This week's doses of finance and other sources of interest:
💰 Doses of Finance
Everyone's asking (particularly in the U.S.), "will there be a recession anytime soon, or are we already in one?" Here's why I don't think this matters for your investments, and what you should be focusing on instead.
Two straight quarters of declining GDP is usually used as a rule of thumb to describe a recessionary economy. So as the US economy contracted for two straight quarters, it must be in a recession, right?
Well, no. In the U.S., the National Bureau of Economic Research (NBER) are the people who actually make the official decision on recessions. But they don't actually use the two-quarter rule as the definition.
Instead, the NBER considers a recession a "significant decline" in economic activity.
So basically if it looks like one and barks like one, then it probably is one.
Even if a recession is averted, some say that the combination of high inflation and slow growth (or stagflation), could persist for the foreseeable, which generally means lower returns for investors.
To Buy or Not to Buy
The best time to buy stocks (historically speaking) is when the NBER announces the start of a recession.
It takes the bureau at least six months to determine if one has started; sometimes longer. So not even they have a clue.
Often, by the time the bureau has figured out the start of the recession, it's close to the end. Many times, investors anticipate the beginning of a recovery long before the NBER does, and stocks begin to rise around the time of the actual economic turnaround.
Let's take two examples from recent history:
The Great Recession -
The Great Recession was officially announced on Dec. 1, 2008 – a full year after it had started. It ended in June 2009.
The bear market ended three months earlier, on March 6, 2009.
The resulting bull market lasted more than a decade.
The Pandemic Recession -
Even more recently, the NBER called the end of the Pandemic Recession on July 19, 2021 (15 months after it ended).
Meanwhile, the S&P 500 gained 50% from April 30, 2020 to July 14, 2021.
Past performance is no guarantee of future results. Of course. Read the fine print.
History can, at times, be a decent guide. And we should understand it. But, in fact, history doesn't always give a good indication of the future, in large part due to outlier events.
Most of what happens in the global economy is tied back to events that were impossible to predict at the time. Like 9/11 leading to interest rate cuts, which led to a housing bubble, which led to a financial crisis.
Like Covid, and the Russian invasion of Ukraine. Both of which disrupted supply chains. Which sent inflation up to 40-year highs. Which caused interest rates to go up. Which might lead to a recession and slower stock growth.
History gives us little guide about these events, so we weren't prepared for them. Just like we won't be prepared for any future outlier events, whether they are detrimental like recessions and market crashes, or progressive like technological breakthroughs, or Boris Johnson resigning. Or, indeed, avoiding a recession.
Back in December, JPMorgan predicted that U.S. stocks would gain 5% this year, some economists predicted the 10-year U.S. bond yield would stick at 2%, and Goldman Sachs predicted that bitcoin would hit $100,000.
But six months later, U.S. stocks were down more than 20%, the 10-year yield was at almost 3%, and bitcoin more than halved to around $21,000.
Good job guys! 👏
So what happened? Outliers.
While I try to keep things forecast-free (because I don't have all the answers either), the only prediction I can comfortably make is that there will be more surprises that move the needle along the way. Good or bad.
In practical terms, we shouldn't be thinking about the likelihood of a recession and what that'll mean for our investments, but questioning our behaviours towards it:
Our relationships to greed and fear.
How we react under stress.
How prepared we are for further losses or potential gains.
Whichever side of the "recession" debate you fall on, the stock market just had its best month since 2020. And we all know how it turns out when you miss out on the best trading days.
Warren Buffet didn't panic during the 14 recessions he's lived through, and neither should you (unless of course you're about to retire to Thailand to spend all your money on weed and blackjack - in which case you shouldn't have been exposed in the first place).
+ How Money Changes the Way You Think and Feel - "A UC Berkeley study found that in San Francisco – where the law requires that cars stop at crosswalks for pedestrians to pass – drivers of luxury cars were four times less likely than those in less expensive vehicles to stop and allow pedestrians the right of way. They were also more likely to cut off other drivers." [Greater Good Magazine]
With China's population implosion, will this really be their century? As things look on the ground right now, I'm struggling to see how. But as I've said before, if there's one country that can surprise, it's China.
🌍 Climate Change
The audacious PR plot that seeded doubt about climate change. "Thirty years ago, a bold plan was cooked up to spread doubt and persuade the public that climate change was not a problem. The little-known meeting – between some of America’s biggest industrial players and a PR genius – forged a devastatingly successful strategy that endured for years, and the consequences of which are all around us." [BBC]
+ Looking for someone to blame for the extreme heat? Try Wall Street. "Banks’ financing of coal, oil, and gas was higher in 2021 than it was in 2016, the year after the Paris agreement was adopted." [The Guardian]
I love chess and poker, but you should teach your kids how to play poker instead of chess, "because chess teaches people that you can make the right decision, but poker teaches you that you can make all the right decisions and still be wrong". Brilliant. [Radio Browser]
Late Bloomers. Malcolm Gladwell on why we equate genius with precocity. Late bloomers often resemble failure until they achieve, whereas prodigies are easy, they reveal their genius from the beginning. Take two artistic legends, Picasso and Cézanne: a painting done by Picasso in his mid-twenties was worth an average of four times as much as a painting done in his sixties. For Cézanne, the opposite was true. The paintings he created in his mid-sixties were valued fifteen times as highly as the paintings he created as a young man. The same goes for beasts in literature, film and other professions. It begs the question, how many great people have we thwarted because we prematurely judged their talents? "Let’s just be thankful that Cézanne didn’t have a guidance counsellor in high school who looked at his primitive sketches and told him to try accounting." [New Yorker]
If a parent has left money in their Will to a child that is specified as their son, and if the son has transitioned into a daughter by the time the parents die, does the daughter get the money? A transgender person’s identity does not come into existence until after a testator has executed a will. So, no? The argument for lawyers is likely less straightforward than that. Can't find any real cases yet but with the increasing number of people who identify as transgender, a test case will probably arise soon. And it will be a complicated one for the courts.
🐦 Tweet of the Week
The measure of a commercially successful newspaper is not simply how well it reports the big events, but what it does when there are no dying statesmen, bloodthirsty desperadoes, or heinous crimes to write about. Hearst succeeded in New York not only because he knew how to report the big stories, but because he was a master at constructing news from nothing.
From The Chief: The Life of William Randolph Hearst by David Nasaw.
I hope that some of these passages gave you something to think about and/or learn.
Let me know which links or comments resonate with you, what you think of the newsletter, and if there’s anything I can support you with.