Buckle up, get ready & ADAPT for more environmental changes ahead of 2020 — The Adaptive Economy
Over the course of just 21 days, the market has dropped by roughly 20% the world has seemingly shut down, and we just might be on the worst economic trajectory in history. So how did we get here and what could we expect going forward? Well, let’s start off with the first part. You see, the first thing, as most of you know, is that there is a global illness going around.
Many people are worried about, however, you might know that my position on this is that if you get the disease, you will almost certainly be fine. But it is disproportionately bad for the elderly and those with underlying health conditions. So it’s good to be cautious on a social level, but also there isn’t a need for you to panic on an individual level.
Initially, when the disease had its first outbreak in China, it caused the Chinese government to shut down its manufacturing sector in order to help prevent the spread of the virus. Now, that wouldn’t be a problem if one-third of all products weren’t made in China. You see China as the global supply chain of the world.
So when China experiences delays in production, the entire world’s economy experiences delays as well. But anyway, because of the supply chain, slow down, we have seen many large companies experience a slow down in their sales and revenue, and that makes sense because if you don’t have your product to sell, well then you can’t make any sales and can’t make any money.
And here’s an example. The car industry is very dependent on tools die in machinery in order to manufacture their cars. But each one of these necessities for the car industry is experiencing a one to three-month delay because of the Chinese shutdown of the manufacturing sector. Now this means that car companies will not be able to launch their new annual vehicles on time, therefore missing out on billions of dollars worth of sales.
And also because people are being asked to stay inside, they’re missing out on some wages. They’re trying to be cautious and work from home as possible. Because of those things, we’ve seen an 80% drop in automotive sales in countries like China. And this effect trickles down. You see, if car companies are seeing a drop in sales and revenue, then so will its suppliers.
And if the suppliers see a drop in revenue, then so both the raw industries that work with the suppliers and this effect radiates to all other companies that are connected to the automotive industry. And what else happens when a company sees a drop in sales or revenue? Well, we tend to see things like layoffs or even bankruptcies, and those things lead to a higher unemployment rate, which would lead to less purchases being made by consumers, which would lead to less sales being made by businesses.
And this cycle continues until the economy hits low points like the great recession or the great depression. Now keep in mind that this is just the automotive industry example that I’m giving. The drop in sales that I talked about will apply to virtually every other industry in the world except the toilet paper industry, because that’s actually manufactured in a bunch of different countries around the world.
Yet sales have increased for some companies like KP tissue by almost 50% in the last few weeks. So there is no toilet paper shortage. Everyone. It’s just a bunch of corridors buying a hundred rolls out of time, and large retailers just can’t restock the shelves fast enough anyways. Typically from the time that we begin to see a slowdown in sales from worldwide companies to the time where we experience massive layoffs, defaults on loans and bankruptcies, it can be anywhere between two and 24 months.
I mean, to think about this, the great recession began in December of 2007. But it took until September of 2008 in order for the worst parts of the recession to begin to be felt. And it was in March of 2009 when things were at their worst. That’s a period of about 15 months in order for the recession to hit rock bottom.
So what I’m trying to say here is that even though we may not experience an economic downturn in the next few weeks, we will almost certainly experienced some sort of negative consequences in the next 24 months. So the great recession might not be the best comparison for what we’re going through today, because that was caused by a combination of banks, insurance companies, and investors that created massive flaws in the financial system.
The most comparable economic downturn to the one that we are seeing today was probably the recession of 2001 except the one that we’re going through today is on a much larger scale. You see in 2001 there was a rapid drop in stock prices after a half decade long bull market. There was also a crisis that slowed down to the world’s economy, which was nine 11 and there was a temporary ban on air travel in many countries throughout the world.
Now, these aren’t the exact same as to what we’re seeing today, but it is the most comparable recession in terms of causes. And in 2001 what we saw is that the effects of the recession caused an eight month economic downturn and doubled the unemployment rates to about 6% but again, the thing is that what we’re seeing today is much more extreme than what we saw back then because today we are seeing many more negative.
This is a chart of the 2008 financial crisis. Over the course of 517 days, the stock market dropped by more than 56% millions of people lost their jobs, their homes, and to their life savings. It was the worst time for the global economy since the great depression in 1929. Now, this is the 2020 economic collapse so far.
Economic indicators. For example, today, consumer debt is at a higher level than it was during their session of even 2008 meaning that any economic downturn might cause people to miss payments on their debt and in turn create massive losses for lenders. Similar to what happened in 2008 today, stock market volatility, which is usually a sign of investors being uncertain about an incoming economic collapse, is actually at the exact same level as it was right before the 2008 recession.
Which was extremely high. There are also two giant industries right now in the airlines and the cruise lines that are actually on the brink of bankruptcy, and no one is really talking about this. In fact, I’m almost certain that if people aren’t able to travel again in the next few weeks or a couple months, then we will see at least one major airline go bankrupt or get built out.
In fact, it might even be all of them. And what is strange that this might be one of the only bailouts that I’ve hundred percent agreed with because it’s due to an unpredictable change and traveling laws and regulations and not due to the incompetence of the industry. In fact, if you want to know how bad airlines are getting hit right now, take a West jet for example.
