Reporting on the business environment through the years, I’ve covered unprecedented times many times over the years. I especially enjoy reporting on the unprecedented times when those times represented a great economy, low unemployment, and low interest rates. Here lately, those aren’t the unprecedented times we are in. So, how do we navigate this current situation? Knowledge! If you understand what is happening, you can better plan and prepare for it.
Starting back in ’08, we all went through ‘The Great American Recession’ (G-A-R). A lot of our colleagues didn’t make it through that one. But, a lot of them did, and are still alive and kicking. So what I’d like to do is give everyone a brief overview of what happened back then, and what is happening now, and the differences between the two. Because knowing what is really happening is the only way to navigate a disaster as it unfolds in real time. I not only taught that class for the Federal Government, but I also taught it to a lot people across the country in this industry, back then, as well.
The G-A-R was the biggest economic collapse since The Great Depression back in the 1930s. There is no unified consensus about what actually caused The Great Depression. But, there is a lot of unified consensus as to what happened beginning around October of 2007 that kicked off the G-A-R. Record high gas prices (like we have now) started in the late spring/early summer of 2007. Many economists agree that was the straw that broke the camel’s back.
If you’re old enough to remember that collapse, you’re old enough to remember the media droning on and on about the ‘sub-prime mortgage crisis’.
In a nutshell, a sub-prime mortgage is basically: “You seem like a nice couple, and that house looks like a perfect fit. Here’s a mortgage.” Many just skipped over the income and appraisal silliness.
A ‘prime mortgage’, on the other hand, is the one where they put your life, your finances, and the property you want to buy through absolute hell in order to qualify for the mortgage.
Both mortgages are perfectly legal, but there is one major distinction. The prime mortgage lender put you through hell because they were doing their due diligence because they were always going to sell that mortgage to other investors – worldwide.
The sub-prime mortgage holder, in theory, was always going to hold the mortgage through the life of the loan. Then something super shady started happening.
The economy was so strong back then that the demand across the world for US prime mortgage investment bundles outpaced supply. These bundled prime mortgages have always been one of the most secure, easily traded commodities on the planet. And guess who holds a few billion dollars’ worth of them? Major insurance companies!
Insurance companies are required to keep certain percentages of their investments in cash, or short term investments, in order to quickly pay claims during a disaster. US Prime mortgages are the perfect short term investment for these companies since they can be sold, and converted to cash, at a moment’s notice.
Remember the uproar when AIG Insurance was bailed out by the government in 2008? They were a victim of the super shady tactics that I talked about earlier. Here’s what happened.
When the demand for prime mortgages exceeded supply, some shysters, wearing tailored suits, silk ties, and expensive Italian leather shoes, started mixing sub-prime mortgages into the prime mortgage investment bundles. That practice, although illegal, went undetected until gas prices started shooting through the roof in mid-2007. The people that could barely afford their sub-prime mortgage payments before the gas crisis, now found themselves in over their heads. These people started walking away from their homes and foreclosures became rampant across the country. That’s when it was discovered that sub-prime mortgages, (which were never designed to be sold off) had been interjected into the US prime mortgage bundles and distributed all over the planet.
Suddenly, investors all around the world started discovering that the $200,000 mortgage that they were holding was worthless. Do that about a million times over, and one of the most solid investment vehicles on the planet was now not worth the paper it was printed on. BAM!
Suddenly, markets around the world began to collapse because of the fraud. I predicted back then that if the Dow Jones Industrial Average dropped below the 6,500 mark, that our economy would be unrecoverable, and it too would collapse. On March 9, 2009, that happened. Luckily, by the end of the day it climbed out to 6,597, and that became the bottom of the collapse. So, how did all of this affect all of us in the jewelry industry?
Prior to the G-A-R, gold had hovered around $400 an ounce for decades. When the stock market collapsed, people began to buy up gold as a hedge against the stock market collapse. That caused gold to go from $400 to around $2,000 an ounce. The jewelry business got clobbered because a repair that had cost $50 for decades now cost $300. A wedding band we’ve all sold for $400 for decades now sold for $1,850. People just said ‘no, I’m not going to buy it,’ or, ‘I’m not going to repair it.’
I know a lot of you out there survived by buying gold, but eventually, all of the gold that could be scrapped got scrapped, and gold continued to hover around $1,500 – $1,800 an ounce. And people were still just saying ‘no.’ It wasn’t a great time to be alive.
Now, the reason I just went through all of that was to compare it to what is happening today. What are the similarities, and what are the differences. First, the similarities; Gas prices are at an all-time high, inflation is at an all-time high, and interest rates are on the rise. That’s about it. The differences here are way more important to focus on.
Yes, gas prices are high, but we’re not likely to see an economic collapse of the worldwide economy this time because the sub-prime issue that facilitated the last collapse is not an issue now. It just sucks to fill up your car.
Interest rates are indeed going up, but they’ve been really low for a very long time. Interest rates are the one part of this equation that I’m not very familiar with, so I’m just going to leave it right there. If I learn more, I’ll write about it in the future.
But, a key element this time for all of us to consider is this; gold prices are probably not going to shoot up 1,000% to hedge against a collapsing stock market. As of now, the US stock market is holding its own. As of now, it doesn’t look like we’re going to have massive job losses like 2008. And as of now, it looks like it’s just going to be a pain in everyone’s wallets, but nothing like what happened in the 1930s or 2008.
Stay strong, overcome and adapt, and we’ll all get through this bump in the road as well. Hell, if we could get through a worldwide pandemic, we can get through this too.
Stay safe out there.
