A Global Economic Collapse?

Let us begin, the macroeconomic policy landscape has shifted rapidly during the past year, with policymakers facing an unusually uncertain environment. We are inevitably part of a global community with many moving parts filled with growing tensions and uncertainty coupled with worsening global outlook. Some permanent output losses are expected in many economies.

So, in order to address this question, we must first ask “will there be a global economic collapse”? We don’t know. I am a skeptic in business, investing and in life and am hopeful a collapse will be averted. No doubt the current environment is particularly challenging amid slowing global growth & elevated inflation.

So, for the purposes of this discussion, we will assume a significant global slowdown and recession (collapse may be too extreme of a word at this time) let’s examine the industries most affected currently from the many existing global challenges which are persistent and seem to be rising.

Not only are there high uncertainties and growing fragilities but the risks of monetary, fiscal, or financial policy miscalibration have risen significantly. Global financial conditions could deteriorate further. Inflation appears to be embedded at many levels as elevated inflation is a global phenomenon and challenge. Bringing down inflation is a key policy priority. As a result, global financial conditions have tightened.

The global recovery has weakened since the pandemic, and inflation pressures have intensified with the most vulnerable groups facing the largest impacts. While most countries continue to grow, the pace of growth has slowed, and some economies have fallen back into recession. World output is declining in 2022 and even more so in 2023.

These unprecedented supply shocks, their persistence and size mean that policies will have to tighten to facilitate adjustment to a new equilibrium.

Simple answer, everything will be affected. Now the gravity of how each industry is affected will vary by many variables. Some industries will exhibit less contraction than others. Therefore, the effects are nonbinary, rather on a sliding scale of degrees.

Has inflation peaked? Possibly. However, I believe elevated inflation (which is the concern) could remain for some time with a global recession possible in the near term. We have seen inverted yield curves for some time here in the US and now the global yield curve is inverting as well (10Y below 1-3 Y)

Increasing pressures on prices remain the most immediate challenge to prosperity by pinching real incomes and undermining price stability. Under-tighten, and further entrenched inflation. Over-tighten, and push the global economy into a severe recession. It is a delicate balance. With Stagflation as a potential outcome.

I repeat, bringing down inflation is a key policy priority. We also need to address elevated debt levels. In order to facilitate adjustment to the new state of the world, tighter policy stances may be needed to address the persistent multiple global supply side shocks. Despite recent declines in commodity prices, energy concerns have grown due to the multitude of geopolitical issues centered around Russia/Ukraine conflict. High food price inflation is prompting a cost-of-living crisis.

We can expect monetary policy to continue to tighten globally, with the degree to vary by country, dependent on where inflation remains high and labor markets tight, thus higher interest rates are most likely needed. Fiscal policy will need to tighten in many economies to address debt susceptibilities.

Therefore housing, which is interest rate sensitive, will most likely be challenged. Industries exposed to greater debt and capital expenditure reliance will face greater challenges and we should proceed with caution.

Manufacturing is contracting

New Orders are softening and contracting

Production is decreasing. Prices are decreasing as well too

Exports and imports are contracting

Companies appear to be preparing for future lower output as output & consumption is declining M/M.

Demand has eased

Real demand is softening but prices are still elevated. Cost reduction is still a primary focus for all.

Margins are compressed with rises in the costs of capital, debt, production, labor. As a result, COGS & operating expenses are much higher. Seemingly, Revenues are being held up more so by inflation and increased prices rather than higher output/vol.

There is a Dilution of value.

Corporate Earnings are already under pressure due to compressed margins, and I believe should continue and most likely worsen into 2023 amidst global growth slowdown and tightened policies. Therefore, deteriorating earnings as well as upcoming employment issues could be our next hurdles.

All Industries will be affected. The defensive, more inelastic industries which are necessities such as utilities, health care, medical equip, some biotech, consumer staples, industrials, “select” technology (which can also be deemed essential) and/or renewables with SOLID fundamentals could fare better. However, I am cautious with equities & bonds and the 60/40 portfolio which may be less ideal as equities could experience further downward risks and am looking more towards commodities and remaining liquid with cash.

Remaining liquid & Reducing debt are key amidst tightening liquidity within restrictive monetary & fiscal policies.

When looking at investments. CASH is king. FCF yields FCF margins, rising earnings, etc.

We can look at historical patterns during economic crisis, various business cycles amidst slowdowns with elevated inflation and potential unemployment challenges which could signal stagflation. However, times differ. So, we remain open-minded and flexible in a world in flux filled with uncertainty & a rapidly changing landscape.

Regardless, continued monetary and fiscal tightening is most likely needed to tackle inflation and address debt susceptibilities and these actions will continue to add pressures to economic activities especially to sectors with more interest sensitivities such as housing and other heavily debt dependent sectors.

This will take time to work through but there is light at the end of the tunnel as always. After the darkest times the light always emerges again.