They’re a fairly big airline with 14,000 employees, but they are expected to lay off between 20 and 50% of their flight attendants in the next few weeks. If air travel does not return back to normal. There was actually an internal memo sent to the West jet union that said, our airlines wellbeing has become grave.
Overnight, and there’s another industry Titan in American airlines that set it will be cutting down its international flights by 75% there’s also air Canada that gets roughly 70% of their revenue from international and us flights and those flights are either empty or just not happening right now. And because of this downturn in air travel, there have been spokespeople like Kristoff Hannibal, who represents air transact, who have said, we are currently assessing the impact on our operations and expect the government to help airlines and travel companies.
Whether these extraordinary circumstances, and as I mentioned earlier, the airline industry is not the only industry getting hit right now. Of course, you’ve probably heard about a lot of the other shutdowns. It’s like the businesses that involve large gatherings of groups of people. These are the businesses like the NBA, NHL, MLB, MLS concerts, comedy shows, conferences, and much more.
And even though each one of these businesses is much smaller than some of the bigger industries that we’ve already talked about, having all of these industries take a hit at the same time, we’ll begin to add up in ways that you don’t think about. I mean, for example, have you thought about the economic impact of shutting down the NBA?
You might think that the only people who will get hurt are the players. The owners may be the broadcasters, but that isn’t true because the people that will be most affected are the arena workers who are expecting to have a stable weekly paycheck, but all of a sudden have no source of income. Now, luckily, many NBA players and owners have offered to give some help to the arena workers by funding them until the NBA comes back.
But the point here is that every single shutdown of a business will likely have an economic impact that most people aren’t thinking of. And yes, there’s even different kinds of companies that don’t draw in large or dense crowds that are still shutting down for several weeks at a time. The best. Two examples are Nike and Apple who have shut down all of their stores in hopes to stop the spread of the virus throughout the world.
And even though these are big companies that will be able to get through the shutdown while still being able to pay all of its workers, there are still many businesses who are shutting down temporarily or who are limiting store hours, who will be unable to pay their hourly workers their expected wage.
And what about the stores and small businesses that do keep their doors open during this time? Well, this early data is pretty terrifying. Let’s take the restaurant business for example. There are apps like Rezi and open table, which are used to book tables at restaurants, and there are reporting that covers are down between 30 and 65% in areas like New York and Washington.
And this one really hurts me personally because picture all of the mom and pop local restaurants and businesses that are just being able to get by and pay the bills, and all of a sudden this disease outbreak happens and they might go out of business because everyone is staying at home. So all of these points represent the case for an incoming recession.
And there’s a ton of other points that are tough to quantify, such as businesses losing productivity by having people work from home. There was a sharp drop in oil prices recently too, and there’s a ton of other economic indicators that signal a really bad economy coming in the future, but this does not mean that a horrible recession is for sure coming.
You see, there are ways to at least mitigate some of the short term consequences of a recession. For example, one action that several countries have done like Canada and the United States is that they have set up a loan program where small business owners are able to take out interest-free loans in hopes to prevent their businesses from shutting down during the next six to 12 months.
Another thing is, as mentioned earlier, using taxpayer money to help bail out core infrastructure companies such as airlines might help prevent large companies from going bankrupt. Now, I’m not saying to bail out every single large company, but core infrastructure ones. There’s a good debate for actually doing that.
Another tactic for whatever reason that no one has mentioned so far is the federal reserve is lending out one point $5 trillion. Yes. That was a trillion with a T. They’re lending this money up to wall street and the big banks. Now, there is complex reasoning behind this called the repo market, and that would take an entire book to explain properly.
But here’s a quick overview. The United States banks have taken out a one-point $5 trillion worth of loans in order to help get them through tough economic times. Where treasuries are less liquid, it’s essentially a loan to help stabilize the market. Now, if the market does stabilize with this injection, that’s a good thing.
So the banks and market might not collapse, but if the market does not stabilize with this injection, all of a sudden you will see a giant collapse on wall street, which was what happened in 2008. And if that didn’t worry you enough, this method of lending to banks is kind of viewed as the last resort to help stabilize a market and prevent a collapse.
Now lastly, another thing that is done virtually every time there’s an economic slowdown is a reduction in interest rates. This is a very simple way to make debt cheaper in hopes of promoting spending that will kickstart to the economy. And typically what you see is that when times are going to be good, interest rates go up and when times are going to be bad, interest rates go down.
Now the federal reserve just did an emergency rate cut down to essentially 0% that is something that you only saw during the deepest parts of the 2008 recession.
And so when I initially recorded this, I was going to say that they didn’t want to lower it down to 0% because they wanted to have one more bullet in the chamber to potentially help out the economy when things start to get really bad. But now they just used that last bullet, unless they want to go to negative interest rates.
And even though these measures might help prevent some companies from going out of business. Or having to do mass layoffs. The one thing that can’t be prevented is the slowdown of the economy that we have already experienced in the last few weeks, and this will likely continue for the foreseeable future.
You see, governmental action can only get you so far during a recession. At the end of the day, the only real way that we can prevent or minimize this recession is to have a life to return wealth back to normal for the average person.
But that might not happen for quite a while.
So buckle up, be prepared & adapt the way you leave, eat, learn, work & make incomes because you will be challenged the next 24 months.
