It doesn’t take a rocket scientist to figure out the crisis we’re potentially facing as citizens of this world. If the population is sick, businesses, especially small businesses, which are the cornerstone of economies such as ours, will be sick too. It really is just as simple as that. If people are staying away from jobs due to sickness, or if companies have to shut down in order to help ease the spread of the highly contagious virus, there will naturally be a decline in profits. If things remain this way for a protracted period of time, then these companies will be forced to lay off staff, and eventually shuttering their doors, perhaps even permanently. That’s when we witness the general downturn in the economy, and with it the ushering in of inevitable recession, which sets in when there is, among other things, high unemployment and consequently high or runaway inflation. 

We have been seeing how the COVID-19 pandemic has been testing the world’s economies, especially the UK and the US, heading on what seems to be a freight train to global recession. COVID-19 has decimated many US states in general — Nevada, Michigan, and Hawaii in particular, with, according to a report in The Washington Post on May 22, 1/4 of these states’ workforce now unemployed. Overall, a shocking 38.6 million people have filed for unemployment across the entire US, in what analysts see as an indication of a looming recession.

For years, analysts had predicted a recession before the bottom finally fell out in 2008. It took a while in coming, but it did come. Absolutely no one, however, could have foreseen that, 12 years later, governments would have to close their borders in an effort to stem the tide which was threatening death and destruction brought on by a virus that would cripple even the most powerful economies. Clearly, a prediction such as that could not have been made with standard economic forecasts.

The unemployment figures in Jamaica aren’t yet in, but we’ve all begun hearing the anecdotal stories of people losing their jobs, unable to pay their utility bills, their mortgages, rent, and so on. The Government has recently begun the process of tentatively reopening the society, realising the brink of disaster the economy is teetering on. But, with increasing speculation that a second and possible third wave of infections could be imminent, if it turns out the economy has reopened too soon, this could send us straight back into confinement in our homes come September or so, plunging us into even deeper recession than 2008.

What are some financial lessons from then that we can learn now?

Diversify Your Skills, Income And Portfolio

Firstly, don’t panic. If you want to remain financially agile during a crisis and you’re in an industry that is declining or vulnerable to layoffs, diversify your skills and parlay them into other industries that may not be experiencing big cutbacks. Pivot and see how these skills can be transferrable. Or perhaps if not transferrable, use them to secure alternative income streams.

Relook at your investments, are they still solid given our “new normal” (I am kind of over this term). Look at Zoom! It is now a social app and not just for meetings. What other gems can you unearth? Logistic services have become even more important.

Contingency Risk

Subprime mortgages led to the financial crash in 2008, it highlighted contingency risk. Banks kept on repackaging the same debt and left themselves undercapitalised. If you own an asset and that asset is heavily invested in another asset then if one falls both dominoes will fall. The assets do not even have to be in the same sector.

Hence, an investor must be aware of the assets the company holds and how they are managed. For example, if you own any of Warren Buffett’s Berkshire Hathaway shares then you have exposure to the airline industry. Financial Institutions and even manufacturing companies often invest in other companies, so be mindful of their investments and their investment policies.

Reign In Unnecessary Spending

A financial crisis is not the time to spend frivolously or recklessly. Sure, shopping can seem to be a panacea. Especially in boring lockdown. But live frugally, and always look out for opportunities to cut costs when cash flow is reduced. Do you absolutely need to have Netflix as well as the premium package from your cable company? Resist the urge to charge expenses to your credit cards. Fact is: these are loans. You will be required to pay them off. In 2008 people were left bankrupt, upside down on their mortgages and zero savings.

Save, Save, Save

For your budget, regardless of how small, exercise fiscal restraint and put away for the proverbial rainy day. Before the wheels fell off in 2008, informal, get-rich-quick pyramid schemes were the order of the day. People were poppin’ bottles, living like they were Bey and Jay. The recession hit and many people were left without a pot to, well, you know. Don’t get caught like a deer in financial headlights. Start to save now; it’s not too late.

Markets Fluctuate

It is a known fact that markets fluctuate, so stay invested! Take advantage of undervalued companies. The one big lesson we should have all learnt by now is to not panic-sell. Those who use their liquidity wisely will not recover from their unrealised loss but stand to make millions! We are not seeing the massive sell-offs and dips that we saw in 2008 and for good reason. The fundamentals have not changed.

It would be remiss of me not to highlight that the market impact of COVID-19 and the recession of 2008 have some major differences. In 2008 there were fundamental deficiencies that had to be rectified for the effective running of the markets. New laws and regulations had to be formulated and put in place to ensure that we did not have another crisis similar in nature. Our current situation is very different. We could not have predicted this; there were no market indicators that this was coming. However, the systems are in place to restart the engine that was humming before COVID shadowed the brake on us.

 – Lamar Harris, vice-president, wealth management, NCB Capital Markets