05/16/2022
A recession is a significant decline in general economic activity. It had been typically recognized as two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators such as a rise in unemployment.
We are NOT in a recession, and we are NOT going to be in one. Why? Because we are currently in a market volatility situation due to the FED raising the interest rates to address the real root cause of the problem, which is inflation.
Interest Rates:
Interest rates are the key factor in any advanced economy. Increase the rate, and everything else will adjust accordingly.
When interest rates increase, investors transfer their money into bonds. It’s a natural process and it has been happening in the financial markets for decades. There is no panic sell.
Inflation:
If we analyze the problem at a deeper level, we can separate the elements of it and study them in separate parts.
Our current inflation is due to several isolated factors, which are coming from circumstances different than market structure problems. Inflation’s main contributors are.
1. Labor shortage.
2. Supply Chain disruption caused by labor shortage
3. Gas Price.
Labor shortage: this is the byproduct of Covid 19 and the great resignation. When the pandemic hit, we went into a recession. Businesses closed and many people lost their jobs for different reasons.
Supply Chain and the Bullwhip Effect: This is a key element to understand our current inflation. The US supply chain evolved to become an incredibly efficient machine under the just-in-time methodology (JIT), which was great in a world without a pandemic. However, JIT brought its own problems. If there were errors in forecasting demand, there were bigger problems upstream the supply chain. This is called the Bullwhip Effect, which states that a small fluctuation in demand at the retail level can cause progressively larger fluctuations in demand at the wholesale, distributor, manufacturer, and raw material supplier levels. Think of it as the butterfly effect in supply chain.
Now, add to this the fact that people are getting let go, quitting, getting sick, and dying. All of the sudden we had a massive problem in the supply chain and the necessary labor to keep the JIT system going.
Then, people started to leave the cities, and there was a massive demand for houses. Real Estate, that was already booming, went through the roof. So, here we got a simple explanation. The law of supply and demand.
Gas Prices: This is the last player but the one that brought the most damage, and we all know it’s because of the war.
What is going to happen next? How do we get out of this?
After analyzing the key elements of our current situation, we can understand that this high inflation is temporary. As our supply chain starts getting normalized, inflation will go down. A key element in getting our supply chain back to normal, is to get people back to work (keep unemployment low). I already mentioned in a previous post that the last job report showed people getting to work in key industries, as well as an increase in the payroll.
Now, as far as gas prices go, the US has an incredible big strategic reserve, and the Biden Administration said they are going to start releasing 1 million barrels of oils per day to help cut gas prices very soon. And that is incredibly important because gas prices are the bigger contributor to our current inflation. Also, the prices of gas are already starting to decrease in several states across the nation, and in many more, they are not going up.
Why is it going so fast? Because our inflation is happening too fast. We are at 8.3%, so the FED decided to push the brakes hard. Just like how the lose items in your car go flying everywhere when you slam on the brakes, the stock market is getting its abrupt adjustment now. It’s a natural process.
So, again. There is no recession and there will be no recession anytime soon. As a matter of fact, it is the other way around. Our economy is strong, and it is getting stronger and stronger every month. We have every reason to be optimistic and to look forward to a bright future.
https://www.stierburgcapital.com/post/economic-market-outlook
