Is a Global Recession on the Horizon?
The SP500 is down 20% this year. The Nasdaq is down 27%. Our local ALSI is down 13% since January. That is what happens in equity markets. We have seen this before, haven’t we?
However, there is something entirely different going on now. Price inflation is rampant due to geopolitical events and supply chain shocks brought about by Covid lockdowns. If we were patient, we would wait for the storm to pass. Be we are not patient.
The US Federal Reserve (Fed) has tried playing all its psychological tricks to reduce consumption.
The Fed has threatened rate hikes and quantitative tightening. None of this has worked. The Fed’s mind tricks are intended to slow down demand and thus reduce price inflation caused by too much money in circulation.
The problem is that the current price inflation is not being caused by too much money in circulation. It is being caused by too few goods.
US Dollars are in short supply, despite the corporate media going on about “money printing”. The corporate media doesn’t understand bank reserves and the Fed’s machinations. But they do believe the Fed’s phycological mumbo jumbo.
The supply chain shock has meant that US wholesalers have over-ordered, and inventories are starting to build up again. This is the classical bull whip pattern. Soon retailers will have too many goods and not enough demand. What then? Prices will come down. Industrial commodity futures markets (think copper and metals) have rolled over; prices are already falling.
As usual, central banks worldwide are too late in applying their hocus pocus and have their diagnosis all wrong. Interest rate hikes in the US are political theatre. The Fed needs to be seen to be doing something. The problem is that higher interest rates might just occur while the US and the rest of the world enter a recession. Of course, the Fed will take credit for “fixing the inflation problem”. The bigger problem will be that they will accelerate the onset of a recession, and before long, they will be cutting rates again.
In South Africa, the reserve bank has also started increasing interest rates. We have very little growth to speak of and an enormous employment problem. The worst thing we can do is raise interest rates.
More expensive debt in SA will not reduce the cost of fuel imports. That is a one commodity price that is not rolling over. More expensive debt will only increase the business risk and add to our unemployment woes.
So far, the ALSI has been quite robust compared to the US markets. But SA has been in a recession for seven years. The formal recession measure is two consecutive quarters of negative GDP growth. However, a glance at the ALSI chart shows the most prolonged period in recorded history of the equity markets going sideways.
A global recession is on the horizon, and the Fed is crowing about no recession in sight. That is the psychological mumbo jumbo that I was referring to earlier. Mark this date. Within a year, the Fed will be cutting rates again, saying, “we could not have known that a recession was coming”.