The US appears to poised on the very brink of recession. Investors are reacting as news of a contraction within the service sector for the first time in five years, an FBI investigation into predatory lending, and increasing unemployment statistics, has sent shock waves of panic through stock markets worldwide. Who wins out in a crisis of this magnitude? And how can an individual take advantage of such a difficult scenario?
While volatility in recent months is hardly a comforting phenomenon, recognizing its continued presence (within relatively unstable areas of the economy such as the stock markets) is key to weathering such a crisis. Even though most areas of the US economy are contracting in some fashion, the saying that the US’s sneeze makes the world catch cold is less true than ever before. As China and other Asian economies become increasingly decoupled from America, the tendancy of compensating mechanisms to come into play should increase.
Someone will be able to profit from the US shoring up spending, even if it is only oil companies for some period of time. Most of these companies are reinvesting the money they make in stable companies like American financial institutions, thus tying their fate to that of the US without risk of takeover bids or boardroom posturing.
While the transmission of wealth from the American middle class to wealthy overseas oil giants is gradually becoming a less attractive proposition to the average American (with increasing energy prices helping this along), the climate crisis may be able to facilitate a reduction in dependence on foreign oil that balances this feedback loop in the future.
Americans are right to begin saving on a more realistic scale, if a bit slow to react. Most of America’s weaknesses in this regard are only sustainable if nothing goes wrong, and the sub-prime crisis is destined to affect many other industries such as credit card companies. If a significant amount of consumer spending turns into savings, Americans will be hurting. But like an unpleasant vaccination, they will be safer in the long run. Perhaps a lesson or two in solubility and risk management has been learned.
As far as an individual’s best chances for taking advantage of these weakened sectors, buying a house couldn’t be smarter now as the glut of unsold houses in many areas continues to drive down prices. Emerging economies will continue to grow even if America stagnates for some period of time, so investment in these regions is a safer bet than ever before. Global GDP will still grow, even if the rest of the world no longer wants to hold the West’s hand while they cross the street. In fact, the complex financial instruments that have fueled the credit crunch were created in order to minimize risk.
As we can see, they have only made it less obvious and harder to bring ontol a balance sheet, which costs much more. If layoffs begin to increase, government action on a larger scale is practically inevitable. The Federal Reserve is obviously prepared to drop interest rates considerably further, which means there is still some breathing room (even if it is shrinking).