How to Prepare for the Second Wave of this Economic Crisis

Mary, a single lady aged 46, was in senior management with a now defunct retailer.

Life was good. Six-figure salary. Leased European car. Designer clothing. International travel.

Dining out. Trendy inner-city apartment.

Outwardly, Mary was the picture of success. But it was all show. Every dollar earned (and more) went on keeping up appearances.

Mary laid bare her tale of woe to me recently. Her redundancy payout, JobSeeker and a reduced rental arrangement have bought her time. But unless she lands another well-paid job, the material trappings of her former executive life will need to be shed.

Leased car…gone. Rented trendy apartment…gone. Five-star travel…gone.

Mary is talking to a psychologist. She is struggling to comprehend what has happened. One day you’re in the penthouse and the next day you wake up in the outhouse.

Sadly, Mary’s story is not an isolated one.

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The connection between wealth and health…

According to Black Dog Institute:

If you are worried about money right now, you are not alone. The COVID-19 pandemic is not only a health crisis, it is a financial crisis too.

The link between mental and financial health can be a vicious cycle: financial stress can lead to poor mental health, which can make taking action to protect your financial health harder.

People may engage in unhealthy behaviours to try to cope with financial stress, from avoidance, to overeating and alcohol and drug misuse, which in turn can worsen mental health.

Ongoing stress about money has been linked to physical ill health too, such as migraines, heart disease and sleep problems.

During our conversation Mary said something that really struck a chord with me…

I know I’m probably going to lose the material things. I can almost accept that. But do you know what I’m most afraid of losing? It’s hope.’

The connection between wealth and health is well established.

In the 2015 movie The Big Short, the character of Ben Rickert (played by Brad Pitt) made the following statement…

If we’re right [about the housing market collapsing], people lose homes. People lose jobs. People lose retirement savings, people lose pensions. You know what I hate about f**king banking? It reduces people to numbers. Here’s a number — every 1% unemployment goes up, 40,000 people die, did you know that?

Our mental well-being can be positively or negatively influenced by our financial situation. Where there’s money, there’s emotion.

The loss of money can, for some, mean the loss of hope.

Mary is one of the early casualties from COVID-19. But she won’t be the last. Beneath the surface a lot of damage has been done to the global economy.

More job losses are coming

For political PR purposes, the looming economic downturn, will not be called The Greater Depression. But that’s what it’ll be.

To know your future you must know your past

George Santayana

In the Encyclopedia of the Great Depression, there’s a chapter titled ‘Psychological Impact of The Great Depression’.

The chapter tells how the 1920s — a time of rising prosperity — led many Americans to equate self-worth with material possessions. The loss of those possessions made them feel worthless. Optimism was replaced by the reality of economic chaos and confusion.

The wind of change in social mood had a profound impact on people’s lives.

Here’s an extract from the chapter (emphasis added):

Many people carried a great psychological burden during the Depression because they had become unwilling participants in the economic breakdown.

Some critics claimed that people on welfare were freeloaders, but these criticisms did not take into account the shame felt by most able-bodied citizens forced out of work and only able to survive through government welfare programs and private charity.

The self-worth tied up in our employment status only becomes tangible when that status is lost.

Being unemployed or unable to finance the lifestyle once enjoyed (and became accustomed to), can be a source of embarrassment and shame.

Financial pressures led to consequences, some more obvious than others:

Merely keeping families together during economic duress became difficult as people lost their homes and livelihood. Some couples delayed weddings due to the uncertainty, while others put off divorce because they could not afford to separate. 

Historian Harvey Green argues that domestic violence and child abuse increased during the Depression. Family disputes over finances, food, and other basic necessities caused tensions to increase.

And, then there were those totally unexpected consequences:

Studies, such those undertaken by sociologist Mirra Komarovsky for her book The Unemployed Man and His Family (1940), revealed that many unemployed or underemployed men suffered from impotence. Both historian T. H. Watkins and writer Edward Robb Ellis also state that the birthrate slipped as unemployment grew.

The humiliation associated with financial hardship goes well beyond the loss of social status.

As identified in The Big Short, financial distress can carry the ultimate human cost.

According to the Encyclopedia of the Great Depression (emphasis is mine):

Suicide became a part of everyday conversation, particularly as the stories of bankrupt Wall Street traders jumping from tall office buildings entered the public mindset. Urban legend regarding mass suicides during the Great Depression far outstripped reality. However, the national suicide rate did increase in late 1929 and continued to increase until 1933—from 13.9 per 100,000 to an all-time high of 17.4 per 100,000.

Based on the principle of yin and yang, it comes as no surprise that a severe economic depression resulted in severe human anguish.

Human beings are averse to loss

Psychological studies on loss aversion indicate that in general, the pain of loss is three-times greater than the emotional response associated with a gain.

In the main, human beings are averse to loss…it triggers a fearful emotional response.

Try to imagine how it would feel losing 80% of your wealth.

How do you reconcile that? How do you cope? How bleak does the future look?

Obviously, the responses to those questions depend upon your age and capital base.

If you’re young with $20,000 invested, then you shrug your shoulders.

However, if you’re older — say 60 or more — and have (or should I say, had) $1 million invested, then you’re probably suffering some level of depression…a lifetime of savings gone.

The Great Depression, due to its severity, had a more widespread effect on society’s mental health.

However, even less devastating financial downturns can impact mental well-being.

In February 2016, Joseph Engelberg and Christopher A Parsons from the University of California, took a slightly different approach in researching the link between loss and emotional response.

Their research paper was titled ‘Worrying about the Stock Market: Evidence from Hospital Admissions’.

Here’s an extract (emphasis is mine):

Using individual patient records for every hospital in California from 1983 to 2011, we find a strong inverse link between daily stock returns and hospital admissions, particularly for psychological conditions such as anxiety, panic disorder, and major depression. The effect is nearly instantaneous (within the same day) for psychological conditions, suggesting that anticipation over future consumption directly influences instantaneous utility.

In support of this finding, the following chart shows what happened with hospital admissions on 19 October 1987, the Black Monday share market crash:


Port Phillip Publishing

Source: Engelberg, Parsons

[Click to open in a new window]

In the context of market crashes, 1987 was short and sharp.

There was a good deal of panic and anxiety for those invested in the market. I remember it well.

However, in 1987 the participation rate in the share market was relatively low.

Today, it’s a different story. Superannuation funds. Pension funds. Managed funds. Sovereign wealth funds. Hedge funds. Share traders. Futures markets. Private equity funds. Private investors.

Investor exposure to markets — directly and indirectly — has never been greater in numbers and in dollar terms.

Prepare for the second wave of this economic crisis

When the inevitable second wave of this economic crisis hits, there will be repercussions…and not just financially.

The psychological impact of a long drawn-out global recession/depression will be deep and profound — retirement dreams gone; wholesale job losses; property foreclosures; loss of material possessions…and the loss of hope.

There’s an old economics joke…

Q: ‘What’s the difference between a recession and a depression?’

A: ‘A recession is when your neighbour loses their job and a depression is when you lose yours.’

From speaking with Mary, that is so true.

The lesson from all of this is to not assume that tomorrow will be the same as yesterday and to err on the side of caution.

If the loss of a substantial amount of your capital will cause you to lose hope in your dreams, then take defensive action now. Reduce exposure to asset classes that could fall hard and fast without warning.

That was my gratis advice to Mary with her super fund. The last thing she needs now, psychologically, is for her sole source of savings to lose half (or more) of its value.

Wealth and health are so closely bound together. Please do not take either for granted.

Regards,

Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion


Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Port Phillip Publishing as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.


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The Rum Rebellion