Dizzying shifts in the stock market and cryptocurrency values with widespread, nauseating price increases feel like the perfect storm on a same-as-last-year paycheck. It may not make it any easier to pay 25% more for groceries, gas or home maintenance, but my way of coping with an uncontrollable situation is to understand how it works.
My analysis of the big picture trends in the economy may make sense of a situation that seems destined to drive us all homelessness. I see it as part of a cycle. A nasty cycle. But it is as likely to stop short of bankrupting most of us as it was predictable in 2020.
When I think about the state of economy right now, mostly I hear “We told you so”. Some of the voices could be heard a month into the economic shut down in Canada and the US due to the pandemic, i.e. April-May 2020. Other voices are timeless, scholars of economic trends.
With the low interest rates and massive government money supply in the past couple of years, traditional economics would predict inflation. So, no surprise when inflation hits in 2022. Other factors fuelling price increases include supply chain issues. Revolving shut downs of manufacturing and export faculties have caused random shortages of components and specific items. Some are far reaching such as computer chips integral to everything from cars to computer monitors to refrigerators. Others are more specific, like specialty cat food or packaging for bags of soil.
Patterns of consumer spending have warped prices since 2020. Because people had so few things to spend their money in the height of the pandemic, they were willing to spend any amount on something they wanted. I did it myself. If I decided I wanted strawberries, I would pay any unreasonable amount for strawberries because it wasn’t like I was saving my money for a dinner out, concert tickets, or a trip to Greece. While this is perfectly understandable in the pandemic circumstances, it can make the price of strawberries go up.
The 2020 voices predicted a contraction in the financial markets. Much to everyone’s surprise, after a brief, rapid devaluation, the markets boomed. This unexpected turn of events has a few possible explanations, other than government intervention.
1. Fundamentals were intact. Any business that did well because it served pandemic needs was a stock market darling. Examples are those that did home delivery of staples (eg. Amazon), or home delivery of luxuries (take out food deliveries like UberEats, Doordash), facilitated remote communication (eg. Zoom), or catered to new needs brought on by isolation (eg. Peloton and exercise).
2. More fundamentals – the businesses that suffered depended on things that required travel and large groups, such as tourism, entertainment and sports.
3. Several quarters of earnings reports reinforced the above fundamentals, leading to inflated stock prices on the pandemic darlings.
4. Bored money. Those fortunate to retain their jobs during the pandemic had few of the usual luxuries to spend their money on. Trading on the stock market was something people could do during the pandemic. With fewer expenses, investors pushed stock prices up. In much the same way as the example about strawberries.
5. Non-traditional money. There were odd things that happened like the rapid increase and decrease of certain stocks apparently chosen by communities for reasons other than investment1.
6. The same broad, sweeping principles could be applied to cryptocurrency markets. New things, new demands, enthusiastic investors, prices went up.
7. NFTs. Same.
And now reality sets in, and the rambunctious stock market, cryptocurrency markets and NFT markets are contracting like pricked balloons.
I think this is simple human nature and economics.
A bunch of things are changing:
- inflation – it’s been so long since we’ve experienced rapid price escalations, it’s a bit scary and leads people to liquidate savings to pay for necessities,
- re-adjustments of habits, and demand – in general, people are starting to go out more, and require things abandoned two years ago, like hotel rooms, international flights and hostess gifts,
- similarly, people require less home entertainment, home delivery and home everything else,
- because of increased costs of living, people have less discretionary spending, meaning decreased buying of speculative things like cryptocurrency and NFTs and high end stationary bicycles,
- money is being pulled out of the stock market to support more immediate needs, like paying off a loan that is escalating in cost due to higher interest rates,
- because of the increased costs of livings, people are re-evaluating ‘what they really need’, meaning everything is under scrutiny, for example, the value of subscribing to four streaming services may be reassessed.
There is a great spiral interconnectedness of all of these things. Less consumer demand means lower company earnings, less enthusiasm from investors and lower stock prices, which may cause investors to ‘take profits’ from their stock investment. Investors pressed for cash may sell of their positions too. Lower company earnings causes businesses to be more frugal in their spending, leading to lay offs. People who have been laid off buy fewer things, especially discretionary things like their fourth streaming service or NFTs, and take their money out of the stock and crypto markets to pay their bills. This contributes to contraction of all those markets.
And so, down come the value of investment portfolios, the extra cash and the buying of exuberant luxuries. Up goes the cost of everything, the likelihood of unemployment, the cashing in of speculative investments, and the anxiety level about the financial future.
Welcome to a classic economic contraction. The good news is that it’s generally self limiting. Once enough people stop paying high prices and sales go down, sell off enough stock/crypto/NFTs to make ends meet, prices will stabilize, salaries will catch up, investments will become affordable, and commerce will pick up. There will be more jobs. And therefore more people employed who will want to buy stuff.
According to the theories, that’s how it generally works . But past performance is no indication of the future.
1 Here is a blog post I made at the time.