Recession Basics and How to Prepare for 2020 - Investing, Economics, Money and Finance

1. Intro to Recession Basics: Hi, everyone. Welcome to class Recession basics and how to prepare for one currently were recording this Class four skill share on Lee. So this class is made specifically for skill share students, and it's March 2020. So we are about to enter into a recession. So we thought it was very pertinent to make this class right now. Prepare you and your loved ones for a recession and how to prepare for one. So understanding the basics and how to prepare for one so a little bit about me. And what's most relevant in the situation is that I graduated college in 2008 with my master's degree at the height of the recession, so it was really intense. Half my Ernst and young class was laid off in the first month. Obviously, most people know what happened there in 2008 will cover some of those facts in a second. But again, I graduated during the recession in 2008 so I've been through one the most serious recession since the Great Depression, actually, so what we're going to cover today is the great recession of 2008 but also how to prepare for one and the basics of a recession 2. Agenda for Today: So what's today's agenda? We're gonna cover three things. First, what are the basics of a recession to what happens during recession, what we can expect? And, third, what can we do to prepare for a recession? That's what we're going to spend most of our time because the academic theory of recession , yes, it's somewhat relevant. But look, it's March 2020. A recession is looming. We've got to be prepared for a recession, and that's where we'll spend most of our time. This class is going to be less than an hour, just like all of our classes. We want to get over the person information as fast as we can so you can prepare for this. No lectures over three minutes. We'll keep you engaged will give you really good information throughout all of this. With that, let's get started. 3. The Great Recession By the Numbers Revised: So what? We decided to ones make a really cool infographic. And again you have access all these slides, the great recession by numbers. Okay, again, This was the biggest economic downturn since the Great Depression. Again, another recession is coming in March 2020. So what happened during the great recession in 8 2001 housing prices plummeted. They went down 31% because there was actually a housing bubble back then. Unemployment at the start of the recession at the end, with still 9% after two years. So in 2010 the him unemployment was still at roughly 9%. There were three million foreclosures in 2008 default became commonplace. Multiple people were defaulting and it just became normal to see your neighbor being evicted out of their house. The housing bubble. OK, what was it created by? It was created by lax lending standards. Everyone could get alone. They didn't verify income. You didn't have to have good credit. You could have been at your job for a month. All of these things were really really bad, which created fake prices created a bubble because people were buying council houses, cash that would not have been possible. So the housing bubble was actually created by the availability of home loans to freaking everyone. Gay. 465 banks failed. They were either acquired, were taken over by the federal government, leading to a global recession. Right. We thought Greece was gonna go bankrupt. There's so many things that could have been gone wrong. It was still a really bad recession, but it could have actually been worse. So these are the numbers of the great recession of 2008. Just so you're a little bit more aware of what happened again. Housing bubble causing housing prices, a crash, foreclosures all over the place. Don't Thoughts became commonplace and people were evicted out of their houses. 4. At Will Employment: So what's really important here? Okay, I get really passionate about this subject because it's really important to understand what is at will employment means in America. Almost every job is at will, which means you can get fired for any reason at any time. Okay, I could get fired for learning a blue shirt. I could get fired for coming into late three minutes late. I could get fired for coming in early. Actually, there are so many reasons I could get fired. Aiken get fired for cursing. All of those things are allowable reasons to get fired. And what you have to understand is in big, bold letters. Here, your job is not guaranteed. It's really important to understand that at all times, especially during a recession, because what companies are gonna try to do is maximized profit. So either make more money or what's in really easy thing to do is cut your costs where most companies cost people. Okay, so it's really important that you understand at will. Employment means your job is not guaranteed, and you could lose your job tomorrow and what we saw during 9 11 What we saw during the great recession in 2008 is that tons of people lost their jobs didn't matter if you and working for Lehman Brothers or United Airlines. People were losing their jobs left and right, and that's likely to happen again in 2021. We're entering this recession. Even if we get out of this recession, you have to understand your job is not guaranteed and you can be fired for any reason as long it's not illegal at any time. 5. Recession Indicators: Okay, so they're five. Recession indicators were not going to spend a lot of time on this because this is more the academic side of things. But it's important to know what the five academic indicators or recession indicators, as you can see here first, Real GDP. What is GDP mean? Gross domestic product. Think about all the stuff the United States makes right. Second is income. Third is unemployment, where employment fourth is manufacturing and fifth has reached our retail sales. Okay, so let's kind of go through them. Not a lot of time again, but just spend a little bit of time on them. So what you see is like incomes will start being reduced, right? Either people are gonna be forced to take pay cuts, work less hours or just get laid off employment going to be the same thing, so you'll see unemployment rise or employment go down. But that means that people gonna try to find job. But there will be no more jobs. Left toe work at manufacturing and retail sales. That kind of connected. If I start selling less stuff, I'm gonna stop producing less self right manufacturing. I'm not gonna be able to sell it. So why manufacturer all these toothbrushes if I can't even sell those, for example, right. And so retail sales is gonna be impacted as well. What's really important here is understand is that thes recession indicators work in lab. What that means is that they're measured six months later by the time that the United States announces that we're in a recession. We've already been in that recession for six months, which is already starting to happen. Now we see stock market start to dive. People are getting laid off, people are working less. That's how you know recession is looming. And so it's really important to know that. Look, you gotta look at your community right now. Ask people. Are they starting to work less? Are people getting cut back on hours? That's how you know, in the midst of a recession, do not wait for these economic indicators again. We have five economic indicators because they're measured on lack again. These are the five economic indicators, as you can see above me that relate to what is a recession 6. What is a Recession: So we made this, like nice infographic on what is a recession. You'll see unemployment rates start to rise. Consumer purchases fall off. That's a reduction in retail sales. Businesses go bankrupt, especially the ones with a lot of debt. People start losing their homes because they take on debt. We'll explain that later. In young people like college grads can't get a good job. Okay, these air five indicators of a recession in MAWR lay terms OK, unemployment rates rise, consumer purchases fall off, businesses go bankrupt, people lose their homes. And if you're graduating from college, you can't find a good job. And even if you're not graduate from college, you may wanna work. But they're no jobs right now, And that's when the unemployment rates start to rise. So it's important to understand what is a recession. We broke it down into a nice infographic. You can print out and post it on your wall. Now you can know what's happening during a recession 7. Recessions Happen Every 6 Years: So you may say, Hey, son, recessions are gonna happen in my lifetime. I don't gotta be worried about this. I'm really optimistic The economy is only gonna go up. Stocks are only gonna go off. The sad news for you is the average time between recessions is six years. You can see the information that we pulled from the U. S. Bureau of Economic Analysis and you can see the time between each recession. So we put previous months since the last recession again months, so you can see it starts at 36 months. 58 months, 12 months, 1992 months 120 months. 73 months in 100 17 months. OK, so we do a simple average of that. It's roughly six years between the recession, So recession, just like taxes and just like death are inevitable. They are going to happen. You have to prepare for a recession again. March 2020 were coming into one. Right now they happen about every 10 years. So the last recession we had with 10 4000 to 2010 it is now 2020 right? So this is the perfect timing for a recession is gotta come within the next couple of months, maybe in the next year, but most likely were in it now. So we're sessions happen every 6 to 10 years. You gotta know that's happening. Recessions again on our it happen every six years. So it's inevitable that you will go through a recession. You've got to prepare for one. 8. What Happens During a Recession Overview: So what is the recession? We're just going quickly. Do the summary and then we're gonna dive into the details. Unemployment rates rise, consumer purchases fall off, businesses go bankrupt, people lose their homes and people can't find jobs. People who just graduated young people, no one can find jobs. That's why you'll see unemployment rates start to rise. We're gonna now go into a deep dive into each one of these to cover the details. 9. Unemployment Explained: so unemployment rate. Okay, we talk about unemployment rate, but what does that really mean? Let's talk about that. Okay? So unemployment rate, you can calculate as unemployed, divided by the civilian labor force. However, to be included into the civilian workforce, you've gotta have a couple of things. One you got to be actively looking for a job. So, for example, of Sun decides not to work anymore and decides. Look, I tried to find a job. I can't find a job anymore. I just give up. I'm actually not included in that. So that's one of the problems with the unemployment rate. So again, you have to Actively, you actively will be looking for a job. And it does not include two people. Those who have taken a significant pay cuts. My company comes up to me and says, Hey, son, you know what? You could have your job as long as you take a 50% pay cut. Unlike band, there are no other jobs out there. I'm gonna take it does not include that. And if I were hourly and I was working 40 hours a week and they look to me and they say, Hey, son. You know what? Your bartender, instead of working 40 hours week, we just need you five hours weak. And I'm like, Damn, I should do that because I can't find any other jobs. I'm not included in the unemployment rate either. So as we talk about unemployment, rates start to rise. That's the worst case scenario. You're unemployed, right? But they're also situations in which I take a pay cut or I worked less hours, which essentially a pay cut, and I'm not included in the unemployment rate again. That's why we say unemployment rate is just one of the things that think about. 10. Jobless Claims vs Unemployment: so I'm updating this course as quickly as I can. But with this cove in 19 recession and possibly depression, it's hard to keep up with all the information. I am getting questions from students and they're good ones like son. How is unemployment so low? But the jobless claims so high, So I wanted to address that one now. So what are jobless claims and what's the difference between jobless claims and unemployment? Jobless claims are statistically who reported weekly by the U. S. Department of Labour that counts people filing to receive unemployment insurance benefit cumulative total 17 million in the past three weeks. This is a leading indicator, so think about it this way. Let's say that I sent home lost my job. I go apply for unemployment benefits. Okay, so I start receiving unemployment. I'm included in the jobless claims. So now what's the difference between that and the unemployment rate, which is like roughly 4.5% right now? Why is it so low? Well, unemployment is based on who responds to government surveys that are actively looking for a job. Bureau of Labor Statistics measures that monthly into a lagging indicator, so Now you see the difference If Sun Han apply for unemployment insurance, okay, and I'm getting it. But the survey hasn't gone out yet. Then I'm not included in unemployment rate, so I wouldn't really focus on the unemployment rate. What I focus on is jobless claims and there at 17 million, And if we go back to this next slide here and focus on the middle, we're seeing them. During the 2008 financial crisis, the high was 650,000. Jobless claims were at an unprecedented 17 million jobless claims filed in the last three weeks. This is astounding. I don't I mean, if you can't say that we're about to hit a depression, I don't know what else to tell you. I mean, this stuff is really, really bad. 11. Unemployment with your state: one thing that we wanted to clear off was the difference between unemployment as a recession indicator, right? The unemployment rate versus what is true unemployment. What's very important understand is the unemployment rate is a recession indicator. However, true unemployment, you can actually apply for unemployment if you've lost hours, Okay, In almost every state, you've got to check with their safe. But if your hours have been cut dramatically, then you can apply for unemployment. It doesn't really hurt to apply for unemployment. So check out your state rules. But you can apply for unemployment if your hours have been cut. So if you're under employed, you can actually apply for unemployment. So don't think that you actually have to been laid off to apply for unemployment. Your hours can have been reduced and you can apply for unemployment. So again, the unemployment rate that we just showed is a technical recession indicator. What we're looking for is operationally in real life. I r l, right. How do you get unemployment if you have been laid off or if you're number of hours have been cut, you can apply for unemployment and use Google, find it out and try to apply for unemployment. We urge you to do that as you look for another job 12. Consumers Spend Less Money: So the next thing that happens, right? We talked about the decrease in retail sales or consumer spend less money, which is a slide you see here just very clearly written consumer spend less money. Why? Unemployment rates rise. I get paid less. I have to take a pay cut. I work less hours, so I'm gonna spend less money. And that affects the economy. Because essentially, if I'm not spending any money, the economy wheels aren't turning. Okay, So consumers spending less money is a very clear indicator of a recession coming. And that includes me. It's March 2020. I'm gonna spend less money because I actually want to invest more money because stock prices are cheaper. We'll talk about that a little bit later on. But in general, consumers spend less money because they become fearful. We don't know where the economy is going right? So we're like, Look, instead of like, spending money, I'm just going to save it, which is a smart thing to do. So consumers spend last money is pretty self explanatory and pretty sure Ford. So that's it. Consumers spend less money in a recession 13. 