The post-pandemic economy is a complex puzzle. While recession fears linger, the reality might be more nuanced. Different groups experience economic stress differently, and traditional indicators may not accurately reflect the current situation.
Is this plane ever going to land?
Soft landing, hard landing, no landing, any landing … what is going on in the United States? The rhetoric relates to the state of the US economy – is there going to be a recession (hard landing) or is GDP growth going to slow, but keep growing (soft landing) or is everything fine, and GDP growth continues to accelerate (no landing)? If you read ten different commentaries you will probably get ten different views, and it is difficult to work out how global economics is playing out.
I was at an investment conference this week, where David Shapiro from Sasfin Securities, gave the opening address. He was wearing a pair of jeans (smart ones mind you) and an open collar shirt, and he started off his presentation by commenting on his own appearance, and that he had countless suits and ties in his cupboard at home, but things had changed, and now he doesn’t wear suits anymore. The theme of the presentation – a lot has changed since the Covid pandemic. It goes beyond what we wear, or how we work, but also translates into consumer behaviour – what we buy and how we buy it, how we save or don’t save, and how the government responded to the crisis, and the ramifications of that behaviour.
Governments around the world threw unprecedented stimulus at the population as they locked down schools, businesses and economies during the Covid 19 pandemic. It is difficult to forecast how things will react to such stimulus when you are living through it, but as we look back over the short time since the pandemic, it has become obvious that economies did not react in a traditional and expected way. I am talking more about America here than South Africa, but in this global environment, what happens in the US affects most countries around the world. People didn’t save their stimulus checks – they spent them. And depending on the economic demographic, it may have been on improving their living environment, or investing in the stock market. But the money was spent, and that caused a wave of inflation. Jerome Powell thought at the time that the inflation would be transitory, but it turned out that it wasn’t and suddenly in 2022 he had to scramble to raise interest rates faster than they had ever been raised before.
So if we go back to thinking of how things have changed since Covid, I think there is evidence mounting that the economy (certainly in the USA, but also in South Africa) is moving at different speeds. People in the lower income spectrum are struggling after a period of high interest rates, while people who are in the upper half of the income spectrum are holding up well, as they earn high interest rates on their savings, and typically have lower fixed rate mortgages.
So do recessions look different for different groups of people? Certainly in the past recessions showed up differently in developed counties – usually through high unemployment and bad credit cycles – where in emerging markets we would tend to see recessions as a result of currency crisis or economic stagnation. So if we have no singular economy, then different groups of the population experience recessions at different times.
Phil Knight, co-founder and former CEO of Nike, made a comment that goes something like this:
Everyone was looking for the next Michael Jordan on the basketball court, but he was walking down the fairway.
That is to say that everyone was looking for the next big athlete where they had found the last one, but the next generationally dominate athlete was Tiger Woods.
Are we looking for a classic recession, and scaring ourselves into thinking one is around the corner, when in fact, post Covid, we need to look elsewhere? Have we already had the recession – not in the form of high unemployment, but in the form of high inflation and a pay cheques that don’t stretch as far.
Unemployment is rising, but off a low base; credit conditions are easing, but are still tight (usual for a post-recession environment) and the most expensive stocks in the market have been defensive non-cyclical ones, not investors piling into bullish cyclical stocks on a strong economy. The broad market has underperformed gold over the last three years, which is also typical of a late-stage recession. There wasn’t a slowdown in GDP growth, because the government was issuing debt and spending it with abandon. Government spending is still part of GDP after all.
If one wants to get technical, this is as a result of fiscal dominance in the economy, rather than monetary dominance, but that it is discussion that I am happy to have with anyone who is interested. But for now, be prepared for surprises, which may come from multiple directions. I don’t think the world economy is about to collapse in a heap, and investment opportunities haven’t disappeared, but we will need to navigate carefully through this environment, because I am not sure we can look back in history to understand where we are!
