A few hours’ drive from my hometown in North Carolina you will find the Outer Banks, a picturesque string of islands and inlets. The Outer Banks boast one of the most interesting, and most treacherous coastlines, in the world. The geography there changes due to natural ocean occurrences. The sea creates new islands and inlets and claims older ones. Typically, this takes place over many years, but it can also happen abruptly, even overnight if the storm is severe enough, like a hurricane.
The shifts of the Outer Banks led to the rapid adoption of the iconic structures that dot its landscape: Lighthouses. As you can imagine, these became literal life-saving beacons for many sailors that cruised its coastline and provided messages of guidance, caution, and hope.
Lately, it feels like many of us are searching for lighthouses in our personal and professional lives. There seems to have been a dense fog that has descended upon us here in the United States over the past several months. COVID-19 has permeated so much of our lives that it has been difficult to see much further out than a day or two due to the uncertainty and unpredictability that has become commonplace.
We, like those sailors of old, have experienced one of those abrupt changes. We are looking at a topography that doesn’t match our map, and we are longing for a light to pierce the darkness and provide guidance.
Today, we find ourselves in a recession, but it doesn’t look like previous recessions. Typically, the high tide of unemployment peaks well into a recession as layoffs mount, not within the first three months.
Income doesn’t rise in a recession, and yet U.S. household income ticked higher in the second quarter of 2020 due almost exclusively to generous unemployment benefits and personally addressed stimulus payments.
Financial markets seemingly appeared to have reached their nadir three weeks into the official recession. This alone isn’t unique, as the 1926 recession saw a similar market reaction in its first couple of months, although the decline was less than 10%, not the 34% drawdown we saw.
What does stand out, though, is we just witnessed an annualized GDP contraction of -32.9% for the second quarter of 2020, the worst GDP reading since the Great Depression. Additionally, many industries remain operating at incredibly low capacities with no end in sight, including entertainment, sports, restaurants, and tourism.
While an economic inlet may open here and close there, you don’t normally see huge landmark pillars erased from the map. Today, this is the changing landscape that we find ourselves in — a geography that puzzles even the most seasoned of economic explorers.
Naturally, we look around and ask ourselves: Where am I and what comes next?
A Beacon of Guidance
We look for data to provide a landmark so we can adjust course and avoid running aground or crashing into the proverbial rocks. Just like ancient ships used fires on seaside cliffs to signal an upcoming port, we believe there are several signs we can look to today to help provide a forecast of what we may see around the bend.
One of the Possibilities of ‘What Comes Next?’ is Inflation.
With the incredible surge in government spending and loose monetary policy from the Fed, the potential for inflation on the horizon has certainly moved higher. We believe the key to unlocking sustained inflation is the devaluation of the U.S. dollar. Dollar devaluation appears to have begun, and if it continues in earnest, we could transition from the recessionary environment we find ourselves in today and move into an inflationary environment for a period of time.
Commodities have also begun to signal a changing tide. With gold at prices not seen since 2011, silver doubling in value this year, and commodities on the whole looking like they might break out of a decade long slump, it stands to reason that we might get the inflation numbers the Fed has targeted for the past 10 years.
A Beacon of Caution
But does this move to a sustained inflationary environment happen quickly? Could it be possible that the recessionary storm hasn’t passed?
One of the scariest places to be during a storm is out in the water. The change in current, darkened skies, sweeping winds and rain can happen so suddenly that, without proper planning, even the most seaworthy vessels and crews can be overwhelmed.
A unique storm to experience is a hurricane. Living in North Carolina, you are bound to experience at least one every couple of years. With modern day radar, we can easily track and know where the storm is in relation to our location. Unfortunately, with investing there is no radar to pinpoint exactly where the economic storm will land or when it will end. There is also no way to say for certain if the recent run up in the equities market is a true recovery declaring the storm has passed.
Perhaps we are now in the eye of an economic hurricane, where the relative calm is misinterpreted as “the worst is behind us.” when, in fact, a second downturn is inevitable.
A Beacon of Hope
Whether or not the worst has passed is up for debate and only with time will we begin to have more clarity as we move out of the fog we are in economically. The hope for the future is that this recession, and these extreme times, will not last forever. All recessions are unique but have one thing in common: They all have come to an end.
There is hope that an efficacious treatment for COVID-19 can be produced. While it takes years to produce treatments for illnesses and diseases, we have never witnessed such a focused, global effort toward finding a solution than we have for this health crisis.
There is hope many of the industries that have been hurt will adapt, and even bounce back over time — that the changes forced upon businesses due to the pandemic will result in positive economic profit in the future.
While we can’t predict the future or forecast with 100% accuracy market prices 10 years from now, we can build portfolios to help mitigate risk exposure and volatility during turbulent times. If you are looking for a financial lighthouse to help guide you, set up your free consultation today.