2 Reasons Debt is Used: people lose their houses, right wire houses foreclosed upon. If I own my house outright, why would foreclose on it? I wouldn't if I bought my cows cash $100,000 house and I bought a cash. Wouldn't matter. The problem is, is that no one actually owns their house, right? We talk about this in our classes, all the classes that we teach. No one really owns their house. They make debt payments. So one wise debt used because people can't actually afford the house of the car that they have. If they did, they would just buy cash. Okay, so because they can't afford it, they're making these debt payments. And when you lose your job and you can't make your debt payments anymore, that's when you lose your home, okay, and that's when you lose your car. And that's what happens during recession. As unemployment rises, people lose their jobs. They don't make a much, and they can't make their debt payments. So debt is used throughout, society becomes commonplace and becomes the norm. When I don't think you should be using dead at all right, treat debt like it's the plague. Have you taken any of my classes, you know that. But that's why debt is used. And why debt is so bad during a recession is that you can't make those debt payments. And what do we know when you can't make debt payments? The bank doesn't come in and say, Hey, son, it's OK. Don't worry, man. You don't have to pay the house. No, they kicked me out and it take my house. That kick, they re pull my car if I don't make these payments. And that's why people lose their homes, okay? Because they've taken on too much debt and it can't make their debt payments anymore when they lose their job. Okay, so it's really important to understand that people who lose their houses and the people lose their cars are not the ones who pay cash for them. Right? I own a Jeep Wrangler. I paid for it. Catch? Why would the bank come take it? They don't because I own the title, Right? But if I didn't own the title when I stopped making payments than what happens, they're gonna repo the car while I sleep while I'm at work again. Same thing with houses you take out a 30 year loan on a house. What do you depending on you? Depending on that, you can keep that job for 30 years and that your pay is never gonna go down. I don't know if I'm gonna have my job six months from now. Right? The economy could change. And to depend on your income for 30 years, that's a really long time. And that's why people lose their houses during a recession because they can't make the debt payment, because recessions come every 10 years and people don't think about that. They go by house with 30 year debt, and they say, Look, everything is gonna be the same for the next 30 years. They're super optimistic that betting on hopes and dreams. We all know that a recession is gonna come on average every six years, and they're gonna lose their jobs. They're gonna have to take pay cuts. They can't make the debt payments. The houses, they're gonna be seized by the banks. 14. Key Takeaways: So one of the key takeaways with this right? People on Lee lose their houses and cars if they can't make their debt payments from member that your job is at will. That's why was such a big slide at the very beginning with the guy falling through, remember? And that at will in point means you can be fired at any time. Why debt is so scary that you have to pay it over 30 years. When you're taking a home loan out, you could be fired at any point. You wouldn't be asked to take a 50% pay cut. Your hours could be cut. And that's why debt is so scary. You're depending on your salary to be fixed for the next 30 years because your debt payments are fixed. They're not gonna change over the next 30 years on a house, but you cannot guarantee your salary, but you can guarantee you're gonna have to make those debt payments for the next 30 years. Those who own their cows is houses in cars outright. They don't have to worry about this. If they own 100% they paid cash for their house or a cash for their cars. They don't care for recessions coming, because whatever my Jeeps work on behalf of it, my house is worth half. It doesn't matter. That's actually good for me, right? If my house is worth less, I pay less in property taxes. So when I own a house outright for sessions, don't bother me, right? Because essentially, I'm paying less and property taxes, and that's good for me on a yearly basis. So what is the biggest take away here? Debt. Recessions affect those with debt disproportionately those the ones that people are going to be hurt the most because they cannot. They can no longer make debt payments. So getting really understand that during a recession, those who are going to suffer the most and feel the most pain are the ones that have a lot of debt or what we call in finance leverage over lever. They have too much debt. When things go bad, they can't make those debt payments 15. Businesses Will Go Bankrupt: So what? Businesses go bankrupt during a recession, right? You'd be like, Son, what? Businesses go bankrupt? Because don't they make more money that people will? Businesses are no different than people. They take on a lot of debt in finances. Really fancy term called leverage. OK, leverages. The same thing is debt. When businesses take on a lot of debt, they're highly Levern, which means they have a lot of debt payments to make right And what what we have learned is that cash flows or not guaranteed. In March 2020 we saw Cove in 19. What happened with Cove in 19 airlines started having problem because no one's flying anymore. Restaurant started having problems because why no one's going to them anymore. MGM in Las Vegas were just there. Right are starting to lay people off or furlough employees, which is temporarily fire them because no one's doing any tourism right. So cash flows or not guaranteed. And what's happening is that debt payments are still there. Right and debt payments have to be made. No one's giving forgiveness on debt payments, and so when you don't have cash on hand, you have problems because cash flows are not guaranteed. You still got to make those debt payments. Any company that I consult with, right As a CFO, I say that you have to have 90 days cash on hand. That's another fancy term for savings. When I say is 90 days means three months, you have to have three months of savings on hand because you don't know how bad things can get, right. Recessions come every 6 to 10 years. You can't sustain yourself for three months. You've got massive problems. So businesses again no different from people. Businesses that are highly leveraged, which means they have a lot of debt, are gonna have problems when recession comes. So that's why businesses go bankrupt. Not if you own everything out right. You're gonna be OK. You're gonna have a little bit less cash, little bit less revenue and be like, OK, and not a big deal. You can sustain that, but when you have a lot of debt payments, you cannot sustain that again Days. Cash on hand is really important for you as a business and you as a person. So again, that's why business go bankrupt because they have so much debt or what we call highly leveraged 16. How Bankruptcies Work - Student Question: So let's talk about bankruptcies. We're hearing a ton of bankruptcies we talked about hurts. There are a lot of, um J Crew, Neiman Marcus ton of retailers. Wherever you're living right now in the world, there's likely tons of restaurants filing for bankruptcy. But let's talk about in the United States, right? How does bankruptcy works? And it's similar in other Western countries as well. And including, like, for example, Argentina. So Chapter 11 Chapter 11 is a United States term. Just think of bankruptcies in two different ways. The 1st 1 is really organization bankruptcy. Okay, reorganizing a business affairs, using cutting massive costs, okay and then negotiating the debt repayment, usually extending in modifying the debt terms. So it's saying, for example, for Barents, in America with the home loans are saying, Look, I can't make this loan payment now. So instead of a 30 year loan, give me a 31 year loan, and in America you may see home loans goto 40 years and across the world, you may start seeing that the debt repayment is going to be a lot longer to reduce down their payments, right. And this actually reorganization bankruptcy happened to Argentina. This is wide applicable worldwide. It's obviously not called Chapter 11 in Argentina, but they reorganize. They said. Okay, let's extend our debt terms. Let's cut a bunch of costs. Let's do this. Let's do this. They're reorganizing. It's a very expensive to do a reorganization bankruptcy. So you should only do this if you see it. Hey, foreseeable, we're going to be OK. So an example of a non reorganization recently, which you would think eyes like, for example, Blockbuster. They would not do a reorganization because their business model was defunct. It was gone. And so like Now let's move into Chapter seven, which is a liquidation bankruptcy. When you file for Chapter seven, you lose control of your company. The bankruptcy trustee takes over the business assets and determines whether it's in the best interest of the creditors to sell the business as a whole or to sell off assets. If you're liable for any of the business debt. Personally, this may cause a huge problem. So what Chapter seven is is liquidation, bankruptcy and how this generally works is, for example, take retail stores so you could sell the entire company to somebody else. But generally, mostly for wanting to get out of retail now. So when you see retail bankruptcies, a lot of them are going to be Chapter seven because no one's going to stores and buying stuff anymore. So what they're going to say is, Look, let's do a liquidation sale. Let's sell all this stuff in our stores Let's sell off our real estate, for example, And let's break apart these companies and sell off the assets. And then what's going to happen is that the creditors that people who hold the debt for Chapter seven will get paid back something right? Send generally, like 30 to 70% on the dollar. So 30 to 70 cents on the dollar, they're not obviously going to get all of it back. They're only gonna get part of it back. So the next question I've gotten from students is what happens. The stockholders or equity holders. They're completely wiped out in both bankruptcies. Equity holders, for example, for hurts are completely wiped out. So then what happens to the creditors? In a reorganisation bankruptcy? They become the equity holders. They become owners of the company. They said, Look, you old me debt, you couldn't pay that back. Equity holders gone, stockholders gone. I'm gonna own your company now and then in Chapter seven, we just talked about it. They get paid back generally less than what they are owed, but at least they get some money back. So maybe 50% maybe 50 cents on the dollar. They get back. Um, and so that's the difference from a liquidation bankruptcy in a reorganisation bankruptcy. Okay, so when you hear bankruptcy, you can't always think like, OK, that's it. You're never going to see them again. For example, Gold's gym. There are going to be gold's gyms around. They just will probably shut down multiple gold's gyms that are not profitable. The last thing I would say is that warm buffet did a annual shareholders meeting that's available on Yahoo Finance. I would go see it. He speaks way more eloquently than me. Yes, it's very long. It's like three or four hours, but go check it out. I've watched every minute of it. It's a very, very good, and it's a very good update on the economy 17. Recent College Grads: So remember what we said. Hey, you know what, young people, they're not gonna be able to find good jobs when they graduate. The reason why is again employment is at will in America. Just because I give you a job offer doesn't mean anything. That is not as some guarantee that you're gonna come work for me. But what I'm saying is, if things