After so many months of uncertainty and tension, it seems that the debt ceiling is no longer a problem. Biden and Congress have reached an agreement to avoid default and give the economy a break. The market celebrates it with increases and optimism. But don’t get too confident. There are still many challenges ahead.
For example, What will happen to the Fed’s monetary policy? Will you keep raising interest rates to contain inflation, or take a pause so as not to stifle growth? How will this affect the sectors most sensitive to the cost of money, such as real estate or technology?
And on the other hand, How prepared are we for a possible recession? Do stock valuations already reflect the risks of an economic slowdown or contraction? Which sectors could do better or worse off in a scenario of less activity and consumption?
These are some of the questions we should be asking now that the debt ceiling is behind us. It is not about being pessimistic, but about being realistic and prudent. The future is uncertain, but we can try to anticipate and adapt.
Markets are like mountaineers who fixate on the nearest peak and forget about the rest. So it is with investors who have focused on the issue of the Fed and its pause. They have celebrated with euphoria that the central bank does not tighten their belts anymore and lets them breathe a little. But they have been shortsighted. Because what comes next is much more complicated and challenging. The economic slowdown is already here and it will show in the results of the companies. It is very likely that earnings will fall and valuations will suffer. The sectors most indebted and dependent on cheap credit will have problems paying off their debts and maintaining their growth. Consumers will spend less and savings will yield less.
We do not want to be pessimistic, but you have to have your feet on the ground. Yes, the Fed could stop raising rates for a while. But that is not the goal. Certainly, a pause is better than a rise (although it is not guaranteed that such a pause will actually occur). But we must remember that a pause is not a return to stimuli. So, we could think that the market has become too optimistic with the rally that took place in the first half of the year for waiting for that pause. Whether or not it’s a reality at the next Fed meeting, we need to look further ahead and be ready for what’s next. We can’t stay partying at the top while we still have a long way to go. Markets are shortsighted and simple-minded, but we can be smarter.
Are we on the verge of a recession? Some indicators indicate this. And some experts warn that it could be more serious than the 2008 crisis. The outlook is bleak, as if a legion of ants surrounded us. But you must not lose hope. Just because the worst is possible doesn’t mean it’s inevitable.
One of the indicators that warn of a possible recession is the drop in company profits. According to a report by AP News, companies in the S&P 500 Index have seen their earnings shrink for two consecutive quarters, known as an “earnings recession.” This is partly due to the impact of inflation, which has raised costs and reduced the purchasing power of consumers. The most affected sectors are raw materials, public services, health, communications and technology.
Another indicator that causes concern is the level of public and private indebtedness. Legendary investor Jim Rogers warned in an interview with Real Vision that the next bear market will be the worst in his life, suggesting that it could be more severe than 2008. “In 2008, we had a bear market because of excess debt.” , said. “Look out the window since 2008, debt everywhere has skyrocketed.” And that doesn’t bode well for investors. “It’s a simple statement that the next bear market will be the worst of my life because debt has increased by such staggering amounts in the last 14 years.”
The debt problem could also affect the US dollar, which could lose its hegemony as the world’s reserve currency. Rogers said that many countries are looking for alternatives to the dollar, partly because of their huge debt problem. “You should be extremely concerned because if you’re not, you don’t know what’s going on,” he said.
Given this scenario, what can investors do to protect themselves? Former Treasury Secretary Lawrence Summers offered some clues in a speech at the Peterson Institute for International Economics. Summers predicts that the Federal Reserve will have to raise interest rates in the short term to contain inflation, which is hovering around 4.5% or 5%, well above the 2% target. Apparently, the friend Larry is not team pause. He also anticipates that taxes in the United States will rise significantly in the long run to cope with the growing public deficit.
Summers recommended that investors diversify their portfolios and bet on sectors that benefit from inflation, such as agriculture. Rogers agreed that agriculture is a promising sector, also saying that he owns silver, gold and other currencies. Both agreed that we must be attentive to what is happening in the world and not trust too much in the optimism of the market.
As you can see, the current economic situation is complex and challenging. There is no magic formula to avoid losses, but there are some strategies to minimize risks and take advantage of opportunities. The important thing is to be informed, be prudent and adapt to changes. In situations like these, it is not convenient to take refuge in denial.
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