Sunday, June 23, 2024

A Few Thoughts About The State Of The Economy

Below are a few current thoughts and takes about the "State Of The Economy." The world and markets seem to be on autopilot. There is "no here there," and by that I mean it is chugging alone despite itself. Everything is connected and intertwined in a way that leaves the whole system in a fragile state. Our financial system and economy are so complex and opaque that it is impossible to predict where and when it will break or from where contagion will flow. 

Recently I have not been writing as much as in the past. Like many of you, the business of daily life has been consuming all my time. Like a frog in a pot of water that is rising in temperature, the average American is complacent and remains in a state of denial. Inflation is meandering along with a small drop in consumer goods, but that does not mean it is dead. People, whether passively or actively continue to invest in intangible assets. By not buying  tangible and real items they help to minimize inflation by diverting money from physical assets like machinery, vehicles, and buildings.

What And Where We Buy Matters!
Where and how we spend our money has a direct effect on inflation. This extends to which goods are increasing or losing value the fastest. Damn near every economist and analyst seem oblivious to this point. Most tend to take the easy route and simply mix things into an economic stew. In our bullshit world where media outlets like Bloomberg tout the message that if you are not in this rising market, you are missing out, it is understandable that people want in. This has resulted in the "wealth effect" becoming a key driver of our economy.

History shows that when consumers feel more financially secure and confident they spend more freely, the reverse is also true. Get ready for the "reverse wealth effect" to kick in. If this happens it will be a real ball breaker. The wealth effect is a behavioral economic theory based on people spending more as the value of their assets rise. Even decades after its economic bubble popped, Japan stands as a monument to the devastation the reverse wealth effect can unleash. 
With this in mind, it could be argued that the rubber-band has been stretched way too far and could break at any time unleashing a devastating wave of defaults. Trees don't grow to the sky and this long-in-the-tooth upward market, especially in equities will soon reverse, possibly for years. Just because it has not happened does not mean I and like-minded people are wrong. Still in the same way liquidity is more important than interest rates, timing trumps being right when it comes to predicting markets.
Some of us, long ago predicted inflation would increase and the economy drop away. The flaw in our thinking was underestimating the size of the stimulus the government would put in the pipeline. This massive infusion of money into the economy has only postponed the collapse of the financial system. Still, many investors are basing their investments on more intervention from central banks and governments to pull another rabbit out of their hats. It still remains a possibility that currencies will be debased and inflation may soar at the same time the global economy sinks into a funk.
Used, This Item Has Little Resale!
How weird has all this become? We might throw into this  mix what could be called the "garage sale factor." You can call this the used items market if you like. This is where a little-used Keurig coffee maker that costs well over $100 is likely to sell for only around $10. In short consumer goods having little or no resale value highlights the fact we already have way too much stuff and could go a long time before needing to buy more. This also supports the idea a loss of the wealth effect will result in a devastating drop in demand for consumer goods. There is a big difference between need and want.
One of the biggest X factors investors and the masses face is corruption in government and the fact that we have no real say or input into how things will be resolved in the case of a crisis. Systematic corruption means things will unfold to do the least damage to those in charge. Another big issue is world affairs, with conflicts sprouting up in so many areas, we have little reason to get overly comfortable. The fact government debt has exploded and the soaring use of the T word, "trillions" alone is problematic. It is best to remember that when a currency is debased the biggest losers are the masses.

(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

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