are good and I have money, you can come or for me. Otherwise I'm gonna renege that job offer, which means I'm gonna cut it up. I'm gonna tell you not to come in. Okay, so I had friends are I have friends that work during 9 11 What Wall Street did during 9 11 was a offer. People lump sum payments. It's his best case scenario. They couldn't didn't have enough money for them to start. So they said, Hey, you know what, Sun? Here's $50,000 for you not to come in because we don't have a job for you. You can take the $50,000 you can walk away. Right? That's best case scenario in 2008. That didn't happen in 2008 when the financial crisis hit. They said, Get at, Get out there! Hit the road. We don't want you here. Ah, lot of people were escorted out with police officers. Can you imagine being 22 Just having graduated? You're like, man about to get my life started. You're making this money. You thinking everything's good And maybe you took on a ton of debt like you bought a new car. Could you deserve it? You got a house cause you deserve it. And then one month into your job, boom, you cut, right? And I saw that with half of my starting classes. I'm not talking to people, right, e y Starting class in 2008 Houston was over 200 means 100 people were walked out the door. So what's really important is understand that during the recession, right, young people, college grads are not gonna be able to find jobs in addition to other people and that at will, employment means your job offer that you're holding right now could be gone tomorrow. OK, so that is not guarantee anything, Which is why we'll talk about the art of side hustles class. Why it's so important to have diversify your income and have a second job, even if you're in college. One thing that I forgot to mention is that if you're not laid off during the recession, you'll likely be asked to work double. Okay, So again, I keep bringing up my e y experience because that would happen during a recession. So the reason why I worked 100 hours a week during my time, any why was because they laid off half the workforce, right? And so if I was slated to work 50 hours a week and half the people are gone, then my hours jump, okay? And so I was working 100 hours a week. So if you're lucky enough to have a job, be ready to work twice as hard number of hours will go up, especially if your salary, because they're saying is like, Hey, I'm gonna pace on X amount of dollars And if he wants 100 hours or 120 hours, 50 hours, I'm paying him the same amount. Of course, I'm gonna have him work 100 hours a week. It's better for the company. The companies don't care about you as a person. So again If you're lucky enough to have a job during the recession, you're going to be asked to work twice as hard. 18. Building a Capital Base: So before we move on, I think it's really important, understand network and the impact debt can have on you. Well, you know, it's like, Son, you're standing in front of cameras. Not really do that much. So what we've done is created Jenga blocks to show you what the impact of having a lot of debt can do on a person will go through somebody who has high network. So no debt. Somebody who has low net worth, right? And then somebody who has negative network negative network meaning they have a ton of debt in just a little bit of assets. You'll see what happens when they lose their job. The reason why this is so important is the likelihood of losing your job during the recession is pretty freakin high, right? And so it's important. Understand what happens to you when you have a lot of debt. So again, we'll cover these Jenga slide videos and you'll see what happens when you have a lot of debt and you lose your job 19. Capital Base Jenga Blocks: Okay, so let's talk about building the capital base. Let's use jingle blocks to show you the difference between people who have a negative net worth Ah, high net worth and a low network. So you can see here that the red blocks the red Jenga blocks do not represent some truth or dare Jenga game. The red blocks represent debt. The green blocks represent income or assets. So off to the left you see somebody with negative net worth because they have a lot more debt than they have. Incoming will go over through the details in a second in the middle. You see somebody with the high network. They have tons of different income, starting with an emergency. Fine. And then it screw. You find in a bunch of different other types of income in savings. And then finally, you have somebody who is off the right, which is a representation of my parents who have a low network. But they don't have any debt whatsoever. So these are the three different blocks to give you a visual analogy off negative net worth off to the left in the Middle high network and on the right hand side, low net worth 20. Net Worth Explanied: So let's go through the detail of somebody was negative net worth. So on negative net worth. What you can see here is that you have your main job, which supports your car debt, your house debt, Moorhouse debt, credit cards and student loans. You can actually think of this as somebody who just graduated, right? They graduate. They have one job they get, Ah, car. They get a house they can't afford. These two have credit cards, and they still haven't paid off their student loans. This is not different from the average American. So what about somebody with high net worth? Right. So let's look at the details of somebody with high net worth you would see at the bottom there, and we'll talk more about what an emergency fund is and its crew you find. But those are two things that are buttressed thing in their staff. Then you look into it, and they have a 41 K savings. They have more savings. On top of that, they have dividend income as an extra stream of income. They have one side hustle. Maybe it's a rental property. They have another side hustle. Maybe it's a business that they run on the side and then they have their main job at the top. In this case, we added a little bit of debt. Maybe they have $5000 a car net. Obviously, they can paid off really easily. And then finally, let's talk about somebody with low network somebody like my parents. They're refugees. They didn't have a college education, but what they didn't have is any debt. So we look at their stack. They have a 41 K at the bottom a side hustle, which is a rental house, and they have their main job. 21. Negative Net Worth: in finance. We do this thing called scenario analysis. What we say is what happens if this thing happened. So it's kind of life. If you're a computer science major and if then statement if this then this. In this case, we're to see what happens if you're negative network and you lose your job so we can see the stacks here again. Main job is at the bottom are looking at the left hand stack of Jenga blocks, right, tons of debt and one job holding all so we see what happens whenever you lose your main job and you have a ton of debt, your entire Jenga block comes crashing down. And that's what we want to prevent. Because what happens when all of its being budgets by one job and supported by one job, not on Lee. If you lose your job, everything comes crashing down. If you break your leg, you think you're gonna call out of work. If something goes wrong? Do you think you're gonna call out of work? No. And how do you sleep? You're gonna have so much stress because you know that if you lose your job, everything comes crashing down. And again. This is that average American, Which is why we're trying to prevent this for you. 22. High and Low Net Worth: now moving on to high and low net worth. Same scenario, and you lose your job, right? You lose some income. It's pretty obvious to know what's gonna happen here. Let's go through the video, but you'll see what happens. So you see here that you lose some income. You're okay because you have so many other income blocks. If you lose your main job in your low net worth, what happens, you're okay as well. So my parents were tired and they have a rental house property supporting them, and they have savings as well. So that's the thing when you're high that weren't in your low network with no debt, something could go wrong and you're okay. And that's the's air. The to this acts that we want you to be as you head out of college. So pay off your student loans if you have any as soon as possible and avoid taking on any additional debt 23. 4 Steps To Prepare for Recession: Okay, so this slides really important. Which is why we made this life full screen. And me smaller therefore steps in preparing for recession. This is what we spend the remainder of the class on the forceps and prepare for a recession or one. Avoid debt at all costs. This is before recession happens. Okay, five years before recession. Avoid debt at all costs to always have a second source of income. It's important to diversify your income businesses. Do this. You should as well. Three have at least six months of savings in cash. It's gonna be really important that you have this, because again cash flows are not guaranteed. Your job is not guaranteed. Fourth, always live below your means. People say. What does that mean, son? Well, that means can you save 25% of your income? If you make $100,000 a year, can you save $25,000 a year? If you are, then you're living below your means. So again, the forceps of preparing for a recession are one. Avoid ball debt at all costs to always have a second source of income. Three. Have least six months of cash on hand, and four always live below. Your means mean you're saving 25% of your income 24. How Society Confuses Us: it's important to avoid debt at all costs. Right? The first principle to pre being prepared for a recession wise that society confuses us with debt, right? They think they make debt normal. It's like jumping off a bridge. What your parents told you in your little if everyone jumped off a bridge, would you? And we say no as kids. But then everyone does that with debt. Everyone jumps off the bridge, right? Thats proverbial bridge, which is debt. And they take it on and we just think, Well, that person's doing it and that person doing and everyone's buying their house with debt. I guess I can to don't do that. That's how society confuses you. They confuse you because they say, Hey, son, you just put 3% down on the house. You own that house. You're a homeowner. No, I know not. I own 3% of that house. The bank owned the other 97%. That's how society confuses us. 30 year home loans, as you can see on the slide, are not normal. We just made them normal because banks want to earn a lot of interest off of you. Right? You won't pay interest over those 30 years. You may lose your job two or three times during that cycle because they're multiple recessions that say three recessions happen during that 30 year home loan, right, That's going to cause you to have a lot of issues, A lot of stress and 30 year home loans are not normal. What I recommend is, if you cannot pay off your house in five years, that house is way too expensive for you. I think you should buy house cash. But if you cannot do that, you've got to be able to pay it off in five years because what's gonna happen is a recession is gonna come, and you're not gonna be able to make those home loan payments and then you're gonna foreclose. And that's what it means when you can't make the payment. As you can see on the slide above me, they will foreclose on your house, OK? Because what banks want to do is get their money right? And if you can't get they can't get their money, they're gonna tell you to get the hell out, and that's what's important. So society confuses us with debt. They convince us that we own our houses when we don't. And when we can't make our payments over those 30 years, you miss one payment over this 30 years or two payments. Get out right immediately. Get out. They don't care about you as a person. They aren't saying Hey, son has cancer. His mom passed away. Whatever it is, they don't care. Did you make your payment Yes or no if you didn't get out. And that's what is important to understand. And that's why we say avoid debt at all costs. We're not gonna go into it with a credit card, and we're not gonna go into it with with cars, because it's the same exact thing you're buying things you cannot afford. And that's why you need to use debt if you're using debt. Because let's say I have $30,000 in cash and I want to take out this car loan for 25,000 because the percent interest 0% that go ahead and do that. But because if anything goes wrong, you can just pay it off with cash. That means you can buy with cash. You just don't want to way different than saying, Hey, you know what? I'm gonna buy an $80,000 Ford Larry it car bean truck. Right truck should not cost that much. And I'm only going to use that. That means you can't afford it. Same thing with the house. $500,000 house or $300,000 house. And it takes you 30 years paid off. You can't afford it. I'm sorry. Okay. And that's just the way it is. So avoid debt at all costs to prepare for a recession. 25. Side Hustles: the second core principle being prepared for a recession is always have to source of income . Every company is like this. They have multiple source of income. 10 and 15. Look at G E. There's so many companies with multiple source of income. So you didn't have your main job. But you can see in this yellow circle here plus a second income. You've gotta diversify your income. And you could be like, Well, son, how do I do that? While Great question, we actually have a class called the Art of Side Hustles where you can take our class to ensure your building skills so you can offer other things up and make money other ways. If you're dependent on Onley, your main job. I remember jingle blocks and we had said, You know, you have your main job, a side hustle, and then a screw. You find an emergency fund. What you need to do is have multiple sources of income in case you lose your main job. You've got something to fall back upon. Okay, What we call a contingency plan or a backup plan. Okay, so take the art of side hustles. Class could be really important to start your side hustle today because that's the best way to prepare for a recession because everyone could lose their job tomorrow. But if you have a second income, you at least have some financial support as you look to replace your main job. 26. 