The markets are abuzz about the possibility of a global recession. And based on the economic indicators especially the tools used by the market participants to gauge or predict a possible recession, you could see a strong case there. Having said that, if you are student of recession and also life in general then, your view will quite possibly be that, almost all possible recessions are manufactured, and therefore manageable. You can’t fully avoid a recession, in the same way as you can’t always avoid an accident or a fall when you are out and about.
And looking at the evidence, one could conclude that, in a way recessions are manufactured, and mainly driven by market sentiments and overall market psychology aka “ the mood of the market”. But there is no fixed theory or tool to accurately predict a guaranteed recession. That’s important to highlight.
What does tend to happen is, a general consensus build up about an impending recession ends up dries up the flow of capital flowing through the entire economy. And this tends to happen because people end up going into cash and value preservation mode. So the appetite for taking on risks sharply declines. It is more or less a hibernation mode. But having said that, it is during a recession that you can also make substantial returns on investment, and there are ample evidence to support that conclusion, you just have to look at the financial crisis of 07/08.
The investors who invested in the markets during recession did end up making substantial amounts of money. So you could argue that, while being fearful is an understandable reaction, its worth not losing a sight of the big picture during an event, crisis or otherwise. A decline in the overall economic activity can also help consolidate the growth in the economy.
In a way, it’s like driving a car on a highway on a busy day, your average speed will not reflect the time you might have spent stuck in a traffic waiting for the traffic to clear up. People don’t necessarily look for those numbers. Also, I would say that, the overall economic journey isn’t that different to a personal journey of human being for that matter . You will have highs and lows. And there will be days when you won’t like to get out of your bed for any number of reasons, but that does not mean, your chances of dying has significantly increased. Or you may never succeed for example. What the process is telling you is, your state of mind is going through a phase that might needs clarity and action, and you are simply going though a natural phase in your journey in life. But if you are willing to take right decisions, you will see changes.
People who are piling up in safe haven assets have a view of what’s happening within a market or the economy at large. But there is always a degree of disconnect between the expectations and the ground reality. And we know this for a fact. It is almost impossible for economic data or a series of economic indicators, to comprehensively capture the economic activities of an entire economy. Also, even in worst economic downturns, there are always areas of the economy that does better than other parts of the economy. Again the evidence to support such a conclusion is all out there.
In my own view, the fear of recession is a good thing, because then people start to shine a light on larger parts of the economy, which can then lead to adjustments within the economy, and sometimes that is what an economy needs.
Today a number of factors are influencing the global economy, and one of them is the uncertainty and general disruption caused by politics. The ongoing disruption is bound to cause chaos, so therefore people looking for certainty will most likely pile up in assets that are considered safer. That’s quite an understandable reaction. But winds do change directions, and that’s just how natural architecture of what we know as nature is designed.
The evidence of an interconnected world can clearly be seen from what happening in the global economy. So yes, the talk of isolationism is probably nothing but a talk. Because quite frankly, it is going to be very difficult for anyone to undo the existing architecture of the global economic ecosystem. You can’t grow and prosper in isolation, it just doesn’t work in reality.
My own assessment is that, the fear of impending recession globally will push the central bankers towards lowering of rates, and also they will most likely start looking at adopting a bit more expansive policy measures. The governments will also play their part. I firmly believed that, the central banks will continue to influence the markets and the global economy at large. Why wouldn’t they ? They are the Gods, and the markets are depending on the Gods to come to their rescue again.