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Writer's picturePhilip Ammerman

Headlines and Bread lines


headlines and breadlines. An article on the economy by Philip Ammerman

A quick diversion into textbook economics, which may explain so much of what we are seeing. I'm speaking from the European and US mainstream perspective in writing this. There will be many exceptions depending on your country and sector. 

 

It’s really clear across multiple sectors that we are between two capital cycles. Central banks are starting to reduce interests rates but they remain largely above 4% and well above the average over the past 14-16 years since the last major crash (which introduced non-conventional quantitative easing and zero interest rate policy).

 

The “damage” done by high interest rates is basically corrective action, but it tends to lag at least 18-24 months after the rates themselves being a downward movement and reach some flatter level.

 

This means that two of four main GDP components, personal consumption and corporate investment, will be low.

 

Which in turn means GDP will normally fall, in the absence of large scale government spending. Since government spending is largely constrained by large debts, large deficits and the inability to approve projects and absorb funding, I’m not counting on a Keynesian solution to economic growth. At least in most countries. 

 

Moreover, most governments are continuing a trend line towards historically higher spending as a share of GDP, and doing even better than this is a challenge. So the third GDP component, government expenditure, is also no panacea.

 

In fact, I’m counting on the opposite. Besides high interest rates:

 

  • We have two major conflicts ongoing (Ukraine, Gaza/Lebanon);

 

  • We have the threat of tariffs and political instability in the United States as well as prior tariffs from the US and European Union across a range of products and industries;

 

  • We have a property and credit crash in China which may slowly be showing signs of recovery, but is a long way from full steam;

 

  • We have consumers who have eaten through their COVID savings and stimulus;


  • We have ridiculous housing prices as well as price gouging across many value chains, resulting in high inflation despite high interest rates. In fact, the standard approach of high interest rates as a solution to high inflation probably has nothing to do with the prices we are seeing in tourism or the food chain right now.

 

In the case a new tariff war breaks out, this will inevitably negatively affect exports, and therefore reduce the final element of GDP (expressed as consumption): net exports.


And what about the stock market? Can we have a stock market that rises in the face of a recession? I would argue ... probably. There appears to be a significant divorce between any tech-heavy index that features the 8-10 BigTech shares (NVIDIA, Meta, Alphabet, Apple, Tesla, etc.) and everything else. To be blunt, there is too much global money chasing too few growth opportunities, all in a very synchronized fashion. This is hardly a new insight, but it may explain why so many investors and politicians tend to conflate a rising stock market with a rising economy.


The end of a capital cycle is typically characterised by a recession that typically affects demand over an 18-24 month period. This is not to say that all growth will be affected, but enough growth will be affected so as to affect consumer and producer sentiment and actual budgets.

 

What are the clearest signs of this? Substandard jobs and long hiring delays. I have friends in so many countries that have been applying for a job for months now, and are not getting any results. Firings and salary cuts should probably also be expected. When the job market slows, it’s a sure sign that corporate spending is being reduced.

 

Another sign is slowing property transactions. While this is already apparent in commercial property, it should become more visible in the residential market as well. This is heavily market-dependent, but it’s really clear that for the most part, we have overshot the rational logic of property prices, especially on the European periphery. And this is despite all the justifications to the contrary: safe havens, golden visas, Airbnb, vanity projects, etc.

 

So, if I have any advice for my friends on the job line, or in startups seeking finance or in vulnerable companies, it would be to prepare for a downturn lasting at least 2 years. We are likely at the beginning of the correction, all macro data to the contrary.

 

If you (negatively) affected by the current climate, take whatever defensive measures you can. If I am wrong, raise a toast to my miserable analytical skills. If I’m right … well … you can toast me later. With lemonade.

 

And if you have capital available ... well ... better sailing ahead.


Cheers,

Philip

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