We have heard a lot of macroeconomic doom and gloom news of late. This invariably comes up every now and then in cafeteria chats and 1:1 conversations. In those chats, I had a realization that a fair lot of people who are today in work force, have never seen a recession. Given that last recession was in 2008 – when George W Bush was handing over Presidency to Barak Obama and given that a new college grad from 2008 would be about 35 years old now, it may be a fair hypothesis that a vast majority of people have never experienced a recession.
I have experienced two recessions in my professional life.
2001 – The Dot-Com Bust
Current macroeconomic situation reminds me a lot of the situation in 2001 (a.k.a. The dot-com bust). Due to a combination of the end of the cold war (and hence reduction in defense spend) and fiscal measures taken in early 1990s, the US federal budget was running a surplus that eliminated the need to issue new treasury bills. Low interest rates of that time, plus cuts on capital gains taxes created an environment flush with money. Does that sound familiar to today’s low interest rates environment and quantitative easing?
This was also an exciting time when the Internet was just taking off. As a result, a lot of this cheap money flowed into the dot coms whether or not they had a viable business model. There are eerie parallels between people betting on dot coms based on essentially a domain name and crypto boom from last year.
Anyway, the party came to an end on March 13, 2000. Sentiments turned based on the news that Japan had entered recession. Soon NASDAQ composite fell 33% from ~4900 to ~3300 in 2-3 weeks. While it bounced around for a while (similar to how it is bouncing now), it went down to ~1700 in early 2001 and went further down after the 9/11 attacks. If you leave out the effect of 9/11, it had fallen some 65%.
Environment in the Silicon Valley
Since the bubble was mostly tech centric and many of those companies were in the Silicon Valley, the impact was felt really hard there. Some anecdotes from that time –
- At one stage every 3rd or 4th person I knew socially was unemployed. Lots and lots of startups went under.
- A large number of immigrants had to leave the country when they lost employment. Many of my friends went back to India.
- Roads in Silicon Valley used to feel so empty compared to traffic jams the year before. Only the pandemic related shut downs dwarfed this.
- There were stories about how people simply abandoned their leased cars (or the ones taken on loan) at the airports before leaving the country, with a note to the bank.
In other words, things looked really scary.
Me in 2001
I used to work for a tech company in their professional services arm and was working on a project at Intel. The stock of that company went down from 152 dollars when I joined to 50 cents when I eventually left. They must have laid off 70-75% of their staff (don’t recall for sure). People like me, who were in consulting and therefore making revenue for the company survived initial rounds, but as soon as their projects ended, they were let go. Fortunately, I was working on a critical technology for my client and they hired me. But to hire me, the hiring manager had to make a business case all the way to the CFO of the company, so that he could hire me in spite of companywide hiring freeze at the time.
My employer also lost the ability to file for my Green Card petition then because it is hard to justify that you need an immigrant employee in that environment. In those days, there was a maximum timeline on H1B visas – 6 years – and once you were out of that you had to leave the country. This made timely filing of green card applications very critical and the recession put that at risk.
2008 – The Great Recession
2008 downturn (a.k.a. The great recession), had very different characteristics since the epicenter of it was on wall street. However, it too generated significant uncertainty around revenues for companies and subsequent impact on labor market.
I did much better in 2008 compared to 2001. My company announced what amounted to a 10% pay cut and furlough one week every quarter – resulting in further pay cuts. I had bought my house at the top of the housing market in 2005 and the value of the house dropped 20%. While I will admit that I had my own freak out moments even then, I took much of it in stride. I figured out a way to supplement my income beyond my work and that helped. For a brief period, I overreacted to the implications of my 5 years interest only loan at the time, but soon figured out that I was overthinking that impact.
My Lessons from this experience
#1 Your first downturn always feels more scary than the subsequent ones
As you see the movie for the second (and now third time), you feel much better prepared to deal with it. We tend to think of our surroundings, layoffs as disasters. But quite bluntly, war in Ukraine is a disaster. Or the Indian Ocean tsunami was a disaster. It is important to put things in perspective when our emotional mind might say otherwise. I have personally been at the receiving end and I know many who have over the years, and I can’t think of a single individual of them who did not do alright.
#2 Manage your emotions
When an economic downturn hits, rise in unemployment is a natural unfortunate consequence. Companies lose their ability to predict future revenue flows with any degree of certainty and they tend to go conservative on their spending plans – which is what anyone would do. As a result, there are fewer and fewer job opportunities available. When one sees this happening, it is easy to panic whether this hits you or your friends.
Our mind tries to play tricks on us and take us to extremes in worst case scenarios thinking. It is important to manage this as it can psych you up into not thinking rationally on how to approach the situation.
#3 Focus on things under your control
Rather than thinking about worst case scenarios, you can focus on things that are under your control. Focus on doing impactful work, for example. Develop or rekindle any hobby you have. It kept my mind gainfully occupied and probably motivated my hiring manager to go through the painful process of justification to the CFO. If that did not happen, I probably would have had to leave the US.
#4 Take a philosophical view on things not under your control
Easier said than done, but quite frankly what else can you do. I knew that it was within the realm of possibility that I may have to go back to India and rebuild my career there. That was not my preferred outcome, of course. But if that was the worst case scenario, it did not feel that bad at all.
In the 2008 recession, a friend of mine lost his job. He had a lot of time on his hand and Apple had just released the SDK for building apps. So he started to develop an app that supported his hobby. Fast forward to today, that app is now used very extensively and I am sure that resulted in monetary benefits in addition to learning.. I have many such examples, where people lost jobs or left for their home country and would say now that it was the best thing that ever happened to them.
#5 Build a rainy day fund
My savings account balance used to be pretty low before the downturn hits – equivalent to about 3 months of expenses. This was not because I did not have enough savings – just that I used to invest them immediately because the perception of any risk was low and I prioritized getting higher return over building a large enough rainy day fund. I built it to about a year’s expenses to account for any financial uncertainty.
#6 Be careful about making any significant changes without evaluating risks
I had a possibility to join another consulting firm right in the beginning of the downturn. They had not yet hunkered down. Pre downturn, I would have jumped on that offer. However, knowing the economics of consulting, I thought the risk of changing job was much higher at that time and declined the offer.
In general, while any financial decision is about risk/reward calculus, we often do not think of job change as a decision that has risk associated with it when the job market is hot. It does have risk and the risk increases exponentially in a downturn.
History repeats itself. Unfortunately, having seen this movie before, it is entirely possible that the macroeconomic situation will get worse before it gets better. Fortunately, watching the movie for the second or third time tends to make one better prepared.
On the positive side, when the economy recovers from the downturn, things start looking quite spectacular – both in terms of career opportunities as well as investment opportunities. For example, S&P500 yielded ~40% returns in the two years preceding the downturn in case of both 2001 and 2008 recessions. Also on the positive side, we have an opportunity to work on some of the most exciting products/services in tech and that ought to be immensely satisfying. So rather than overthinking the negative implications of the possible downturn, I would highly encourage all of you to apply some of these lessons and focus on things you can control.