The government will release the Q2 GDP figures this morning. This is likely to be around the time you read this article. Since the White House has set its own definition for a recession, it is likely that we’ll see a second quarter of negative GDP growth.
We would normally call this recession.
With tech stocks down 80% in the past six months, crypto dead, bonuses down, inflation high, gas prices higher, and waves of layoffs, it feels like we are in a recession.
Here I am sitting in a coffee shop packed with people in Atlanta, Georgia. Business is booming. The baristas were busy all morning, as there are 30 people waiting for lunch. The Braves’ game that I attended last Tuesday ( TUESDAY ) was sold out. The party I attended on Saturday night was not dominated by concerns about the economy. On Monday morning, the Atlanta airport had a full house.
Reality has forgotten the recession.
What is going on?
Two Different Worlds
There are two worlds: the one you read online and the one you live every day.
Online world is more dangerous than ever before, with dangers lurking around every corner. This online world says that we are just one mistake away from a free-falling economy. Each headline warns of war, inflation and supply chain issues. Financial markets are in decline, startups are failing and all lines that used to rise straight up are now falling straight down. (Except for gas prices of course).
You’re reading about a world of suckiness online.
What about the real world? What about the real world? It’s doing well. In reality, we’ve hired 100,000 more than expected just in June.
Amex customers spend 148% more than last year’s Q2 on air travel, 90% on lodging and 48% on restaurants. That’s only “experience”-related spending. The total spending has increased by 31%.
Recent earnings reports by Hilton and Visa confirm the same trend. Consumers are spending an incredible amount of money.
Best recession ever.
We are now in a strange situation where everyone believes that the economy is bad, but everyone behaves as if it’s booming.
Recently, Kyla asked an intriguing question: Is the economy in a slump?
She makes a very good point. Actual economic data are mixed. The jobs numbers are positive and inflation is low. Vibes is bad, but the consumer sentiment is also awful. Everybody seems to believe that we are in a bad situation, even though we are not.
This is important, because thoughts lead to action. The actions people take because they believe things are bad (because they read about it in the online world), can have real-world implications.
Remember the early days of pandemic, when people were so afraid of toilet paper shortages, they hoarded it. This, in turn created a shortage.
The same thing applies to a “vibecession”. When people feel the economy is bad, they will take actions reflecting this feeling, such as cutting back on consumer spending. If the reduction in spending spreads throughout the country, it could lead to a recession.
Consumer actions are good but consumer sentiment is not. If consumer sentiment is bad, then actions are likely to get worse. This could lead to a recession.
But right now, the consumer is still spending a lot of money. The consumer’s spending habits have not yet been affected by this vibecession.
Since these “vibes” could have real consequences for the business, it is important to ask why they are so bad.
Means Reversion
The last two and a half-years have been a crazy time for both the stock market and the economy.
White-collar workers began to work from home as a result of a pandemic. To keep businesses afloat, the government cut interest rates and committed trillions of dollars in stimulus.
The stock market suffered its worst ever 30% drop, but then rebounded so violently, that it ended 2020 up 180%. Quantitative ease and stimulus packages sent tons of new capital to different assets. We saw growth stocks trade at 50x their sales, cryptocurrency shoot up by 1000%, SPACs take half-constructed science project public, private companies raise funding at 1000x their revenue, and JPEGs traded for hundreds of thousands.
Come on, man! People were paying $1M dollars for rocks.
What was the result? Millions of people were working in their living rooms and casually spending money on anything. Everyone was becoming rich. We were all stock market wizards. We all knew someone who was a crypto-millionaire. Stimulus cheques became lottery tickets and no one “worked” from home.
A number of events that never occurred before happened simultaneously.
We normalized the new environment after 18 months. This was, of course, far from normal. this was far from normal.
The S&P 500 has historically returned 8-10% per year. In 2019, it increased 31%, 18% in 2020, and 31% by 2021 (after a 30 percent decline in a single month). This is not normal.
In 2019, the Invesco QQQ ETF that tracks the tech-heavy Nasdaq returned 39% (!!!) In 2020, 27% of the stock market will be worth it. This is not normal.
In the context of history, two years are a blip. But in today’s “everywhere at once“, it feels like ages. The 24/7 coverage of economic and financial news keeps us in a state of hyper-exaggerated “right now.”
It’s hard to remember life before “right now” when you’re always in the present. The “right now” has become our standard for normality.
If you finished college just before the pandemic, or if you became interested in stock markets because you were bored at home while working, then the last three year are the only normal years you’ve ever known.
The new normal consisted of rocket ship emojis and NFTs. Also, billion-dollar companies subsidized with cheap capital that couldn’t make a profit.
This new normal was not normal. This new normal is just the normalization euphoria.
Stocks cannot increase by 30% each year. Cash-strapped companies can’t continue to hire thousands of new workers. Assets with no real value cannot be valued at insane levels. Interest rates cannot remain at zero percent forever.
This was never going be sustainable.
If you were seduced, then it seemed sustainable. You wanted to make it sustainable, or at least that’s what you wanted. Everyone loves making money, after all.
It’s not normal to think something is. Now that interest rates are rising, cash-burning businesses have gone bust and speculative investments have crashed, we’re back to “normal.”
This is not a recession. This is not a scenario from 2008. It’s just a mean-reversion.
It’s hard to get out of the mean reversions, especially if you are in love with euphoria. The boom cycle. You will be a pessimist about the economy if you have been making money for months and suddenly you start to lose money.
You will believe that the labor market has crashed when your employer used free money to hire a large number of people, but then cut jobs in order to concentrate on profitability once the money runs out.
You will naturally think that the economy is in trouble when you were able to secure a 30-year loan at a rate of 3% and now you are paying 5.50%.
When every piece of online financial information highlights how far away we are from the peak of euphoria, without mentioning how insane the peak of euphoria in the first instance was, it is only natural to feel that the world has crashed.
Everything feels this way right now.
If you extend your time horizon it will look more like this.
Market speculation that is profitable and widespread is not normal. It’s not normal for companies to burn cash in perpetuity. You are currently experiencing a return to normal.
Your negative feelings are stronger the more you normalize the euphoria from the past few years.
There are always risks. Risks will always exist. When unemployment and interest rates reach historic lows and consumer spending is high and companies who make money continue to make money, then I think that we will be okay.
The air travel industry is booming. Sports events are packed. Restaurants are busy. And dive bar cover bands have returned to the scene. Spend some time outside and away from screens. Right now, real life is on a major bull run.
