Good news is now bad news.
What do I mean by this riddle?
I will give a quick recap of what’s happened over the past 2 years to help explain this.
In 2019, the global markets looked strong on the surface but had weak foundations built on a fiat currency (paper money backed by the government) system.
These were quickly exposed when we had an external shock – covid – that caused the stock market to crash by around 20% in a matter of weeks.
It was the fastest recorded decline but bizarrely, the shortest-lived recession (only lasting around a few months) that followed quickly behind….unheard of.
The cause of this rapid rebound was, of course, as a result of the central banks around the world “printing money” to excess (into the trillions) – known as monetary stimulus – and giving it to the commercial banks & governments.
Governments then launched initiatives to give that money directly into the hands of its people – known as fiscal stimulus – in order to make people “feel rich”; thus, encouraging them to go spend it.
The idea being that when people buy things, this puts money back into the economy and staves off any recession (supposedly).
But alas, there is no such thing as a free lunch. Do you remember how impossible it was to get furniture delivered(?), some lumber wood for house projects(?), hell, a new and shiny peloton?!
When the world went into lockdown, supply chains broke down, warehouses ran out of stock and so, there were less goods & services available.
As a consequence of more printed money chasing a reduced global itinerary of things (a simple equation of supply vs demand) – guess what happened…
Inflation got invited to the party.
Prices have since skyrocketed from gas bills, weekly food shops, house prices to petrol ….need I go on?
Inflation , coupled with the war between Russia & Ukraine , suddenly made it a lot more expensive to live and we haven’t even got into the winter season yet.
Where am I going with all of this?! Well let me tell you.
The Federal Reserve – America’s Central Bank – looks foolish because they said “inflation was transitory” but guess what: it ain’t. Sticky little mother-fu****. Inflation is here to stay.
Now they’re trying to reverse course and take money out of the financial system to bring inflation down before the mid-term elections, as it’s not looking good for Biden who has caused a global recession.
The reason why pieces of good news, such as: “high asset valuations!…rising house prices!…an unwavering stock market etc.” is actually bad news is because it encourages central banks and governments around the world to continue ‘tightening their belts’.
Effectively they will continue raising interest rates and withdrawing liquidity (money) out of the economy – known as “quantitative tightening” – until they break something a.k.a a stock market crash or bursting of the property bubble, for example.
Happy times ahead ! Hoorah!
The key is to be in the know, start educating yourself about money and understand how to not get hurt when the next Global Financial Crisis 2.0 arrives . Start with building up an “Emergency Fund” that I have discussed at length in this blog post.
On that note, I’m off to pour myself a stiff drink. Until next time!