Asset Class Returns
The table below represents a rolling year view of the major asset class returns that we track. It offers a view of the asset classes we use to diversify your portfolio.
Is this plane ever going to land?
Soft landing, hard landing, no landing, any landing … what is going on in the United States? The rhetoric relates to the state of the US economy – is there going to be a recession (hard landing) or is GDP growth going to slow, but keep growing (soft landing) or is everything fine, and GDP growth continues to accelerate (no landing)? If you read ten different commentaries you will probably get ten different views, and it is difficult to work out how global economics is playing out.
I was at an investment conference this week, where David Shapiro from Sasfin Securities, gave the opening address. He was wearing a pair of jeans (smart ones mind you) and an open collar shirt, and he started off his presentation by commenting on his own appearance, and that he had countless suits and ties in his cupboard at home, but things had changed, and now he doesn’t wear suits anymore. The theme of the presentation – a lot has changed since the Covid pandemic. It goes beyond what we wear, or how we work, but also translates into consumer behaviour – what we buy and how we buy it, how we save or don’t save, and how the government responded to the crisis, and the ramifications of that behaviour.
Governments around the world threw unprecedented stimulus at the population as they locked down schools, businesses and economies during the Covid 19 pandemic. It is difficult to forecast how things will react to such stimulus when you are living through it, but as we look back over the short time since the pandemic, it has become obvious that economies did not react in a traditional and expected way. I am talking more about America here than South Africa, but in this global environment, what happens in the US affects most countries around the world. People didn’t save their stimulus checks – they spent them. And depending on the economic demographic, it may have been on improving their living environment, or investing in the stock market. But the money was spent, and that caused a wave of inflation. Jerome Powell thought at the time that the inflation would be transitory, but it turned out that it wasn’t and suddenly in 2022 he had to scramble to raise interest rates faster than they had ever been raised before.
So if we go back to thinking of how things have changed since Covid, I think there is evidence mounting that the economy (certainly in the USA, but also in South Africa) is moving at different speeds. People in the lower income spectrum are struggling after a period of high interest rates, while people who are in the upper half of the income spectrum are holding up well, as they earn high interest rates on their savings, and typically have lower fixed rate mortgages.
So do recessions look different for different groups of people? Certainly in the past recessions showed up differently in developed counties – usually through high unemployment and bad credit cycles – where in emerging markets we would tend to see recessions as a result of currency crisis or economic stagnation. So if we have no singular economy, then different groups of the population experience recessions at different times.
Phil Knight, co-founder and former CEO of Nike, made a comment that goes something like this:
That is to say that everyone was looking for the next big athlete where they had found the last one, but the next generationally dominate athlete was Tiger Woods.
Are we looking for a classic recession, and scaring ourselves into thinking one is around the corner, when in fact, post Covid, we need to look elsewhere? Have we already had the recession – not in the form of high unemployment, but in the form of high inflation and a pay cheques that don’t stretch as far.
Unemployment is rising, but off a low base; credit conditions are easing, but are still tight (usual for a post-recession environment) and the most expensive stocks in the market have been defensive non-cyclical ones, not investors piling into bullish cyclical stocks on a strong economy. The broad market has underperformed gold over the last three years, which is also typical of a late-stage recession. There wasn’t a slowdown in GDP growth, because the government was issuing debt and spending it with abandon. Government spending is still part of GDP after all.
If one wants to get technical, this is as a result of fiscal dominance in the economy, rather than monetary dominance, but that it is discussion that I am happy to have with anyone who is interested. But for now, be prepared for surprises, which may come from multiple directions. I don’t think the world economy is about to collapse in a heap, and investment opportunities haven’t disappeared, but we will need to navigate carefully through this environment, because I am not sure we can look back in history to understand where we are!
Asset Class Returns
The table below represents a rolling year view of the major asset class returns that we track. It offers a view of the asset classes we use to diversify your portfolio.