6 Months of Savings: So the third step in preparing for a recession Have six months of savings on hand because you don't know how long things can last again in March, 2020 Cove in 19 or in the middle of it. Right now, we have no idea how long this pandemic is going toe last. It could lost one month. It could last six months. Okay, We're about three weeks into it in the United States right now, And it could last for another six months. Right? And so you need tohave six months of savings of cash on hand. I recommend this to every company and work with as a CFL, right? Dates. Cash on hand is what we call it. We recommend at least 90 days, but in all actuality, they should have 180 days cash on hand. Because cash flows are not guaranteed. Your job is not guaranteed your at. Well, what we see with Cove in 19. United Airlines, Southwest Airlines, MGM, all of these companies. Yeah, they were making money hand over fist. All that stopped immediately. Once Cove in 19 came around. Same thing with the n B A and C double A PGA golf tours. Everyone is stopping all economic business because we cannot let the spread of Kobe 19 goal round right. Which means that cash flows have stopped. Restaurants are not making any money anymore. They're starting to shut their doors in Houston. What we're seeing is people were getting laid off, so income is not guaranteed. You gotta have six months of savings in your bank account in cash in case you need to make your mortgage payment and you don't have a job. And that's why six months of savings is so important. You have any debt, even if you don't have that, six months of savings is what we recommend to prepare for recession. You should have that on hand in cash at all times. 27. You Can Lose Your Job Tomorrow: I know I've said this before, and right now you'll be like, Son, I'm so tired of you saying this. But another reason why I have six months cash on hand again. You're at will. Employment. You could lose your job tomorrow. I could lose my job tomorrow. This is why brainy money is my second source of income. Okay, so six months of savings because you could lose your job tomorrow. That's it. Have six months of savings on hand. 28. Live Below Your Means: so the fourth and final principle of preparing for a recession is live below your means. Okay, This is such a good theory, tohave into practice throughout life live below your means. And what does that mean? Right, Like it? It's a pretty nebulous term. So we quantify that for you, if you can save 25% injure income, you're living below your means, and I don't really care what income bracket you're in. Try to save 25% of your income if you can. What that means is that you are living below your means in that eventually, when the recession comes, you'll be able to take roughly two years off. Okay? Why is that? Because if you're saving 25% of your income that in four years you saved 100% of your income. If a recession happens every 10 years, that means you have eight years under your belt of working. You save 25% year income each year, which means that you have two years of savings. Don't worry too much about the math. You can do the math and XLR on your piece paper. Trust me, I'm right on the CFL. I understand the math. What you need to understand is that you've got a live below your means. Okay? Every year you've got to save 25% of your income. Because if you don't that recession comes. It's gonna hit really hard, and you're not gonna have that savings on hand. Okay? So live below your means, save 25% of your income. That's another perfect way to prepare for a recession. 29. Difference Between 2008 and 2020 Recession: So the main difference between the 2008 recession in the 2020 recession is that nine big banks acted with recklessness. Okay, in 2008 they started giving out loans. What we call no credit check loans, no, no income verification loans to a lot of people who could not afford the load. OK, and what happened is that these loans began to default. And when they defaulted, they brought the entire economy down with them because millions of loans were given out two people who could not afford them. And so what happened was that millions had their houses foreclosed upon. Ah, lot of people lost their jobs, but the banks caused most of it. So people who lost their jobs were mainly associated with the banks. Now compare that to 2020 in 2020. What you're seeing here is that there's a complete grinding halt to the global economy, and so there's been four shutdowns up. Millions of small businesses think hair salons, barbershops, bars, restaurants there so many small businesses that had to be shut down because of this gyms, for example, my local glue Jim had to close down travel and leisure into C were hit hard Restaurant industry and retail business industries all hit very, very hard. Grocery stores were able to say open Amazon, where it was able to stay open. Cost go to a certain extent on DSO. What you're going to see is unemployment's gonna be a record highs in 2020 because millions of people are employed by these institutions, right, These small businesses and they're all going to lose their job. This is unprecedented on the impact that's gonna have to the economy. The two other things that are happening is that because people are losing their jobs or not spending any money right and these businesses were closed. So stocks and equities are plunging, they're going down 20 and 30% from the record highs of January 2020. In addition to that, I think about how many before driving their cars and using oil at this point significantly less so. Demand for oil has dropped significantly, so if you look in your current city in America, your gas prices are probably a dollar $58.60 per gallon versus $3 a gallon a couple of months ago, and then What's happening is that supply is shooting through the roof so OPEC couldn't come to an agreement from Saudi Arabia and Russia are spending are producing way more oil than they could have. So supply is going up. Demand is going down for oil, which is dropping oil prices to $20 a barrel, which is essentially unheard off these air The main differences between 2008 recession into 2020 recession. Many more people are going to be impacted by this from an unemployment Sandpoint. However, another big difference is that in 2020 banks are, well, more capitalize, er much more well capitalized. So foreclosures air Not likely not going to happen because Ally Bank B of A. They're all extending home mortgages by several months, deferring payments and making sure that customers they're not kicked out of their homes. This is good in one aspect. No foreclosures, no evictions. Bad for the customer in the long term. Because now that 30 year loan just became either 31 years or 30 years and four months, plus the impact of compound interest. We're gonna add that principal interest back onto load. So again, those are the differences between the 2008 recession in the 2020 recession. My prediction is that the 2020 recession is going to be worse in the 2008 recession because of two reasons. One unemployment's gonna be massively higher globally. Right? Restaurants are not disclosing in the United States. They're happening everywhere. There's Cove in 19 and in addition to that, oil prices are falling through the floor because no one's using oil anymore. And there so many gigantic energy companies. I'm going to suffer from this so again, I believe the 2020 recession will be worse than the 2008 recession. 30. Emerging Markets Impact Could Be Significant: So one thing that no one's talked about yet is a possible emerging markets crisis. Think about it this way. If Cove in 19 If the impact is significant on emerging markets, this could lead to a global depression. Why? Because death tolls could be significant, leading to record high unemployment and record low consumption and production from these countries. So we'll talk about what emerging markets are now, but essentially think about it this way. Think about India and Brazil. Can social distancing be practiced like it is in America or Western Europe, where you have big houses, lots of space and not a big population? Actually, if you think about the United States, air only 318 million people in the United States for the amount of land that we have, that's actually a pretty small number. So weaken practice, social distancing in places like Ecuador, Peru, Brazil, Russia, China and India. That's not so easy to do, and we'll talk about how this could lead to a global depression now. So what countries are emerging markets? We'll talk about four specifically, but I've listed here from Bloomberg a map that shows you all the emerging markets What is an emerging market? An emerging market economy is the economy of a developing nation that is becoming more engaged with the global market, right? So selling stuff to us and importing stuff from the United States countries classified as emerging market economies are those with some but not all, of the characteristics of a developed market, meaning like they're not gonna have, um, and equity markets like us like they can trade stocks. But they may have a lot of liquidity, for example, or they may have ah lot of ability to interact with the global economy. What you look for is not a lot of inflation. Control of the political landscape as well as an emerging market economy progresses. It typically becomes more integrated with the global economy. OK, that's globalization, as shown by increased liquidity and local debt, for example, in equity markets, increased trade volume in foreign direct investment. So companies in the United States and I will invest in your company in Brazil and the domestic development of modern financial regulatory institutions, right can have a lot of corruption because then no one can trust what's going on. Currently, some notable emerging markets economies include India, Mexico, Russia, Pakistan, Saudi Arabia, China and Brazil. So here's some key facts. If you're studying for the CF exam or learning getting in debt finance at all, it's gonna be really important to understand the BRIC countries. Bricks are Brazil, Russia, India and China. They represent 25% of the world's landmass, 40% of the world's population. 20 billion combined. GDP obviously couldn't be a lot lower than that in 2020 2.8 billion people in 650 million people in the middle class. What the middle class is determined, as is anybody who makes more than $6000 per year. Yes, if you live in the United States, that seems very low. But the cost of living is a lot cheaper in these countries. So per Goldman Sachs, anything greater than 6000 U. S. D. Is middle class. And why don't we talk about middle class? Because those are the people who can buy consumables. Who are they buying consumable goods from right? Diapers, soap, things like that. Well, let's go on to the next slide and talk about the American companies or Western European countries that are impacted by this. So here's a list of four multinational companies right, Coca Cola, Unilever, Nestle, Procter and Gamble, and I've listed the P E ratio. If you don't know what a P racial is tick, check out our investing 102 class were being talked about on the different measures that you can value. Evaluate companies in how we from a finance side from a cf a perspective. How evaluation works. So P ratio. 22 times earnings for Coca Cola 21 times for Unilever, Nestle 24 times in 62 times per p and G A. Proctor and gamble underneath them. If you don't know these companies, you may not know, you know Lever. But you do know Ben and Jerry's Dove acts Hellmann's Mayo and Lipton Zoe listed the company's underneath it for Coca Cola, Fanta, Dasani, Minute Maid, Powerade, Nestle, Durbar, Perry a mess, Quick Cheerios, Purina dryers. That's just some of them. All of these have more than 100 brands underneath them. Procter and Gamble Pampers bounced Downey type Charmin double rules. Always Gillette and Dawn. So what is the impact here looking Coca Cola 200 plus countries. You know, Lever No. 190 countries that they sell in 187 countries. Sell Nestle products in 160 countries. Sell Procter and Gamble products. Think about this. Coca Cola's even sold in places that have political instability. So I worked in, volunteered in South Sudan. We could get Coca Cola's every week delivered. Tow us in U. N. Refugee Kim's Coca Cola is selling in South Sudan. That should blow your mind. So 80% of Coca Cola sales outside the U. S. A. 60% of sales from emerging marks for Unilever, 42% of sales from emerging markets and 40% of sales from emerging markets for Procter and Gamble. So you can see here if the emerging markets cannot control Coben 19 and have massive death tolls because it can't practice social distancing the impact it's gonna have on the global economy. Coca Cola is valued at 22 times earnings because of not the sales they're making inside. The United States love. 20% of their sales come from the United States, 80% come from outside of the United States. So what you're going to see here is that is that if the emerging markets get hammered by Cove in 19 which my suspicion is that they probably will, because again, technology is not as good. Their hospitals aren't as good and social distancing. They just don't have it. Look at India, right? Or look at Brazil. The the cities are incredibly dense. 