Is the Macro so bad? What should we do then?
Is the macro so bad?
What is the macro (economics)?
According to Investopedia:
Macroeconomics is the branch of economics that deals with the structure, performance, behavior, and decision-making of the whole, or aggregate, economy. The two main areas of macroeconomic research are long-term economic growth and shorter-term business cycles.
Gross Domestic Product (GDP)
For a start, 2 successive quarters of GDP decline in the US is a good start on why the macro is bad.
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| US GDP (2018 - 2022) |
According to the US, this alone does not imply recessions. However, we are expecting earning compressions in the coming earnings reports. With the recent PMI coming out from China, the demand for production is slowing down. China is one of the big producers and this should imply a drop in global demand too.
Inverted Yield Curve
An inverted yield curve shows that long-term interest rates are less than short-term interest rates.
An inverted yield curve shows that long-term interest rates are less than short-term interest rates.
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| US inverted yield curve (10-year rate less 2-year rate) |
The inverted yield curve has been a good predictor for recession (periods shaded in grey) in the chart above.
Let us look at the various symptoms of macro challenges.
Money Printing
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| M2 money supply in USA |
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| M2 Money supply in detail (Jan-Aug 2022) |
The US has printed $15T since Covid into inflation. Before Covid, there was $5T worth of money in circulation. This is inflationary and started the erosion of disposable income. We are simply leaving the problem for the later generations to pay.
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| Forecast of growth of net interest outlay from 1.3% (2022) to 3.3% (2032) |
CBO’s projections: net interest outlays increase from $352 billion (2021) to $399 billion, or 1.6% of GDP in 2022. This outlay triples to $1.2 trillion by 2032, 3.3% of GDP, 1.3% points higher than their 50-year average as a share of economic output.
Inventory overstocking
When the supply of (stimulus) money stop, what is left is several companies including Walmart, and Nike left with "too much" inventory on hand. These will have to go on discounts as the ongoing supply chain costs of storage/handling eat into their margins.
When the supply of (stimulus) money stop, what is left is several companies including Walmart, and Nike left with "too much" inventory on hand. These will have to go on discounts as the ongoing supply chain costs of storage/handling eat into their margins.
From WSJ, Nike said inventories rose 44% to $9.7 billion in the latest quarter, & higher discounts & freight costs squeezed profit margins. Executives said they would mark down more goods, heading into the holidays.
Supply Chain challenges
Supply Chain is unable to cope at one time at the ports of Long Beach & LA. With freight rates up from $2.5K to $14K and now some of the routes are down to $3.9K. The US is still short of 80,000 drivers. We need autonomous vehicles, yesterday. This is not something that can be solved by adjusting interest rates. They need a better port, and not just lesser traffic.
Supply Chain is unable to cope at one time at the ports of Long Beach & LA. With freight rates up from $2.5K to $14K and now some of the routes are down to $3.9K. The US is still short of 80,000 drivers. We need autonomous vehicles, yesterday. This is not something that can be solved by adjusting interest rates. They need a better port, and not just lesser traffic.
US infrastructure
US infrastructure rating stood at an unacceptable (average) grading of C-
US 2021 infrastructure report (source: https://infrastructurereportcard.org)
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| ASCE report card on US infrastructure 2001 to 2021 |
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| Infrastructure ratings in detail |
Overall: C- Over a ten-year period, the total investment gap is nearly $2.59 trillion.
The US is still pumping money into Ukraine - I would have preferred if they spend the money to shore up their infrastructure, telecoms, education, healthcare, etc.
Inflation & Debt
Inflation has 2 components of demand and supply side. From the demand side, inflation leads to lesser disposable income - leading to lesser spending on the house, and more household has taken on more debt - overleveraging.
Inflation has 2 components of demand and supply side. From the demand side, inflation leads to lesser disposable income - leading to lesser spending on the house, and more household has taken on more debt - overleveraging.
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| US household debts as of 2022 |
Data from the Federal Reserve Bank of New York showed a $312 billion increase in total household debt to $16.15 trillion in the second quarter of 2022. Credit card debt, in particular, increased by $46 billion. U.S. credit card debt hit a record $930 billion with younger Americans having the highest delinquency rate. Source: CNBC (Jul 26 2022)
The average household's debt (2021) is USD$96,371. With the interest rate hike, they will be paying more for interest over the coming months. Some of the families would not be able to repay. Such default is expected to grow over the months.
According to Experian, average total consumer debt in 2021 was $96,371. That's up nearly 4% from 2020, when average total consumer debt was $92,727.In the second quarter of 2019, total debt was $13.86 trillion. As of the second quarter of 2022, debt had risen to $16.5 trillion.
Let us not forget that there is a supply side to inflation. When the supplies were not available, these will also lead to inflationary effects on prices. Recently, there were supplies in the ships but not the shelves due to supply chain challenges. These too has led to shortages and price increments. When the supply chain costs rose from $2.5K to $19K (40' container shipping from China to US West Coast), such costs are eventually passed on to the consumers.
Housing bubble
The housing bubble looks to pop - with monthly mortgages increasing as much as 70% (for non-fixed rates) from a year ago. This is not something that a typical household can afford. now, there are buyers who simply walked out of housing deals (being constructed) after learning that they can no longer afford the "increasing" monthly repayment. This left home builders holding to unfinished property, materials on the way, and having to sell back to a market that is seeing falling prices.
