Why do we only get bulls and bears? We are all badgers now, digging into our setts with whomever we were stuck with when the drawbridge was raised. Badgers can live for decades, but one study reckons that humans can only be restrained in a lockdown scenario before things start going rather more pear-shaped.
Badgers we may all be, but sadly we cannot ignore the outside world entirely.
Because by our very act of badgery, digging into our lairs and waiting out the storm, we all have the potential to crash the national and global economy. Simply by doing nothing!
This is what the Federal Reserve Bank is doing in the US, to replace the evaporating wealth we leave sat outdoors:
Source: Holger Zschaepitz on Twitter
This is the effect of quarantine on one of the most powerful economies in the world:
Source: Holger Zschaepitz, on Twitter
And stocks are actually going up, because in a game of economic Top Trumps, chart one beats chart two hands down. Apparently.
But China kept growth above 6% during the actual global financial crisis (GFC). This time it didn’t just miss this crucial growth figure slightly, it actually fell by 6%. Does all this seem a bit abstract to you though? Fair enough.
And the Nasdaq?
It’s above where it was on Christmas Day 2019. Looks like unprecedented falls in economic output are a bit abstract for everyone else too.
If you’d invested just a year ago, you’d have made a good return. Investors in American technology are saying that nothing has changed since Christmas.
Here in the UK, markets aren’t quite so buoyant, perhaps because the Office for Budget Responsibility says that under a three-month lockdown, the UK economy would shrink 35% lower than its size last year. That’s three years’ worth of the Great Depression of 1929. During the GFC of 2008, UK growth fell only 6%, and took five quarters to do so.
So, this is much worse than that.
But what does that actually mean?
GDP measures everything that is produced or bought in the economy, so if you build a house, a car, a phone, serve food or drink or manage someone’s savings, pension, legal case or health, then that contributes to a total GDP figure.
If 35% less is being produced or serviced in the UK, then everyone is worse off.
Because everyone’s spending is someone else’s income. Think about that for a minute. Every pound you spend gives the recipient an extra pound to spend.
If no one is going to the hairdresser, maybe the hairdresser can’t afford their car payments, or doesn’t buy new clothes, or nice food. If the restaurants, shops and carmakers are no longer receiving their payments, they can’t afford to pay their suppliers, their staff, and the chain continues indefinitely.
Our economies are so intertwined that the chain reaction involves everybody.
When times are good, people are optimistic. They borrow, they take out debt. The most common forms are mortgages and credit cards. When you borrow, new money is created by the bank and injected into the real economy, by your spending.
The bank creates debt, which is yours, and credit which is theirs. Debt always has two sides, remember. And you’re not borrowing money from the bank that it already had in its vaults, it’s created on both sides of the bank’s balance sheet, as an asset for them and a liability for you.
One of the most resurgent forms of debt since the financial crisis has been car financing, where people pay for their cars in monthly instalments rather than outright. See below:
In an economy where one person’s spending is another person’s income, a 35% contraction in GDP means that a very severe loss of income will result, for everyone, everywhere.
It won’t be equal geographically, and certainly not for different income levels.
Overall, when people are spending less, people start earning less. And when they are earning less, they start spending less. And when they become cautious, they want to save more, even while spending less.
That’s how it goes in cycles. The more optimistic people get, the more debt they take on in order to make more transactions in the present, which they will pay for in the future. That builds up and up, and when it ends, the longer it went on for and the larger the debt built up, the more severe the comedown.
The higher the pedestal…
That’s how cycles form. Debts mount up, and then everything turns at once, causing consumer and lender confidence to recede in unison.
With the tools at their disposal, our governments and central banks seem to have done a fantastic job at lubricating the financial system, by replacing liquidity in financial markets.
But what they cannot do is replace consumer demand.
They can’t replace demand at the garages, estate agents, restaurants, tourist sites, nightclubs, pubs, cafes, gyms, libraries, shopping malls, cinemas, theatres, museums, wine shops, National Trust sites, phone shops, charity shops, festivals, cruises, bike shops, sports clubs, football matches, youth centres, swimming pools, furniture shops, bookshops, airports, train stations, hotels, spas, pottery-painting cafes, kids’ play centres, nurseries, nanny organisations, trade fairs, careers fairs, recruitment offices and cricket clubs…
As every tortoise on that list pulls its respective neck in to the safety of its shell, all of their lost spending equals an equivalent loss of income for every other one, eventually. To the tune of 35%, or roughly the entire four-year Great Depression squeezed into 3-6 months.
Moreover, governments and central banks have proven financial markets are insupportably disjointed without their support, so it’ll be pretty tough to remove these temporary measures. The measures from 2008 lasted until today for the same reason.
Which is why I urge caution, while many around you may be throwing their hats back in the ring. Remember, what the wise man does in the beginning, the fool does in the end.
But as ever, our view must remain balanced. At the moment caution should reign, I would say, but it doesn’t have to be total, or absolute. In fact, it mustn’t be. Because there are two main risks in investing. Losing money, and not making money.
This week I have focused on the former, but next week I shall also give due credit to the latter, and expand upon the theme which I find the most powerful and compelling as an investment case.
I look forward to speaking to you then.
All the very best, have a wonderful weekend everyone,
Editor, UK Uncensored