318 million people in the United States versus other countries. Think about that, right? And so if they cannot control that, what you're going to see is a massive devaluation of companies like Coca Cola and Nestle and Unilever and Procter and Gamble, because they are valued so high 22 times earnings because of the developing and emerging markets. Really important. Understand? Again, this is kind of CF a level stuff that we're presenting in this recession class, but it's good for you to know. Please watch are investing one of two class if you want to learn more about finance and learn more about things like the P E ratio evaluation 31. Global Impact in 3 Graphs: So we wanted to show some graphs here that show the impact on the global markets. Just three of them. First. How did the pandemic kit jobs? Okay, how did in this recession, how is it hit jobs? Look at the US, which we talked about A lot during this course is that the unemployment rate has gone up to 4.4%. But keep in mind the unemployment rate is a lagging indicator. Okay, so we know that the unemployment rates not 4.4%. If you live anywhere in the world and none of these percentages are really, really time, they're all lagging indicator. There's no way that China's unemployment rates 5.9 or Australia's 5.2 when jobless, claims that people implying for unemployment or some sort of state benefit is increasing at a dramatic rate across the world. Okay, so really interesting to see. Look, yes, the unemployment rate has gone up, but we know that's not right, because unemployment rate is a lagging indicator. So the difference between leading and lagging indicators is really important here. The plunge in retail sales as Copan 19 spreads case of what you can see here is when you are only looking at us and China here. The U. S has gone down negative 6.2% in China, down negative 15%. So again we looked at the impact across countries China, Australia and Germany, US, South Korea. All of them have had their unemployment rates increased to a certain extent and then the retail sales have gone down for both U. S. And China. This is a really interesting one. So the i m f the World Economic Outlook as of April, so old forecasts in new forecast. This shows you the impact of the recession. Okay, The International Monetary Fund cut its GDP projections for all regions. Here's the world. Here's the US Here's China. Here's Japan. Here's Germany. So look at gross domestic product in the world in April. I mean, in January it was spoke, predicted to go up maybe 3% roughly and now it's negative. 3%. Look at the U. S. Okay, roughly 2% increase in GDP now negative 6% roughly China, plus 6% now plus 1% Japan plus 1% now negative 5%. Germany plus 1.5% roughly and now negative 7%. So this is the impact on the global economy that this recession is having. And the I am meth projects the GDP to fall for every one of these countries U. S. China, Japan, Germany. These are all developed nations, right? The difference between emerging and developed nations. We've already learned now. But look at the impact on the developed nations which strong health care systems, etcetera vs emerging markets. 32. Steps to Keeping Your Job: so the steps to keeping your job. We got some questions from students about this, and we wanted to answer it. The 1st 1 is never complained. Whatever your job is in, whatever you're doing right now during a recession, do not complain. Be grateful that you have a job. Be thankful that you have a job. So one never complained to take on war. That's not yours and ask for more work, whoever your manager is. If you're working at McDonald's or Chick fil A or a manager, the wide just raise your hand and say, Please, is there anything else that I could do? Okay, ask for more work. Three. Bleed. No job is beneath me wherever you work. OK, so at ey, during the recession, I was asked to order subway, pick it up, pick up 30 sandwiches. Each sandwich is slightly different, right? One came with salt and pepper, one with no oil and vinegar, one with oil and vinegar that was not beneath me. Had a master's degree C p. A. In the c f A. And that's what I was out. So I said, OK, right. And so no job is beneath you. No matter where you're at and four beer bosses executive assistant. What we mean by that is whoever your bosses watch them closely. Okay, What that means is watch them and make their job easier. Whatever they're trying to do, make their job easier. That's essentially what you're paid for. So what I do, for example, is if I see my CEO and we're having a coaching session one on one session and I know she has a meeting at 1 30 then I'll say, you know what? The meeting's ending At 1 30 it's 1 28 now, so I think we should end it. So you have time for your next meeting or reminding your boss to pick up their kids. Those type of things could be very helpful, making your job your bosses off a lot easier. 33. Making a good impression: so making a good impression. Another question from the student. Be ready to work twice as hard. If your salary and you're still employed during a recession, what's gonna happen is that they're gonna lay off half the workforce, right or part of the workforce. 10 2030% of the workforce. So if you're left, if you're lucky enough to still have a job, what's going to happen is that you've got to take on more work. You've got to be willing to work twice as hard. Be ready to do multiple jobs. During the tail end of the recession of 2008 I was working at an energy company. I both worked in accounting in FP in a from 8 a.m. to 5 p.m. I worked for P and doing financial modeling things like that from five PM to midnight. I worked in a county Okay, so I had to separate jobs to separate deaths. Same computer, actually. So I used the same laptop, but still two separate jobs in two separate death be ready to take on multiple jobs no matter where you work. And that's saying contact with your network. Whoever you come in contact with are currently work with or work with previously saying contact with them. Ask them how they're doing. It's gonna be really important to ensure that you maintain your network either through linked in or through personalized emails. 34. Working 100 hours a week (Amazon and Grocery Store Workers): Another question that I receive from students is how did I manage 100 hour work weeks? Yes, it was very tough. Okay, no question about it. To give you a personal anecdote, I was driving home one day. I think it was like 2 a.m. I drove into my apartment complex and actually hit one of the parking polls in my apartment parking garage. It was tough. I, you know, damage part my car. I didn't care. I just walked in and went to bed because I was so exhausted. So one. It's just tough and recognize that to utilize your support system, my parents help clean my apartment, quashing drive my clothes. Things like that were very small things, but very big to me. So utilize your support system. I also vented to friends that were in the same exact situation is me. They were working 100 hour work weeks and we vented to each other and three try to stay healthy. I know this is really, really tough, but try to work out a couple of times a week on Sundays were allowed to come in late at 9 a.m. So we try to work out before that. If you're working at a large corporation like an E Y Deloitte, KPMG, Goldman Sachs, The Evade. If you're working lot, they'll bring in lunch and dinner for you. Generally, that's unhealthy. Just because it's all take out food, right? So try to bring in your own lunch, if possible. With Kobe. 19. Most of us are working from home, so right now, if you're working a lot, try to make your own food and try not to get take out. 35. Saving During a Recession: saving during a recession should be easy, actually, because what happens is if you have a job, you should be working so much that you don't have time to spend any money. Okay? So save as much as you can because this is a time to build wealth to invest in the stock market. Onley, invest what you can lose, right, But a good time to invest because everything is so cheap. Pay off your debt. Continue to pay off your debt during a recession. Do not try not to at least take any extensions on loans because that just means more interest because they're going to capitalize your interest in principle and make you pay interest on that. 36. Recession = Opportunity: The last message I want to say to you is that you're going to be okay. What a recession brings is opportunity. There's gonna be lots of opportunity to work twice as hard. Think about it this way. I d Why worked 100 hours a week, right? So over the course of one year actually got two years of experience. I was a salaried employee, so they didn't have to pay me any more. During bonus time. I was actually rewarded, but still, I didn't get paid anymore during that entire year for salary purposes. So why was getting twice the amount of work out of me for the cost of one person? And that gave me tons of experience that eventually paid off. So don't worry about the money right now. Work as hard as you can gain the experience, and especially if you're younger, like you just graduate from college. A couple of years out of college, you went from paying to get an education. That's what college is right to now being paid to receive an education to learn from people toe learn from partners and managers and and DP's Andy VP's. That's the best part you're being paid to learn. Doesn't matter what your paid rate is right now. Don't complain about your salary. Just work as hard as you can. Everything is going to be OK. We come out of recessions. We've been through several of them as an economy. This is no different. We're going to come out of it. We're going to find a cure for Kobe. 19. You're going to be okay. You just gotta work hard right now. 37. Take Any Job That Pays In A Recession: The one thing that we wanted add to the recession course is that a lot of jobs are opening up. We talk about recession equals opportunity. Okay, So your local grocery stores here in Houston, we have HCB Kroger. These people are hiring Walmarts. Hiring an Amazon is hiring. What you have to understand is that if you lose the current job you're at, there is no job that is beneath you. Take whatever job you can get during a recession and earn money, okay? And so that's gonna be really important. As you do this, as you go through a recession is to seize every opportunity possible. You're still gonna learn stuff. You're still gonna earn money, right? And so try to get those jobs that Amazon work overnight. Stocking groceries sells. Nothing should be beneath you. Grind it out. And that's a core principle of Brady money. You gotta grind it out. Not every job is gonna be Kush. Sit back behind a desk and relax. That's not how life is. So grind it out and make your money the any way possible. During this cove in 19 recession 38. 2020 Explained - Two things happening stocks decline and oil declines: so we've gotten a lot of questions related to the recession, so we want to add some optional pieces around the 2020 recession and going into a little bit of a deeper dive, especially since we've been in the recessional longer. Now Congress has acted, new bills are in play, so now we have a little bit more information to tell you. So we love talking about this. Please. I'm watching videos if you want to learn more their super informative and it's really important to learn about this recession because we're gonna hit another one. So it's important to understand how recessions work. This one is unique because two things are happening at once. First, what you see is a sell off on the stock market, and second you see oil drops, oil prices dropping. So first wire, the stock markets selling off because there's a lot of fear, right, A lot of unknown. We don't know how the economy is going to do so. What people are saying is, I'm gonna sell out right now and I want my cash. So what happens when you start selling out right? It increases the supply of socks and what that's going to do is gonna drop down the price. And so you see the overall equity markets like the Dow Jones and S and P 530% off their highs in January, okay, which represents a really good buying time. If you have money to lose, right, you Onley, invest what you can lose. But what you're seeing is again that dip in equity markets. And it's a dramatic and precipitous drop in the stock markets again by 25 30% as we're sitting in March. April time, period. So in a couple of months it's dropped really, really quickly. So that's a drop in equity markets. And then you're seeing a drop in the oil markets, which is hitting Houston especially hard on. We'll talk about that in one of the other sections. 39. 2020 Explained - Stimulus Bill Intro: So how's the government coming in to help you out? Right? The stimulus is being done. The stimulus bill just passed in March 2020. What we're seeing is a $2.2 trillion bill, and what it's doing is it's helping direct payments straight to individuals. Okay, these air direct cash payments, low cost loans that small businesses bailout for hard hit industries, for example, airlines and then improved unemployment benefits. So the states are now given additional monies to send to the unemployed. It's right now $600 additional toe whatever benefit you're currently receiving. Also, you're seeing the private sector help out as well. To a certain extent, I use help out very carefully here. Banks are extending mortgages okay to up to a year. What they're saying is, you can delay your payment, understand that there's an incentive for the banks. Banks don't just lose money. There is no free lunch. So they're extending the payment. So evictions and foreclosures air not gonna likely gonna happen to the extent they did in the 2008 recession, and we'll talk about that more later on who is not going to be helped? Unfortunately, college students. College students are dependence over the age of 17 and the bill specifically says they're not going to receive that one time stimulus check if you're dependent over the age of 17. 40. 