The housing bubble looks to pop - with monthly mortgages increasing as much as 70% (for non-fixed rates) from a year ago. This is not something that a typical household can afford. now, there are buyers who simply walked out of housing deals (being constructed) after learning that they can no longer afford the "increasing" monthly repayment. This left home builders holding to unfinished property, materials on the way, and having to sell back to a market that is seeing falling prices.
Rising mortgage rates and a lack of affordability are prompting a steep drop-off in demand for housing. At the same time inventory for sale is on the rise. A combination of falling transactions and prices will intensify the recessionary forces the US economy is facing
Crypto
Crypto was once $3T but it's worth less than $1T (a 70% wipeout). Crypto markets down nearly 70% from peaks: Will the carnage continue? Despite US Fed's hawkish stance, crypto-currency markets continue to remain under the shadow of uncertainty. They have dropped about 70% from their all-time highs.
Crypto losses reach $428 million in Q3 globally; hacking cases top concern. With the loss of the capital, hacking now complicates the crypto market.
Student debt cancellation
Student debt cancellation - is inflationary. one man's debt is another's assets. So, the government will need to find sources to fund this. Eventually, the taxpayer will be the one paying for this. It sounds good but is there a need? Are they fixing the root causes or are they just buying votes for the mid-term election in November 2022?
Geopolitical
Ukraine is suffering and the world suffered due to subsequent impacts on fertilizer and grains.
Ukraine is suffering and the world suffered due to subsequent impacts on fertilizer and grains.
The geopolitical issues between the US and the rest of the world like Russia & China are not good for businesses, especially ones like Tesla. Ever wondered what could happen if the US and China end up in an armed conflict, what would happen to Tesla?
Climate challenges
The recent climate crisis is causing challenges for agriculture and energy. Some of the renewable like hydropower dams - could not be powered. Even states like CA have to ration their energy. This is not good going into winter when the demand will be even more. The coming winter could be crippling for Europe due to the energy crisis and surging inflation.
The recent climate crisis is causing challenges for agriculture and energy. Some of the renewable like hydropower dams - could not be powered. Even states like CA have to ration their energy. This is not good going into winter when the demand will be even more. The coming winter could be crippling for Europe due to the energy crisis and surging inflation.
Hurricane Ian
In all, the economic damage wrought by the hurricane could reach up to $75 billion, according to a projection released on Saturday by data firm Enki Research, which studies the financial impact of storms.
Hurricane Ian will be among the 10 costliest storms in U.S. history, Enki Research said, adding that it may end up among the five costliest after the damage is fully assessed.
Agricultural impact
The embargo on Russia has caused a shortage of fertilizers as 40% of the world's fertilizer supplies came from Russia. More expensive alternatives have been sourced in return - this is inflationary and the cost will be passed on to consumers. In absence of fertilizers, this can lead to a loss of harvest of up to 30% pending the crops. Ukraine had a harvest of 86 million tons in 2021 and is expecting only 50 million tons in 2022.
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| IMF - real food index and global food insecurity |
The result is an unprecedented 345 million people whose lives and livelihoods are in immediate danger from acute food insecurity. And around the globe more than 828 million people go to bed hungry every night, according to the World Food Programme.The impact of the food shock is felt everywhere. The suffering is worst in 48 countries, many highly dependent on imports from Ukraine and Russia—mostly low-income countries. Of those, about half are especially vulnerable due to severe economic challenges, weak institutions, and fragility.
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| IMF - Hunger Hotspots |
Maximo T Cullen, FAO’s chief economist, says wheat & fertilizer supply shortages have driven up prices & increased food import bills for the most vulnerable countries by more than $25 billion, putting 1.7 billion people at risk of going hungry.
CNBC reported that grain shortage is expected to last into next year.
Source: https://cnbc.com/2022/08/01/agco-ceo-says-he-expects-grain-shortage-to-last-into-next-year.html
Yes, we are staring at a global food crisis.
Developing Countries
The challenges of food, fuel and finance are staring many developing countries, not limited to Sri Lanka. Turkey and Argentina's inflation has hit or approaching 100%. IMF has listed 69+ countries on the brim of facing such insecurities. Here is a summary by Visual Capitalist in July 2022:
The challenges of food, fuel and finance are staring many developing countries, not limited to Sri Lanka. Turkey and Argentina's inflation has hit or approaching 100%. IMF has listed 69+ countries on the brim of facing such insecurities. Here is a summary by Visual Capitalist in July 2022:
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| Countries with default risk - Visual Capitalist as of July 2022 |
Sources: https://www.reuters.com/markets/europe/big-default-dozen-countries-danger-zone-2022-07-15/ & https://www.visualcapitalist.com/countries-with-the-highest-default-risk-in-2022/
My investing muse
A perfect storm brews and no one is spared. I doubt that there are many countries or companies that is recession proof though there could be few that may do well despite the downturn. Let us be ready. I hope to be proven wrong. But should we need to go through this, we should be hopeful for the best and prepared for the worst.
Let us spend within our means and save "cash for crash". During the coming downturn, we may get once a lifetime chance to buy into great companies at good discounts. For those who are doing DCA into great companies, do not stop.
Here are some quotes from Twitter user mastersinvest on 5th Oct 2022:
'Cash combined with courage in a crisis is priceless' -- Warren Buffett
"Berkshire's best opportunities always came at times of uncertainty, when others lacked the insight, resources and fortitude to make the right judgements and commit." -- Alice Schroder, 'The Snowball'
It is time to qualify great companies so that we can purchase them when they are priced with good discounts from the coming downturn. For a start, companies without debt cannot go bankrupt. Let us look for companies with strong moat as these are the ones who should recover better from downturns.
Give time the runway to do her compounding magic.
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