide for their financial calamity.

Tide Predictions

We know that economic predictions exist to make seedy occupations (astrologer, fighter pilot, brothel pianist) seem respectable, but human behavior drives economic cycles, so we may not know when the next economic tide will recede, but we do know it will eventually. And it will come back in too (at least for some).  If the tide will go out, should we skinny dip? If not, what does clothed swimming look like, financially speaking?

Tide Preparation

In 2007, if you knew a crash was coming, you probably would have stock-piled cash, offloaded excess leverage, made yourself indispensable at work, and paid off credit cards. These ideas aren’t rocket surgery-level complex, but like many concepts, they’re conceptually simple and operationally difficult.

If you’re in the “Cash is Trash” tribe, it may be difficult to rationalize holding enough cash to survive a deep, prolonged recession.  There are at least two great reasons to play it conservative here. First, if you have cash and there’s a crash, you get to buy things on sale. Second, and this is where “a person with experience is not at the mercy of a person with an opinion,” credit can dry up during a recession (especially one fueled by financial shenanigans). In the 2008-09 recession, banks retracted credit cards, cut limits, canceled HELOCs, and called any loans they could.

If you’re in the “Cash is King” tribe, you might risk hanging out on the sidelines too long.  Can you fill in the blanks, “We have $XXX in cash (or equivalents) to cover YY months without employment/rental/pension/VA disability income, plus $ZZZ for capital expenditures/repairs that we normally keep.”? (Pension and VA disability income are included in this list because, well, that’s the current reality.)

Paying off credit cards and other unsecured debt is always in fashion, and getting out of adjustable-rate mortgages usually feels good too. Can you make yourself indispensable at work? Probably not overnight, but it’s never a bad time to devote yourself to your profession. If that’s not a factor, can you start a side hustle that’s somewhat recession-proof?

Cleared to Rejoin

A recession is a case of when, not if. If you weren’t in the workforce in 2007-2009, don’t be afraid to chat with those who were. There’s little harm in staying prepared for a receding financial tide. The discipline it takes to build chunky cash reserves is highly correlated with the discipline required to invest wisely over decades… which helps create wealth and weather bad times.  Non-(primary) Mortgage debt can drown us when financial times are good; it’s lethal when the tide goes out. Who knew skinny dipping could be so dangerous?

Fight’s On!

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