If you have been watching the news lately, you probably heard the word "recession." After
2 years of a global pandemic, we have started 2022 with a market correction and news about
a new recession. What a great time we are living in.
On top of that, inflation hit a new record of 7.5 percent. Just to let you know how significant
is that. In 2020, inflation was 1.2 percent, a year prior to that 2.4 percent. Anything
ab ove 4 percent is already considered catastrophic, leave alone 7 percent. The real value of your
100K dollars is now worth 93K dollars, thanks to the massive inflation that has been happening
lately.
The question is, how bad will inflation get? How is it going to drag the economy into a
recession? Will it impact bitcoin prices, and most importantly, will that crash the
stock market? We will answer all of these questions and many more, but before we do
that, you know what to do, smash that
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What we have to understand is what exactly causes a recession. A recession is simply
a slowdown in economic activity. It was clear why we went into recession during the pandemic
because everyone was sitting at home, but why are we about to have a recession when
we are getting out of the pandemic? Shouldn’t the economy start growing?
The answer is pretty straightforward, a recession happens whenever there is a mismatch between
demand and supply.
Think for a moment. High inflation increases prices, which leads to less demand. In these
circumstances, the fed usually lowers interest rates or buys government bonds to flood the
market with cheap money to stimulate demand. However, interest rates are already at nearly
zero percent and have been in the last 2 years, and the fed has been purchasing bonds since
then at an alarming rate. So it ran out of that option.
In fact, it was one of the reasons that caused such high inflation in the first place.
But that's not the only option the fed has at its disposal. The other option is to increase
interest rates, and prices will stop rising so fast. However, it has its own risks. Less
money will be flowing into the economy since companies will not be able to borrow as much
as they do now. They will have to cut spending, which will result in higher unemployment,
which will result in less demand which will probably lower inflation, but that will lead
to a r ecession. That's why the fed doesn't want to raise rates! They are doing everything
they can to stop inflation without raising rates, but things are just getting worse so
far. Inflation hit a new record of 7.5 percent.
In the last 2 years, we should have fixed the global supply chain, but we didn’t.
And we are far behind schedule. An increase in interest rates will make that
process much slower. We have been building the global supply chain since the end of ww2,
and it's nearly impossible to restore it unless we get rid of this pandemic first or at least
learn to live with it.
Global trade is entirely dependent on huge ships that are filled with containers. They
handle 80 percent of global trade. A containership that transports goods from China to the US,
for example, doesn't just empties the containers but rather fills them with American goods
and then heads to China. But because of the pandemic, 60 percent of these containers are
left empty on the ports of the US because there are not enough goods to fill them.
And it's expensive to ship them back empty. So, companies find it cheaper to keep the
containers in the ports rather than shipping them empty back to China. Out of 100 containers
that are shipped from China to the US, only 40 are back (to china), which creates a shortage
of containers, which means fewer goods are shipped to the US from China, which creates
a shortage of goods in the US which means higher inflation. It's a never-ending cycle.
The only way to solve this problem is either by solving the global supply chain or significantly
reducing the demand, which can cause a recession as we have discussed earlier. So we are left
with just one option (solving supply chain)
When the rates are raised, this problem will take us much longer to solve since businesses
will be able to borrow less money, which means they will have fewer resources to spend to
fix the supply chain. That's why the fed doesn't want to raise the rates. When the economy
is too dependent on debt as it has been in the last 2 years, what happens when that debt
is no longer available? I will leave that for you to answer.
Even if we end up solving the problem, a lockdown in one of the major manufacturing cities in
China or the US or any other major city can bring everything to square o ne.
Recessions don't happen overnight. It's a slow process.
But a recession isn't really the worst-case scenario. Stagnation is a possibility if the
fed mismanages the crisis. Stagflation is when the inflation rate is high, the economic
growth slows, and unemployment remains steadily high. If the fed raises rates to tackle inflation,
that will slow down the economy and will raise unemployment, but prices will keep rising
because of supply chain issues which is exactly what stagnation is all about. Let's hope it
doesn't get there.
The question is, how is that going to impact the stock market?
During the boom periods, speculative assets rise dramatically since the economy is flooded
with money. That's why tech stocks and crypto have been booming in the last 2 years, but
the exact opposite happens during recessions. Crypto and NFT will probably suffer the most,
especially since these 2 markets are filled with so many scams. I know I will get a lot
of hate for saying something like this in the comments below, but that's the truth.
The NFTs are a bubble right now, that's just a fact, and the number of people who are getting
scammed is unbelievable. That's why during recessions, they suffer the most since people
are less likely to speculate since there is less money in the economy and the future doesn't
seem bright.
At the same time, the fear of a recession can become a self-fulfilling prophecy since
that can push people to stop spending, which will cause exactly the same effect. That's
what the fed is afraid of.
However, companies that provide basic services are usually recession-proof such as healthcare
companies. It doesn't matter whether it's a recession or not. If you have to see your
doctor, you will go and see your doctor. Regardless of the recession, you have to put
food on the table so companies such as Kroger, PepsiCo, or Procter & Gamble will most likely
keep rising.
The big question is - how should you prepare for the next recession?
The answer is a bit complicated because every recession is unique, and the future is very
unpredictable. First of all, we have no idea when will supply chain issues be solved, so
we have no idea when inflation will be fixed. Secondly, we have no idea how the fed is going
to react. How many points will they raise the rates? And whether the pandemic will be
over by the end of the year?
But it's really important to have cash because during the recession, businesses suffer, and
many of them go bankrupt. A recession is an excellent opportunity to find a good deal.
I am not saying you should sell your stocks. No am I telling y ou to do anything. This
is not financial advice.
But the truth is that, a recession doesn't necessarily mean bad news for the stock market.
A recession is a two consecutive quarterly decline in the economy as measured in GDP.
But the economy isn't really the stock market. So things might not turn as bad as we might
expect, but only time will tell. Even if you had invested in an S&P 500 index fund at the worst possible
moment in 2007 for example — the market's peak before the financial crisis began — you
would have achieved an 8.4% annualized return in the 13 years since.
Historical data proves that long-term investors always win no matter how bad the crisis is.