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Economic Downturn Here We Come!
The sugar-rushed western world is about to come shuddering off its fiscal high
Yum. Double chocolate brownies, banoffee pie, fried Mars bars, strawberry/banana milkshake, over a decade of loose monetary policy and a diet coke.
Talk about a sugar high, besides the ever expanding waistline and diabetes we're now hoping to avoid, we've been delighted by our asset value inflation, like our very own bouncy castle. And by we I mean those of us - 10/12% of us who have the excess income to invest in stocks, homes you know the ‘asset class’.
Well it looks like we're crashing now. Like an exhausted mum to an over-tired 3 year old who runs about frenetically right before they topple over, our central banks are saying it’s time to hit the sack. Using one of the only tools at their disposal they're becoming the stern parents chucking out the junk food and raising interest rates trying to take some steam out of the economic engine in our belly.
A whole generation of investors or two have only known the asset markets to do one thing - climb. You could argue that the prime housing market crash in 2008 was the last big correcting event except the central banks stepped in and started the current good times are here again streak. And here we are 14 years later…….
The Federal Reserve just approved its largest interest rate increase since 1994. Our decade-plus of loose monetary policy has been the economic equivalent of a “sugar high,” which kept the prices of stocks, housing and other assets going up and up and up, even as the fundamentals of the economy have been eroding. Tik tok.
They flooded the market with money so the big problem that investors had was what to do with all of it. The big problem that a lot of big corporations had was what to do with all of it too.
Some stockpiled huge amounts of it and looking at you Apple then acted a bit out of character as huge stock buy backs and quarterly dividends started up again. Apple hadn’t paid a dividend in decades but in 2012 it announced dividends were back on the table and in 2017 they paid the biggest dividend in the world. One side of the coin says it means that they had matured and dividends were a natural progression but on the flipside it could be that big activist investors flush with easy money applied pressure getting them to act more like a cloned woolly mammoth - Exxon - than a limber high growth, high flying tech stock that might even change the world again one day. Perhaps even creating the iGovernment: with political avatars on blockchain’d voting machines - the Apple way!
A lot of companies and investors and startup C.E.O.s came out looking like geniuses for a while. It's easy to look smart when you can borrow money for nothing and when investors are trying to give you EVERYTHING for, well, almost nothing. Now we get to discover how smart we can be avec nada - just a hill of over priced beans.
And you'll say the economy was booming, the longest boom cycle in over a 100 years.
We had expansion and growth for more than 10 years without a bust in sight. But it was high calorie, low protein rush... Yes a sugar high because behind all that booming was financial wizardry, not bricks and mortar. Or butter and guns (a 60’s phrase for making) which wasn't backed by the production of stuff or investment in education etc. It and the money was looking for innovation and the next big thing. It might just explain the wild valuations for Tesla and don’t get me started on crypto.
Tesla became the poster boy for a smart new technology company (the next Apple?). All that money looking for ‘the future’ piled in and more followed. Because money attracts money until of course it doesn’t. The markets were happy. Asset class inflation kept the investors happy. Then the pandemic.
The pandemic did a strange thing. It stopped the real economy. Politicians - scared for the first time - made sure that money kept flowing - not by interest rate deflation (there was no where else for rates to go actually) but they pushed cash into the hands of the electorate. Suddenly that other 88% of us.
The hand to mouth folks had cash to burn and no bars, restaurants and holidays to burn it on. They bought lots of refrigerators, home repairs, and invested too. Great right? Uh oh.
Now rather than asset class inflation (the kind where everyone (12%) feels richer we suddenly got real price inflation on goods. Top it off with Russia’s ‘awkward incursion’ and spiking gas prices and our boom goes bust. With a clickety clack the Fed suddenly remembers its primary purpose and hikes rates and the merry go round stops and its soup kitchens all around. No cotton candy to be found. Crypto down town!
The fear now as we look around the sudden freeze and take stock is “exactly what did we build with all that money?” Did we just spend it on ubers and deliveroos? Did we take good advantage of that cheap money… beyond a cyrpto bath. Are we richer for it?
And where are the big government investments that could bring us forward. After all, our infrastructure is buckling. In the past, after such shocks, we could point to government action making possible big developments and movements. Actions that boosted strides in railroads in the 1800’s, roads and cars in the 1900’s and Bill Gates from then on.
After WWII the GI Bill - not this time. No power of the Internet developed here - we can’t even squeeze out a bit of 5G. Lots of stock buybacks, no reskilling of workers for jobs in the future, no factories built. Where is the investment in the economic impacts of the future. The R and D. Why didn't we?
Will it really ALL come from the private sector? If so, big government may as well get right out of the way! That’s the clarion call of so many except I don’t see any huge investments in renewables from the private sector. I see a lot of WeWorks and Ubers and crypto junk but just one Tesla. Tons of streaming services and entertainment hustles but where’s the big money in decarbonization technologies?
Is that really what we want??
Crash, cash, crash. Like a LeBron dribble we might end up dribbling right off a cliff - and I don’t mean a financial one this time…
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