Do not worry about Recession

Recession is a single word that scare everybody from President to Factory Worker.

What has happen in past 10 years is that American has created a lot of wealth due to Globalization and Innovation. This are the only two factor one can get rich. I discuss in my earlier post based on Bill Gross finding.

One can be rich by innovation, not necessarily in products and services but any thing to leverage the fortune. For example, CDO, (Financial innovation in 2005) make company like Blackstone lot of money. The second reason to get wealthy is to know how to use others people money. This is a broad topic and I cannot cover in detail here, but simple example would be Mortgage loan. This is wonderful instrument for anyone to make wealthy and rich. I will cover someday how to become rich and retire early.


Now lets talk about Recession, which generally refers to slowing in Economic Activity, such as Spending, Employment, and some other macro economic factors. Lets looks at Employment which is currently 4.5%, if it goes up to 6% still its not bad. There could be a mental distraction in the market but overall still not bad. The other big factor driving the economy is Spending, and it could be Consumer Spending and Corporate Spending (Capex). Consumer contribute 70% and Capex contribute 30% of GDP. As far as Capex go it can go down let say 20%, still its not bad if consumer keep spending. This is what happen in 2001-2002.

Now, what if consumer fall back on spending this will certainly cause the recession. But the key point I am trying to explain here I still have not heard/read from anyone yet, may be I am wrong.

Consumer spending will slow down if housing market goes down, intrest rate goes up or unemployment goes up. Nothing new here. How much it can go down? Not much. I mean it. As I mention earlier that consumer wealth went up significantly during past 10 years due to Stock Market went up, Employment remains low, Low Interest Rate for long time, Housing market was up, and probably some other reason. Here is the proof.

As you can see, Top 20% of American has 90% of total wealth. Or top 1% has 40% of the total wealth. It means that they (wealthy) drive 80% of people. This number is based on 2001, so by 2007 this number could go much higher, because this are the people who do investment. If there is big problem in 80% of people, 20% are somewhat affected. So when you talk about the spending this (20%) are people who significantly spend compare to other 80%. If something goes wrong, probably this 80% will spend less in Vacation, Travel, and some other discretionary spending. How much that could be very little compare to the 20% group.


Net.Net. Limited Spending and 6% unemployment would not cause the recession.