The Half Year Economic Review
Investors and economists rely on historical examples of trends and events to predict the future. Reinhart and Rogoffs study of 500 years of financial and economic collapses proved how prone we are to repeating the past. But what happens when there just isn’t a historical example to draw from?
Sure, today’s macro environment has some parallels to the 70’s inflation and oil crisis, as well as the 1920’s and 30’s boom and bust, and even links to the moves of Volcker and Greenspan with their breaking backs and soft landings; but right now, at this half year, we need to appreciate that this time is different. There are glimpses of the past but the macro factors are unlike anything we’ve seen before.
Despite the blurry economic environment I expect the second half of 2022 and early 2023 will trade sideways as inflation, interest rates, earnings, debt, and consumer behaviour play out. Volatility will stay elevated and markets may trend slightly down until we eventually reach a recession in late 2023 and then recover.
Although there’s myriad underlying factors I see two core drivers of the sideways market; liquidity and uncertainty. Due to the nature of people and traders the two drivers are closely linked and inversely related. This means that as uncertainty increases liquidity typically declines. Uncertainty erodes the trust and confidence in the system and causes many investors to get nervous about where they put their money. On the flip side, when it feels like we have a high degree of certainty and optimism then everyone runs to the market and places trades which creates a flood of liquidity. The most extreme examples of this herd behaviour are in the crypto markets.
Despite how closely liquidity and uncertainty are linked its important to appreciate their separate underlying causes. In this article we’ll investigate these causes and what they mean for investors and business owners. We’ll also do a quick half year review of how the monthly analysis has played out so far.
Investopedia defines liquidity as: “the ease with which an asset, or security, can be converted into ready cash without affecting its market price.” In practice this means the ability for an…