2020 Explained - Individuals and Businesses Can't Handle Recession: So what's also really important is individuals and small businesses can't afford this downturn. Nearly 40% of Americans say they cannot handle $400 cash expense. Okay, And we talk about this a lot in our classes, and now what you're seeing is that they're going unemployed for multiple reasons, and we'll cover those reasons in a second. But you're seeing that they can't handle this. OK, Public and private schools are closed for me, nearly 30 million Children. So what that means is that now, if you're a parent and use, actually still had a job. But you have a three year old at home that doesn't have a school, right? Our four year old or a five year old, then what you gotta do is either say, Hey, I can't go into work today, so you've got to either cut your or ours, or eventually you'll get laid off, and that's what we're seeing as well. Luckily, the federal government has come in and said that we can still feed students so students are still getting their lunches, which is really, really good for low income students. A 2019 report from JP Morgan looked at 1.4 million small businesses, Okay? And they found that 29% of the businesses in a typical community were unprofitable and 40% had less than two weeks a days cash on hand. As a CFO, I always recommend having at least six months days cash on hand. D C O H is what we call it. So if you ever decide to start a business, you've gotta have that rainy day fund to say If I don't make another dollar, I can manage myself for six months. If not, what's gonna happen is you're going to fold during the next recession, which is what's happened in small businesses. Now, stimulus money will take 4 to 5 weeks to get to individuals and businesses. If businesses cannot support themselves for 1 to 2 weeks, as the JP Morgan Chase studies show, they will fold right. And that's the bad part is that even if the stimulus is passed, if the cash is and gets them quick enough, they'll fold. Andi individuals could be under the same situation, although at least they're not gonna get evicted because courts are closed. In addition to that, banks are extending their mortgage payments by up to a year. So instead of a 30 year mortgage now you have a 31 year mornings, which that's a really long time for debt so related to mortgages and evictions and foreclosures are less likely to happen during this recession than the 2008 recession. In 2008 you saw three plus $1,000,000 foreclosures in addictions. But hear what you're seeing is that Fannie Mae, Freddie Mac and a lot of the big banks are saying, Hey, you actually have more time to pay off your loan. So instead of a 30 year loan, you have a 31 year loner instead of a 15 year more. You have a 16 year mortgage. What's happening here? The banks are saying, You know what you can't pay right now will delay your payment, But again, the banks, we're gonna make money off you. How are they going to do that? They're gonna capitalize the interest that you didn't pay in that principle and they're gonna charge you your interest on top of that interest. So, again, the banks, we're gonna make money off of this. There's no like, Hey, we're just being kind. What they're saying is, look, it's actually less beneficial to kick you out, Read rather extend your payments and make more money off of you over the life of this loan . 41. Operating Leverage - Student Question: So another question I got was, Son, why is debt so bad? You talk about debt a lot, and it's really is it really that bad? Um and so let's talk about now. We have a separate class that we're creating his own, actually, how to be a CFO. Okay, so I'm a chief financial officer, and it's important that you understand that's CFO's think about this. But not every small business owner, like a restaurant have thought about this. Even some large corporations. Let's example. Hurts hasn't really thought through operating leverage and fixed costs and debt as well. So what is operating leverage? I'm going to go through this slide with you, and then I'm gonna talk about it, Okay? Operating leverage is a measure of how much debt or fixed costs a company uses to finance its ongoing operations. Um, we don't know what fixed costs are yet. We're gonna explain that in a second, companies with high operating leverage must cover a larger amount of fixed costs each month , regardless whether they sell any units of products, and we'll go through an example low operating leverage Companies may have high costs at very directly with their sales but have lower fixed costs to cover each month. Those air called variable costs Okay, so there are two types of cost. You have to understand fixed and variable costs. Let's say that we're running a pizza hut in this examples. Fixed costs as you pay these costs. If you sell a pizza or not, fixed costs would include full time employees. Salaries. Rent an annual franchise fees. Let's say you pay a monthly rent of $5000 a month if you sell one pizza or 5000 pizzas, that is what we would call fixed costs. Okay, and think of that as your mortgage payment. Mortgage payments have to be made no matter what. If you make money or not, you're making a mortgage payment. That's the same thing with restaurants. They usually lease their spaces, but that's the same thing. It creates a fixed cost, no matter what. If covert shut them down or not, they're still paying their leases, which is why a lot of them went out of business. Variable costs. You can pay these costs on Lee if you sell a pizza, so variable costs include pizza ingredients like dough in the pizza sauce. You Onley pay these if you sell a pizza. Okay, Obviously I'm over simplifying things here, but you've got to understand the difference from variable and fixed costs. And that's why we warn against debt in your personal life. Because debt in your personal life is a fixed cost. You've gotta pay this no matter what. Think about all the people who bought brand new cars in Western countries like America and Europe right before the 2009. I mean 2020 Cove. It hit right. They bought a car. They're not even using it anymore because everyone's working from home or businesses got close. That's a fixed cost. Let's say they pay $600 a month for that car that you just bought because they used debt. Well, now you've got to pay that no matter what. I guarantee you anyone who bought a car before the cove it hit, they are regretting it because those costs have to be paid and their income could have dropped because of furlough or therapy. Hourly employees, the number of hours they weren't definitely dropped. So an example a real life examples hurts, right? They filed for bankruptcy because they used debt to lease all of their cars and they had to make the lease and debt payments even though no one was renting their cars, and thus their operating leverage was through the roof and they filed for bankruptcy. The reason why we used hurts is because everyone knows about them. They're worldwide. And we know we have students from all over the world. Everyone's heard of hurts. And the problem is, is that they didn't all of these cars. They issue debt to buy them. So they were doing exactly what a lot of Americans do. They go take out a loan for one set of one car. They have thousands and thousands and thousands of cars that he took dead out on. And they were waiting for people to rent them and they would make their monthly payments. Well, when everything shut down, they couldn't make it. And then in May 2020 they filed for bankruptcy. So this is the example off. Why debt is so scary is because it creates a massive fixed cost. No matter if you sell one pizza or 5000 pizzas, you're paying the same fixed cost, okay? And That's why you want for side hustles in for small businesses, you want a lot of variable cost, so when things go down when you're not selling as much, you can reduce down your costs. 42. June Update Stats and USA Debt: so I want to update our class with June stats. So now it's June 2020. We made the recession course before the recession started, and now we have some updates from June. So in June, approximately five million Americans asked for four Barents on their home loans, meaning they can't make it. The federal government came in and said, You can't evict them. So what they're doing is extending their loan. So by default, most home loans are now 31 years. Because most people take out a 30 year loan, they can't make the payments anymore. And they're saying, Hey, I can't make payments for six months or three months or whatever it is So they're extending that loan by another year. So four Barron's means you can't make the payment. But the banks aren't evicting you, so five million people cannot make their home loan payments. Notable bankruptcies include J. Crew, Neiman Marcus, J. C. Penney and a ton of other retailers. Gold's Gym Hurts, which is an international car rental company, filed for bankruptcy as well. We have some slides over bankruptcies because I know we talk about it, but we should go into some detail now 40 million people Total file for unemployment in America since the start of Cove in 19. That's how intense it was and how much and how bad this still is. Almost 40% of households earning less than $40,000 U. S. Dollars experience at least one job loss in March. So what you're seeing is that the Cove in 19 has more of an impact on the low income communities in America. The personal savings rate hit a historic 33% in April, according to the U. S Bureau of Economic Analysis. They said that on Friday, usually around 8%. Now it's 33%. So why is it so high? One big fear, right? Everyone's getting scared. They're watching classes like mine and saying, Look, I do need to be prepared So what we can see is my class and classes like mine are getting the message across that people need to start saving money, and they're doing in there doing it Well, 33% of the disposable income is now being saved instead of 8% so they are building that rainy day fund in. The second reason is that no one else is spending money with restaurants closed in a lot of retailers shutting down and filing for bankruptcy. What you're seeing is that people feel poor when my neighbor, let's say, John goes out and has a really nice dinner and Mary over there's buying a new car or whatever. But when everyone is saving, then no one really feels that poor. And that's what's happening is that everyone across America is saving, and this is likely happening in other countries as well, because so many retailers and restaurants are closed. So another question I've gotten from students is well, the United States is issuing a lot of debt. And so other countries, they're doing this as well. In the Western in Europe, for example, lot of Western countries are doing this. And so what happens? Why wouldn't the United States default? And this was a really good question that I bought in from students. So what I wanted to a do is address that question. So the reason why is that the U. S. Issues debt imprints, US dollars? Look at the fed balance sheet. The Fed balance sheet is listed below here at the bottom of this slide and you can see what's on. This is the assets that fed Oh, the Fed Reserve has the federal balance sheet, and it's gone from, you can see, During the 2008 recession, it was down here at about one trillion, and now it's over. Almost $7 trillion. Okay. And what does that mean? Means that seven trillion more dollars got injected into the economy in the United States. So why is not why is it not a risk? Right. So taking a look at the balance sheet of the Federal Reserve or, for that matter, any central bank like the European Central Bank for our European students is like seeing the eighth wonder of the world unlike any other business enterprise that Fed can expand its balance sheet by printing as many dollar bills as it wants. It's like creating wind by merely waving your hands. There are many practical limitations, and pretty money may not always be good for the economy, but during economic crisis is the Fed can expand its balance sheet, which you're seeing at the bottom of the slide by buying more assets such as quantitative, easy, okay, and so I'm gonna link you to the Federal Reserve website. You should go check it out. It's like very interesting. Gets updated every Thursday. But think about it this way. If I could issue a currency, call it Hawn dollars. And I had a printing press printing on dollars. I could borrow money and Han dollars. I would never default, right? Like, think about that. I would never default. I borrow money and I print money to pay back what you get in. Purchasing power can be in doubt, but when S and P downgraded the U. S. Government a few years back, that does not make sense to me. And we'll talk about how this right now is different than a country like, let's say, Argentina, which is on the verge of another bankruptcy. They filed for bankruptcy in 2016 and had to reorganize their debt. Argentina is lent mostly let money, mostly in US dollar, from big institutions in America, like BlackRock. Okay, so since Argentina cannot print US dollars to pay back their U. S. Dollar debt, the risk of default is much higher, especially when their economy is not doing well. Member. I talked about emergent economy is not doing well during Cove it. Argentina, maybe our first country that files for bankruptcy because of covert 19 on and you can Google that and look it up. But again, Argentina's issuing debt in U. S. Dollars. They cannot print US dollars and paid back, and that's why the risk of default is much higher. But again, great questions from our students is The reason why the US won't default is that they can print out money to pay back their U. S dollar debt. So there to websites I think you should go to one is I am meth and we're on it right now. Okay, this International Monetary Fund and what you can see years where they're predicting the GDP for economies to go from over the last 40 years from 1980 you can see it, and then you can see what's happening in 2020. You can see that there's a negative 6% drop, um, in advanced economies. So this is slamming the entire world, and you can see what the IMF is doing. So I m f dot org's for wherever you live in the world, and it's really important to look at this because wherever you're living in the world, there is a prediction on where your annual percentage change in real GDP growth is going to go. So it's important to know where it is going for your country. For the United States residents, the federal reserve dot gov websites really interesting. And this is where you'll find the Fed balance sheet that we've already talked about so again to really cool websites federal reserve dot gov And then i m f dot orig and watch this check in on it every probably month. Be really important to see where the real GDP is going for the world, and you can see here is the last great recession. Advanced economies contracted by negative 3% and now it's already at negative 6%. So this is obviously way worse than great. Recession is what we predicted before this occurred, and we were right 43. 