“May you live in interesting times”.
–Chinese curse
I feel like an economic Rip Van Winkle after a month of vacation (see picture–you can guess where I went).
Boy, have things changed. It is a different world.
I will list the primary aspects of economic change and try to evaluate how readers can deal with and profit from these different circumstances.
INFLATION SEEMS TO BE DECLINING
Since I left, there have been two positive indicators that prices may slow their rise. The stock market decided that things were better and rallied by about ten percent.
But I suspect that investors may be celebrating too soon. Taming inflation is a long process. Uncertainty remains because while inflation may be coming down, the risks of a recession rise every time interest rates rise.
The Federal Reserve will tighten and raise interest rates further in December. The only question is how much.
I wish they would leave rates alone. I am old enough to remember the last time rates went so high so quickly, and the damage was profound.
CRYPTO EXCHANGES HAVE IMPLODED
What a mess.
For those who do not know, FTX, a major currency exchange, has filed for bankruptcy.
We have the usual suspects when things go very wrong:
- Speculation—”investors” have invested in something they don’t understand well, with the idea of making a killing in a short amount of time
- Leverage—people borrow money with the idea that their gains justify their risk
- Poor oversight—much of the news on this front has been very troubling. You can read about it here. There is little regulation.
If some of you think you have seen this before, you are right. The three factors I have outlined have occurred over and over throughout history and are warning signs of impending trouble.
Now, this does not mean that crypto is necessarily a bad investment. It just means that some of the exchanges are a mess. But if you invest in cryptocurrency, be aware that it is highly volatile and can be risky.
I do not invest in crypto for a simple reason: it is not backed by any asset, so the value is in the eye of the beholder. That always means a lot of volatility, and I don’t need that.
That is just me.
However, you can bet a lot of future regulations are coming. Congress, the master of investigating long after things have gone wrong, is on the case.
What concerns me is not the celebrities who have lost their shirts or the hedge funds who have lost their investment. It is the chain reaction of institutions and investors who borrowed money to invest in what is now a worthless asset. Only their debts are left.
We don’t know the full extent of the damage to that group. And I am not reassured by the relatively mild reaction of the financial markets. Everyone has to wait to see what the actual damage may be.
LAYOFFS ARE HERE—IS A RECESSION ON THE WAY?
Companies are starting to lay people off. Meta, Disney, Twitter, and others have already started.
Ironically there is a perverse impact on the stock price of companies that are firing people. They go up and become market darlings. But make no mistake, that is not good for the economy overall. Somehow, I think most people who are suddenly jobless could care less about the stock price.
Whether we avoid a recession depends on how fast those laid off can find a new job. Unemployment remains very low, so there is some reason for optimism, but the outlook for the economy remains murky.
THE MIDTERMS ARE OVER
Historically stock investors love split control of the Congress and Senate. You might even think investors like it when nothing gets done.
The question is, will this time be different because of the threat of inflation? Some think that may be the case.
RUSSIA IS LOSING
Russia lost an epic battle for Kherson while I was gone.
Speaking economically, that area of the world is essential because the grain grown there keeps the world fed. Russia also produces much of the oil needed to keep the world economy humming.
The losses have been vast on both sides. But the faint hope is that the situation may be becoming painful enough that Russia will start negotiating and will end the war. We can hope. It is a stupid, pointless cruel war, but I am not counting on it ending anytime soon.
CHINA CONTINUES COVID JUGGLING
Since the pandemic started, China’s gigantic economy has been a sort of a no-show. That has to do with the national policy to shut down whole geographic areas when Covid-19 breaks out. In turn, that slows down their domestic economy and interrupts companies that produce goods for others.
While there are some indications that their policies may be eased at some point in the future, there is also evidence of another surge. At this writing, they are shutting down some sectors of the economy again. So, the outlook remains unpredictable.
WHAT SHOULD YOU DO?
Ignore the noise.
There are a lot of cross-currents, and it is tough to sort them all out.
Instead, as was noted in the last post, any instability makes it essential to review your finances and make sure you are solid. You should ask yourself the following:
- How secure is your job? Have you kept up with the state-of-the-art in your sector of work? Have you developed relationships among your peers in and out of the office? Have you avoided quiet quitting?
- Do you have a reserve fund? Or do you have access to your reserves? Are they tied up and unavailable if you need them?
- How high are your debt levels? How would you make payments if you lost your job?
- How good is your health? Healthcare costs are the number one cause of bankruptcy. What steps have to be taken to improve and preserve it?
You see, all of the macro issues and trends I mentioned are interesting ways of looking at your investments and other opportunities AFTER you have made sure of a sound base. If you are in the enviable position of having your basics right, you can look at these factors and adjust your strategy accordingly.
Disclaimer: consult with a financial fiduciary before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Photo Credit: Wade Lambert
License: Unsplash