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A Post-GFC Environment
Since the great financial crisis of 2008, financial markets have learned to adapt to a new macro-environment. Central banks struggled as they did everything and anything to stimulate aggregate demand and fight off deflationary pressures. For financial markets, a world of negative real interest rates meant yields had to be chased in waters never charted before. For the business world, over a decade of a world where interest rates didn’t matter led us to our current state where cash flow and solid business metrics ceased to matter. Selling an idea and “future” cash flows worked, even when a company is practically bankrupt to the core. It nonetheless raised money, a lot of it!
I’ve Seen The Bankers Make Money- and now I Want Some Too!
The most dangerous is seen at the level of the individual citizens. People of all walks of life- dentists, lawyers, salespeople, plumbers etc. – have also learned to do “passive income”. They’ve seen the bankers and investing community get rich buying stocks. Indeed, whoever went long the stock market post-quantitative easing in the after-math of the GFC has already made the money and become rich. So yeah, you can’t blame your John Doe for wanting a bit of what Wall Street has been smoking. But what if they’re not prepared to stomach the down-side risk?
2023 Is Here
Except there’s a perfect storm coming our way in 2023. It all started with taking rates to zero in no time over a decade ago, creating all sorts of asset price aberrations yet succeeding in stabilizing the economy- albeit at lower-than-desired levels. And then in 2018, the Fed tried to normalize policy, raising rates in successive meetings. But it didn’t happen. Markets screamed “Ouch” like there was no tomorrow. By 2019 the Fed had already admitted defeat, reversing the course completely. They still talked the talk about raising rates and tightening, but guess what happened next: COVID-19. And you know how the Fed deals with these things. Yes, they doubled down, taking rates down all over again.
By now, the Fed has created all sorts of market distortions and perverse behaviors. Valuations are crazy high, out of touch with reality, whether you’re talking stocks or real estate. It’s true that the Fed has raised rates significantly by May 2023, and yes, valuations have gone down from their all-time highs, but the correction is far from complete. Nor have the rate hikes’ cumulative effect filtered down into the economy (it’s called the lag effect, anybody?). Therefore, this isn’t a buy-the-dip moment. It seems increasingly likely that we’re going tighter for longer (at least if chair Powell is serious about not leaving an Arthur Burns-style legacy). And we’re getting closer and closer to entering the long-awaited recession. So don’t tell me stocks or gold or anything of the like. In recessions, the real recessions, everything gets sold, with no differentiating the good from the bad. Everybody kneels to King Recession.
So Is Joe/Jane Prepared?
The question remains, is the average Joe/Jane, who has put their savings and post-COVID stimulus checks into the stock market, allocated enough thought into risk management, tail events, or even contemplated what losing their savings could mean for them? It’s only sad that given the inflation witnessed across the world, people are increasingly vulnerable and unable to make it through retirement as pensions and welfare systems crumble in face of changing demographic trends and ageing societies.
No More Stimulus Checks- Better Go Back to Work
The author is in no position to offer advice- any advice, not to mention investing advice- to anybody. But if asked what he intends to do, he has but a few words. He sold it all, closed that portfolio. So what did he do next? He went to work. At the end of the day, there’s a family to support, a rent to pay, a kid to feed.. And soon enough the world will follow. Interest rates will soon matter again, money will follow cash flows and solid business metrics. And yes, most of the hyped stocks of today will be revealed for what they are- bankrupt businesses struggling to refinance and roll-over debt. Even more importantly, stimulus checks will prove to be a one-off event, despite having taught a lot of people that they don’t have to work in an era of free ‘helicopter’ money. It’s not going to happen this time around. Look beyond.
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