2020 Explained - Why the recovery will take time: So people have asked about the recovery. The 2008 recession in the 2020 recession again are different. We talked about unemployment being much higher, and that's why we think the recovery is going to take a lot longer. Right? So currently we're at three million unemployed and people say, Well, you know, son, if the covert 19 restrictions get lifted, the economy's gonna come right back to normal. I don't think that's gonna be the case. And here the reasons why First, a lot of people lost their jobs and they will have permanently lost their jobs. Right? Small businesses are closing, so they actually don't have a job. At this point on DSO unemployment is going to be high. Even after Kobe 19 restrictions are lifted because small businesses, the ones without enough cash on hand actually closed for good. Right? So that's gonna happen. And if you didn't get unemployed right and you weren't laid off, do you have the same amount of confidence? Are you gonna go spend $100 on dinner? $150 at the bar? Likely not, right. And so your consumer confidence, you're gonna say, Look, I'm not going to spend that much money. So you have two people, right, one unemployed and the other one still employed. Neither room have as much disposable income because they are saving more if they self a job . And if they don't have a job, they're getting unemployment checks. And they're not going to use that to consume right on at restaurants and bars and things like that. So that's why the restaurants completely shut down for the long term and unemployment be a lot higher for a lot longer. Secondly, small businesses that cannot survive right again that we've talked about that don't have a lot of cash on hand are going to be permanently closed. The stimulus checks are going to take weeks and months to get here, so these businesses aren't gonna be able to sustain themselves. Some of them will, but a lot of them will not. So the again the small business will be shut for good. And then, finally, certain industries are suffering massively during this recession. Easy one to call out our cruise lines, right? Cruise lines, our headquarters, not in America to avoid taxes, so the stimulus is not gonna help them out it is likely that at least a couple of these companies are going to go banquet. Big, corrupt, No region Airlines has like 1.6 billion in cash, so they're a lot better off. But what's keeping the company afloat right now is that they're they have credit lines if they can pull on. But eventually, as we know, debt comes due and that's when they're gonna bank go bankrupt. And that's what you're going to see. Cruise lines employ lots of people, right? And so that unemployment rate is going to be really and then energy companies, as we talked about before it took on too much debt. Right? And oil prices are way too low for them to be profitable at this point, and they can't take losses for that long. So what, you're gonna see a Houston? This city's going to suffer a lot more than other cities because we're very oil and energy dependent 44. Saving Money During COVID 19 Recession: So the other thing that's idiosyncratic about this recession is that people want to work, can may not be able to work right, And that is the reason why is this cove in 19? So they're too afraid to contract over 19 for a multitude of reasons. Maybe they're at risk where they have someone at risk in their house. So what we want to present is one major way to save money. It's called the storage option with their car insurance. So if you call your car insurance and you tell them I'm not going to drive the car anymore , and you cannot drive the car anymore because you are unemployed and you can walk to the grocery store than what you could do it to a storage option. But caveat. Do not drive your car because it's not covered it for an accident. So if you do this, what you want to do is not drive your car, and it will be able to cut your insurance premium by about 50 to 70% per month. So if your monthly payment was $200 you can cut it to below 50. This is a huge way to save money again. Call your insurance company and tell them you want the storage option. And how much does that cost on a monthly basis with your car insurance? The second thing and this is pretty obvious. Stop unnecessary spending. Don't go to local restaurants. You don't need to support them if you're unemployed. If you're unemployed, you need to eat spaghetti. You need to eat for nutrition. So what you need to do is focus on the cheapest food possible that can keep you sustained. You gotta be able to save money, places, and food is one really big place that you can say. Okay, so that's what we were highly recommend. Focus on saving money by not going out to eat. 45. Possible Outcomes - Bull Case Bear Case: so I wanted to end with this. What's the bull case in the bear case? And I took this from Howard Marks. He is from Oaktree Capital Management, billionaire investor and a writer as, well, American Investor. So let's talk about the bull case. Okay, so this is that everything goes well. Everything opens up in six weeks. The unemployed can go back to their old jobs or, as true Americans. Bootstrap. What bootstrap means is like create your own business with no outside money, no VC money, no nothing. You just start your business on your own economy. Back to normal within six months. Two trillion and p e dry powder. PES private equity. $2 trillion means that they have $2 trillion cash waiting to do something with incredibly low gas prices, which we've talked about 0% Interest rates pour fuel onto the economy, making it even better, right? The roaring twenties means the 20 twenties now and then the bear case. Okay, this is the bad part, right? In soft markets, bull means a good market bear means bad bear case. Unemployment surpasses 20%. Everything does not go back to normal before at least two years, and in the meantime there's a huge demand shock. The effects of the lock down on businesses as well as the oil shock create depression like conditions globally. Emerging markets and developing nations suffer tremendously, possibly leading to an IV, er, even deeper global depression. I believe that we're headed towards the bear case. This is why I have so many income streams because I'm not sure which income stream I'm going to lose. But I'm preparing for the worst case scenario. I do believe it's Barry Case because we already have 17 million Americans filing for unemployment. And if the United States can't test in Western Europe's having problems testing it, how is Brazil Russia in the Howard? They gonna know how to control this. If we can't even do it in New York City, it is running rampant number of deaths in excess of 700 people per day, mass graves being built. I mean, if this the United States can handle it, how can these emerging markets handle it? And we've already went over how Pepsi, Coca Cola and all these other companies have 50 and 60% of their sales from emerging markets, so in the long term. I believe the United States is gonna be OK over them, you know, five year period. But I do believe that the global markets in the emerging markets will lead us to a global depression. 46. Art of a Side Hustle - Build Skills Now!: So now you understand the basics of a recession and how bad it can be. What's really important here is that you invest in yourself. A recession is a great time to do that. Because a lot of people are gonna be disheartened. You need to be incredibly motivated. So what we recommend is the class the art of a side hustle. Starting your freelance business that we teach on skill share. Please invest in yourself. Learn new skills, learn how to get rejected, build real world skills on how to start a business, okay, And so we cannot recommend this enough. After you finish this recession course, please take the art of aside also starting your own freelance business. You can see Norm profile in skill share. You've got to invest in yourself and learn new skills now 47. Conclusion: So that's it. We're done with this class. As I said, less than an hour. Okay, you've got a ton of information. This is really great. You learn the basics of a recession, you understand what to expect. And what are the indicators of a recession. And finally, and most importantly, you know how to prepare for a recession. So thank you for watching this class and skill share. I really, really appreciate it. I love helping people out. And I've worked all weekend on this class because of recession is looming. I want people to be prepared. Hopefully we get thousands of students just like my other classes. That watch this. And we're preparing thousands of more students to prepare for this recession. If you're not in America, you're not based in America, right? Cassio shares global. This recession is likely. Global Cove in 19 did not leave any country on touch. It's really hurt. Italy and Spain have gone on. Both gonna lock down, right? And so if you're watching it in any European country, a recession's hitting you as well. So the five key points of what we cover today one your job is at will. Okay, this relates to Americans, but a lot of countries as well you can get fired for any reason to. A recession is inevitable. They happen every 10 years. The 2008 recession was global. This recession is likely to be global as well. So on average they happen every six. But you can think of them happening. Every 10 everyone will experience a recession. Do not think on hopes and dreams and say, Oh, my gosh, my life. In my 50 years that I'm gonna live, there will be no recession. You're wrong. You're absolutely wrong. Without equivocation, A recession is going to happen. Three save 25% of your income. You gotta live below your means. People who spend wildly have nice cars, $80,000 trucks and all that stuff. It's all gonna come crashing down when a recession occurs, which is inevitable. Just like death and taxes avoid debt like it's a plate. Okay, debt really is the plague. We worry about Kobe 19. I worry about dead as well. If you're taking on too much debt, what's gonna happen is when it all comes crashing down on your income doesn't go. Isn't there anymore? because you lost your job. Your life is going to be incredibly stressful. And there been a lot of actually, this is a morbid topic. But there been a lot of research, a number of suicides that happened during a recession because of foreclosures, right? You lose your house, you lose everything that you have. You think you're gonna be happy. And the answer is not. The answer is no right. And that's why this class is so important to me is because we're helping people live a more happy life. Finally have six months of savings of cash on hand. Again, The really fancy finance term for this is dates cash on hand. We recommend 180 days, right? Divide that by 36 months. Why six months of cash on hand? Because you never know what's gonna happen. My mom was incredibly smart, and she always said, Prepare for a rainy day and this is a rainy day. Rainy days come every 10 years, and those recessions come every 10 years, right? And so that's what you have to understand. Have six months of savings on hand again. This is skilled share only class. We really appreciate you watching it? We're gonna produce the artist side hustles. So watch that Class two and then watch the core for personal finance. If you watch all these things, you will be prepared for the next recession and you'll be way better off in the majority of America. 48. OPTIONAL - Advanced Level Finance Knowledge - CFA Level: Okay, So now you finished the basics of a recession. A little bit of intermediate information there. Now, we're gonna move on to some advanced stuff. We put this at the end of the course because this is pretty advanced stuff that cf a level true finance professional material. There's no reason that you need to take this part. This is completely optional. This is for educational use on Lee. So, please, we're not giving out investment advice. We are Onley providing educational materials so you can increase your knowledge level. So again, this is advanced level information that is not required by the average person. This is CF A level material. So again, very finance heavy material, deep finance knowledge here. So the first thing we're going to cover our futures water futures, we maybe You see it? Everyone's while you read about it, but you don't understand that futures are traded in a market. Okay. There, derivatives. You've heard the term of derivatives. So they're derivative financial contracts that obligate the party's. Okay, So you have to do this thing. You have to transact an asset at a predetermined future. Date and price. Okay. I have to sell oil or I have to buy oil in the futures oil contract in three months for X price here, the buyer must purchase, or the seller must sell the underlying asset at the set price. In our terms, we're gonna talk about oil regardless of the current market price at the expiration date. Okay, so you have to understand this is an obligation. This is not an option. You have to buy or sell oil. In this case, if you're entering into a futures contract at a set price for oil at expiration, this means you take the physical barrel of oil. Okay, you take physical delivery. This is what we call physical settlement. So, in futures oils contracts, what you're doing is trading oil at a future date. A future time at a future price using a derivative financial instrument. But you're taking physical delivery of that oil. So in 2020 we saw negative oil prices. What does that mean? Okay, so look, wt I West Texas Intermediate. We've already talked about this. Look, it