Inflation in America is at a 40-year high, while household incomes, adjusted for rising prices, are falling at the fastest pace since the government began collecting data in 1959.
That’s largely because the cost of food, fuel and housing has been climbing so dramatically. The price of commodities shows no sign of going down much anytime soon, thanks to the war in Ukraine, while a tightly constrained housing market in the US may keep prices higher than normal for the next few years, even as interest rates rise.
But what about non-essential items? There one can see the beginning of a correction that may have surprising impacts for both business and markets. A recent report by Currency Research Associates, a US-based financial strategy firm, identified strong anecdotal evidence that a “global ‘buying strike’ is emerging”, as consumers around the world begin to cut back their spending on anything they don’t absolutely need.
The evidence for this is strongest in developing countries, where the spike in the price of basics (which are even more expensive when priced in depreciating currencies) has led to rolling blackouts, food insecurity and what amounts to a “removal” of hundreds of millions of people from the global consumer economy.
Now rich countries may be in for some of the same. Residents of New York and New Jersey, for example, owe more than $2.4bn to utility companies (nationally, the number is $22bn) and some cities are warning about electricity shut-offs if bills aren’t paid.
Businesses are beginning to adjust their own expectations for spending. Used cars have been outselling new ones in the US for some time. In late March, Apple announced plans to scale back output of its iPhone SE by 20 per cent, because the war in Ukraine and rising inflation were cutting into consumer spending around the world. It also slashed orders for AirPods earphones. Last week, Netflix announced that it lost more streaming customers than it signed up in the first quarter, the company’s first reverse in a decade. The streaming service’s 35 per cent share price dive following the announcement led the entire S&P down.
The worry now is that anything people can cut back on — from eating out to summer holidays to new clothes, white goods, cars or gadgets — may take a hit if food, fuel and (in places like the US) housing costs remain high. While that’s already happened for the 60 per cent of Americans who live pay cheque to pay cheque, there are indications that richer people are becoming wary about excess spending, too. One recent poll found that over half of those making $100,000 or more were dining out less, and roughly a third were cutting back on driving, travel and monthly subscriptions.
What might the domino effects be if lower consumer spending, rising costs for raw inputs and falling share prices collide with higher interest rates and corporations holding more debt than ever? Ulf Lindahl, the chief executive of Currency Research Associates, says investors would be wise to look at what happened in another period of declining income and production growth, between September 1937 and June 1938.
Back then, after hitting a couple of peaks, equity prices plunged by 40 per cent in three months. It’s a period that economist Kenneth D Roose examined in detail in his 1954 book, The Economics of Recession and Revival. While the exact causes of the crash are difficult to tease out, wholesale prices had surged at a time when people were still very conscious of the Depression and increasingly nervous about geopolitics.
All that collided with a reduction in the federal aid that had been doled out as part of the New Deal, just as central bankers had begun raising rates. The cost of capital for business rose, even as spending declined, and share prices collapsed.
There are obviously disturbing similarities with today’s global economic and geopolitical picture. We also have wary consumers, higher wages in many places, soaring inflation in commodities globally, a war in Ukraine, and central bankers trying to stay ahead of it all. Real 10-year US Treasury yields are about to turn positive for the first time since the pandemic, giving consumers yet another reason to save more, and spend less. It will also make corporate debt more expensive, and companies more vulnerable.
Does all this mean that we are heading for a 40 per cent market correction? I’m betting not, if only because a China still pursuing a zero-Covid policy and a Europe in crisis means that US equities will benefit, at least for the time being, from being the cleanest dirty shirt in the closet. In our deglobalising era, it is, like it or not, safer to invest in a region that has its own food, fuel and consumer demand.
That said, it does feel as if we are approaching a major turning point in the markets. Supply chains are shifting, conflict is growing and currency systems are changing. All of this is happening at a time when monetary policy is about to cross a Rubicon with rate hikes and quantitative tightening. History rhymes. Let’s hope it doesn’t repeat.
rana.foroohar@ft.com
Source: Economy - ft.com
