What is normal to us nowadays? After 3 years of Covid, anything before 2020 looks like a different world altogether. Youtube travel videos from 2019 and earlier cannot be used as a reference point anymore as many businesses may have stopped operating after years of lockdowns.
Are we nearing the levels we were at before the great shutdown of 2020? The initial collapse of supply chains and then the knee-jerk start-stop motions more than a year later had created choke points had taken time to unplug.
The final holdout for zero Covid (China) finally broke their walls down a few months ago. The rest of the world has progressively opened up more than a year after the first vaccines were rolled out in early 2021. Looking back, inflation was inevitable into 2022 as the global engine started to crank up again after country lockdowns had caused demand to collapse in 2020.
It was in hindsight that aggressive rate hikes had to happen last year which would lead to asset bubbles popping after many years of cheap borrowing costs since the 2008 GFC. It was a ticking timebomb that was waiting for a perfect storm to happen.
We are moving into a brave new world where Covid has permanently changed the way we work and think about life in general. Technology has allowed WFH (Work From Home) to happen and now a hybrid work life balance is possible. Digital nomads can work from any beach resort while moving around.
Every human being on earth had the chance to re-evaluate life again and assess our mortality as we face the deadly virus without knowing what will happen the next day. Humans are adaptable creatures but yet this once in a 100 years event shook us to our core.
And now we are slowly but surely returning back to normal. I can see revenge travelling picking up with still some cautious over hang of mask-wearing, just in case. Personally, I already had 5 shots of the vaccine to date (2 + 2 boosters + 1 bivalent) plus the flu and shingles ones too… I have never had Covid before but it may had been a mild infection which I did not notice.
The economy is at a crossroads junction and historical data cannot be used to determine the near future nowadays. While US interest rates are now reverting to the long term norm of 3-5% range and looking to touch a bit higher at the 5% level, it is good news for retirees who had to eat into their savings when rates stayed at almost zero for many years.
A paragraph from a Washington Post article probably provides a close enough reply to what we are seeing now:
“The most plausible explanation of all is that the pandemic and subsequent recovery were so unusual that the normal rules of economics don’t apply. Demand surged for everything from toaster ovens to used cars. Supply chains could not keep up. Prices spiked. Now, there’s a right-sizing. Goods inflation has come down for most items (even for eggs) as demand has subsided. The question is whether services inflation for travel, restaurants, entertainment, insurance and deliveries will follow.” https://www.washingtonpost.com/opinions/2023/02/10/economy-inflation-employment/
We are looking at the tail end of the inflation spike that started in Dec 2021 with the reopening of borders and the recovery of supply chains. The Ukraine war further turbocharged inflation fears as commodity prices shot up. There is still a few more rate hikes to go, but at a diminshing pace, in order to keep recession fears at bay.
Newer technological advances in AI (ChatGPT) and climate change innovative solutions should encourage inflation dampening measures as productivity jumps. On the other hand, if America gets its act together and push for a new infrastructure initiative for badly needed roads/bridges, high speed rail and new airports, that can spur inflationary upside pressures in the opposite direction. We have seen what it can do for countries like China and EU as demand for raw materials skyrocket. The opening of China is also a double edged sword as demand and production can pick up as material prices move higher.
Overall, we see a return to normal. But the new normal will differ from the old normal by a lot. The way things work historically will become obsolete and hybrid methods will have to be implemented. Cautious optimism rules for now, a departure from the gloom of recessionary fears just a few months ago. The wild card will be the ongoing Russia/Ukraine war. It is already a year and de-escalation is no where to be seen.
It is important that we look at the evolving macroeconomic picture from a top down approach to investing to further fine tuning of our existing portfolios. Cyclicals seems to have paused its rise and corrected a bit. Coming off from their peaks with big corrections in 2022, Tech stocks seems to have stabilized as they search for the next big thing. CBDC (Central Bank Digital Currencies) are likely to be launched this year as there is a concerted push to move away from USD dominance.
Leave a Reply