went negative, okay? It would actually almost negative $40. What happened here? Let's talk about this during settlement in expiration, oil traders need to take physical delivery of the barrels of oil because supply was getting full in April. There's nowhere to store the oil oil stored on tankers, offshore, old salt mind or in tanks onshore. What that meant is negative oil prices meant that we are paying oil traders were paying people to take delivery of the oil because they had nowhere to store it. So they're saying, Hey, ex trader, take this oil and I will pay you to take it. Okay? And that's what negative oil prices meant. First time in history. This has ever happened with oil. It was a crazy time. And again, what happens with futures contracts? So the futures contracts a financial derivative. What happens is that physical settlement acting time of expiration. They had to say, I have to get this oil, these barrels of oils off my hand And that's why they wouldn't negative. They were paying companies to take the oil off of their hands. So another term, another CF a term is contango. Okay, this is a finance term. Contain gal's a situation when the future prices of a commodity in this case oil is higher than the spot price bought prices as of today. So what's the price today? What's the price in the future? Contango usually occurs when an asset prices expected to rise over time. That results in an upward sloping Ford curb. Okay, so you can see the curve up here upward curving. What we're looking at is May 2020. We see the price about $20 a barrel. It's a little bit lower than that right now. Okay. And then now we're looking at overtime. So 2021 2022. And what you can see is the price gets more expensive. In general. That makes sense, right? Like inflation is the reason why things are more expensive. A Coca Cola today is worth has cost more money than a Coca Cola 100 years ago. That's a contango market. Okay, that's a very simple, continual market. And what you can see an oil is that it's what we call almost super contango. Look how steep this curve is. It's going from $20 a barrel in May to August at almost $35 a barrel and then in November, surpassing $35 a barrel. Okay, so that's a contain Gle market. The other options backwardation. It's a little harder Understands we're not gonna cover backwardation because the markets are not in backwardation. But the term here to learn is contain Gle. What that means is a price later on five years from now, two years from now is higher than the price. Today, the current price today is called the spot market in the spot price. And what you're looking at is the four marker the futures market in the price in the future . Okay, so what is physical arbitrage? Another cf a level term, right. Lots of fun to learn all the cf A material global commodities traders seek to identify and respond to supply and demand differentials between linked markets. OK, they use arbitrage, which means no risk to trade physical commodities without incurring price risk. Without that risk, they hedge the price exposure using X strange traded contracts which are futures contracts and over the counter instruments which called Ford contract. But in this case, let's just focus on futures contract. So what is physical arbitrage? How to people who are really rich make more money? If they're really smart, let us show you here, okay to do this? An oil trader. Okay. Toe perform. Physical arbitrage would buy oil in May 2020 at approximately $20 a barrel. You can see it here. I'd enter into a contract to buy a 1,000,000 barrels of oil at $20 a barrel. Okay. What does that mean, though? That means the trader would enter, then enter into a futures contract to resell that oil in November for approximately $35 a barrel. How would they do that? I'd enter into a futures contract here. $35 a barrel. I can sell it right now at $35 a barrel. Based off this W two w t i futures curve. OK, this was price as a April 14 2020. So I can buy oil in May 2020 obligated to buy it If I introduce contract at roughly $20 barrel, I can sell it right here for $35 a barrel. Approximately. Well, that would mean that if I entered into to contract simultaneously, then what would happen is that I could make a profit of $15 a barrel that $35 here, subtract out the 20 that's $15 a barrel profit. But wait a minute. How do I just randomly make profit? Well, the problem is, I actually at the store the oil for those six months, right? And that's where physical Arbor tries. You have to think about how can I store that oil? Well, what oil traders would do is by physical barrels of oil in May, right? Remember, it takes physical settlement. Store them on a tanker floated around the ocean, right, while simultaneously entering into a futures contract to sell that oil at $35 a barrel in November. As long as the cost to store is less than $15 a barrel, that I'm okay. So let's say it costs me $5 a barrel to store it then. Now my profits $10 a barrel, right? The pure profits 15. But I actually got to store it and let's say it could stored at $5 a barrel. And that's what physical arbitrage means. You've taken on no risk, and all you've done is say, Look, I'm gonna enter into a futures contract in May to buy the oil at $20 a barrel and resell it , then turned to a separate futures contract to sell the oil in November for $35 a barrel. And that's that. $15 a barrel profit. Okay, but the hard part is, how can you store that oil? And this is where you have to be a really large company to buy tankers or lease the tankers and store them on their for six months, right from May to November for six months and then resell that oil again. Physical delivery has to occur here. So this is what we call physical arbitrage. Very cool term. So physical arbitrage untangle. We learned a little bit of backwardation, but main things we learned about today our futures contain what are features their derivative contracts. Then we learned how contain gold markets work and then physical arbitrage. So again, CF A level terms optional information, but really cool information to learn 49. OPTIONAL - Financial Contagion: so another CF a level term is contagion. It's a spread of an economic crisis from one market or region toe another and concur and can occur at both the domestic or international level. Okay, mostly in finance. We talk about financial contagion and, on a global level, one country's financial decisions impacting another countries, um, financial markets. So think about how I talked about emerging markets bric countries remember Brazil, Russia, India, China, impacting the financial markets in the United States. How do we talk about this? Remember the global conglomerates, those those companies that had high P E ratios that sell a lot of stuff like Coca Cola to other emerging market countries? That's how one market can impact another. So think about this. If in Brazil, right, the financial markets are crashing. How is that going to impact the United States? Right? How did the emerging markets impact are developed? Nations. So let's go into a little bit more detail here. One. A contagion is the spread of an economic crisis from one market or region toe another, and can occur at both a domestic or international level. You talked about that many academics and analysts see contagions as being primarily symptomatic of global market interdependence. Right? And it's pretty clear here that all of the global markets are connected, right, And that's what sovereign debt is, where maybe we'll talk about that in a little bit year. But when you invest money into other markets, if those markets go down, then it impacts your markets. Right in three, usually associated with financial crisis sees, contagions can be manifested as negative externalities externalities diffuse from one crushing market to another again. How does this financial market in emerging markets impact developed nations like the United States or Western Europe in those markets? Again, contagion is a very important word to understand here, because markets are so connected now, right? We are all connected in our markets, in the financial markets. In one country's problems. Don't just impact that only one country, right, every country is importing and exporting to each other. And so that's why all the markets are connected and why contagion is an important war to understand. 50. OPTIONAL - April 2020 Update To See Where Things Changed: so we wanted to make some slides to show you graphically how bad this cove in 19 recession and possibly depression is going to be. Okay, The U. S is bracing for economic disaster. Why look at the great Depression level unemployment? That's even possible. Okay, so in April 2019 we had 4% unemployment. 2008 Financial crisis 13% The Great Depression, 25% Cove in 19. The Fed is projecting 32 un percent unemployment. Okay, 32% unemployment. What's gonna lead a potential 47 million jobs lost for the Fed? That's a really big deal, right? And that makes sense because think about how many places air closed in the United States. As of right now, Barbara shops, hotels, restaurants so many places were closed. So how does that compare to the 2008 financial crisis? The current number unemployed already is per surpasses the 2008 financial crisis over 400% higher in 2008. We have 650,000 unemployed people in Kobe 19 2023.3 million. Why? Because 27 states are enforcing stayed home orders. Right? So you people can't go into work, and something that keep in mind is other lowest. 10% of wage earners, almost 70% don't have sickly, so you can think about the economic impact this is going to have on those families. For the stock markets, as much as $13 trillion has been lost in U. S. Equity value since January. And what is this measured by its recall that Russell 3000 index, You can look it up or Google it, and you can see $13 trillion of lost and energies down 51% with energy sector is the worst performing sector. Okay, something else it considers because these companies are performing so poorly, 49% are 50% of companies approximately are considering layoffs. So no job is safe, as we've said before, which is why we recommend watching the artist side hustles. You've got toe, learn other skills. No job is safe. Everyone is at will in America. Eso If we go to the next slide, you can see that oil prices are falling dramatically due to decreased. Demanded increased supply. We've already talked about this, but again decreased demand because no one's doing anything. No one's leaving their house an increased supply because Saudi Arabia. So let's track the oil prices from 2009 to 2020. This is W T I. West Texas Intermediate. So $62 in the 2013 we're hitting highs around 98 2015 and 2016. You see the great oil recession here? This is Houston got hit really hard because oil prices dropped to 48 $43 right? This is average closing price. Well, they did not expect prices to be $20.16 in April 2020 the average year to date closing prices around $46 or $45.79. But the current spot price is $20.16 so buying a barrel of oil right now cost you $20. This is the dramatic decrease in wire. Tennessee Houston suffer massively because energy companies are the worst performing sector because they can't make any profit off the oil they're making oil as measured in dollars per barrel, is now being produced at a loss right, because break even for oil companies is somewhere between 30 and $40 a barrel and it's being sold for $20 a barrel currently. So we've seen a precipitous drop in both the S and P 500 West Texas Intermediate. Okay, so what about the S and P 500? It's down 20% since January. So we're looking at January 2022 April 2020 and you see the S and P 500 down 20%. Well, what about wt I West Texas Intermediate, January 2020 March 2020 66% decrease since January 2020. So that's how you can see how bad it is. Finally, markets are bracing for an even worse Q 2 2020 Okay, and this is S and P. 500 estimated year over year earnings growth in coup to 2020. So this is April, May and June. It's only gonna get worse. And you can see energy. Their year over year earnings is negative. 92%. Utilities are the best at a growth rate of 6.5%. So this is the first time, and you can see the quote over here from the New York Times. This would be the first double digit percentage fall in earnings since 2009. So again, this is worse than the 2008 recession. Because this is global, it's impacting everyone from bartenders and waiters. Two flight attendants to CEO is taking $0. So this is really bad. I will end with this hotel's. We're going to get hit terribly because no one's going to travel. Travel's not gonna come back for at least a year. So 12 months of a terrible GDP hit from the lack of travel commercial property owners are gonna be hit the hardest because everyone's working from home right, and the operating leverage and the debt leverage that they have, it is going to make them unprofitable and then default if they have a lot of debt. And so commercial property owners are not gonna be able to sustain this. So if you own commercial property has got to start preparing, I really urge you to do that because it's going to get bad. Um, and so hotels were going to struggle. Travel industry is going to struggle, and this is going to take a long time to get out. And with this, if emerging markets think about Brazil. India cannot control Colvin, 19. This is going to be really bad because Coca Cola companies like that. They're expecting to sell their products, Not to you and me. In the United States, their growth is dependent on emerging markets. Another person in Brazil buying a Coca Cola, Another person in India by Coca Cola. Well, the problem is, if cove in 19 becomes rampant in those emerging markets, then we have an emerging markets crisis. Okay? And quote me on this Sun Han called me on this. If there's an emerging market crisis, you're talking global recession toe place that we've never seen before. Okay, it is gonna be a pandemic from an economic side, and we hope that doesn't happen. But unless a cure or vaccination is found, this is going to be incredibly bad for the world.