Eggheads around the world are arguing the toss about whether parts of the world could go into recession. Problem about recession is that there is no clear definition about what constitutes a recession. Some say that it is after two consecutive quarters of economic output. Some say it is when the US yield curve inverts.
What if an economy does contract for two successive quarters but employment is still high? Is that still a recession? What if consumer spending remains strong even though the yield curve has inverted? Is that still a recession?
Perhaps we are asking the wrong question. Maybe we should be asking why recessions or economic slowdowns even happen. Another question is whether recession is really such a bad thing.
Recessions generally occur when the market recognises that capital has been misallocated. The realisation that capital has been misspent can happen when there is a scarcity of money.
There is little doubt that money is scarcer now than a year ago. The US Federal Reserve is making sure of that. There could be even less money swirling around next year when the Fed withdraws US$95 billion a month through Quantitative Tightening.
Given that we know money supply could be tighter, it stands to reason that we are more circumspect about where we should put it. It wouldn’t be a problem if the money had been properly spent. But in many cases, it hasn’t. It went into flaky ideas such as cryptocurrencies, zombie companies, and property that were already at nose-bleed levels.
So rather that call it a recession, we could think about it as an opportunity to reset our investments as the market presses “alt-ctrl-del”. That doesn’t mean it won’t be painful as we watch our portfolios shed value. But the upside is that we could take advantage of a market downturn to buy shares in companies that we really believe in.
It may seem counterintuitive, but a recession doesn’t signal the end of the world. It is the market’s way of telling us that FOMO is not an investing strategy. It is the markets way of telling us that the old rules about investing still apply. Investing is quite simply the yield on an asset over the lifetime of the asset. If we understand that then we shouldn’t go too far wrong, recession or no recession.
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