😱 JPMorgan’s Warning: Recession is Coming?!
Here’s why JPMorgan is ringing the alarm bells for the economy.
Dear readers,
Yesterday our morning started on a very cautious and jargon-heavy note.
We read an article that said:
Now, we realised two things:
What the analyst was saying was super important for people to know.
The way most websites/newspapers were discussing this, it was super difficult to understand.
So, we did what we do best.
We put on our researcher hats and dug in to break down what’s going on.
Buckle up your seatbelts and ReadOn!
😯 The Economy is in Trouble?
In a line, what the JPMorgan analyst said was: The Economy is in Trouble! Recession is Coming! Brace Yourselves!
Umm, why is the economy in trouble?
Analysts have been warning of a recession since forever, so what has happened now that has gotten JPMorgan so pessimistic?
Well, the past week’s news headlines say it all.
Three major US banks failed (Silvergate bank, Silicon Valley Bank and Signature Bank). One had to be rescued (First Republic). This ultimately led to the fall of Credit Suisse, one of the world's biggest banks. It ultimately had to merge with UBS.
Now, it seems that we’ve all recovered from this. After a couple of days of market sell-offs, the stock market is rallying again.
But when banks fail, the economy is always in trouble.
In a world that runs on money, banks are the engines that power the economy forward.
When they fail, the whole financial system can come to a halt.
That’s exactly what is happening here.
As banks fail, investor concern rises.
Investors no longer want to invest in banks. Depositors don’t want to park their hard-earned money in potentially weak banks.
This means banks won’t have enough money to lend to companies.
Result? The economy is at risk of recession.
This is the Minsky moment that JPMorgan is talking about.
🤓 What is the Minsky Moment?
The full-of-jargon dictionary definition of the Minsky Moment:
"The Minsky Moment is the end stage of a long period of economic prosperity that encouraged investors to take on excessive risk, to the point where lending exceeds what borrowers can pay off. "
The ReadOn, jargon-free explainer of the Minsky Moment:
Think of it like a game of Jenga.
The market is the Jenga tower. Each block represents a part of the financial system. Over time, investors keep adding more blocks, and the tower gets taller and taller.
This tall tower is also now more unstable than before. Eventually, when one block is removed in a hasty manner, the whole tower comes crashing down clumsily.
That's the Minsky Moment.
One famous example of the Minsky Moment was the 2008 financial crisis.
After years of steadily increasing housing prices, a sudden drop in housing values led to a wave of mortgage defaults and a collapse of the housing market. This crisis spread to other sectors of the economy too.
Another example was the dot-com bubble in the late 1990s, where investors poured money into internet-based companies, driving up their stock prices to unsustainable levels. The bubble finally burst in 2000. (let us know if you want in-depth explainers on these two crises).
Coming back to why JPMorgan is now predicting a Minsky Moment.
Due to low-interest rates in 2020 and 2021, investors had a lot of liquidity. They invested in a lot of risky assets from startups and crypto to NFTs. This extra lending exceeded what borrowers can pay off and now the Jenga Tower is in trouble.
Now, if JPMorgan is right, what will be the impact on the world? On India?
Well, a recession in the US or even Europe could be catastrophic for us.
After all, everything is connected. In this global village, the pain of a cry in the West is felt close to home too.
As the world economy slows down, there would be bankruptcies and layoffs.
Our exports would fall, and a lot more companies here would have to reduce expenses leading to layoffs.
Foreign portfolio investors and foreign institutional investors would start withdrawing money from the stock market, leaving companies with even less money. In fact, the FPI/FII sell-off has already begun.
So, is India in trouble? Is the world in trouble?
🌍 Impact on the World
It sure does look like that.
This is why everyone was super eager for the US Federal Reserve (Fed) meeting that just happened (a reminder, we’re writing this before the Fed meeting has taken place).
Now, in the meeting, the Fed can either continue with the rate hikes to control inflation. Or it could stop the rate hikes or even reduce the rate to increase liquidity in the market. This would prevent a recession, at the cost of inflation.
Yes, the trade-off is between inflation and recession.
No matter what the Fed chooses, the common man is going to feel a pinch in their pockets.
In fact, JPMorgan feels no matter what the Fed does, it cannot prevent a financial crisis.
“The Fed is facing a difficult task…but it is likely already past the point of no return. A soft landing now looks unlikely, with the airplane in a tailspin (lack of market confidence) and engines about to turn off (bank lending).”
Such is the financial system.
There are times of plenty, times of prosperity and then there are times of despair, times of worry.
All we can do right now is wait and watch and hope we can all get through this together :)
Let us know your thoughts on the economic outlook of the world. Will we see another recession?
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Hi ReadOn, Thank you for the insightful study,
if possible kindly write a article on dot.com & housing bubble which led to financial crises in late 2000 & 2008.
If there is a financial crisis coming ahead, ReadOn, please make sure to tell your subscribers beforehand. 😝