Today's show will focus on what we can expect in 2023. We don't have a crystal ball or claim the power of prophecy. Rather we look at past behaviors of the people and institutions that shape economies and assume these approaches will continue. Never forget the past predictor of future behaviors is the past.
EPISODE 25 - THE GLOBAL ECONOMY
The outlook is gloomy. Given the policies that have been put into place since the last recession, 2008-2010, world governments have kept interest rates almost at zero. That is the interbank leading rates which means if they place a traditional 3% margin on top of the loan, most business loans were artifically low. This meant credit was too cheap.
Also, because of excessive spending and building unsustainable sovereign debt, this contraction was inevitable. All of the factors are present for a recession: rising prices, unemployment, and declining GDP.
The only question is will be there a world-wide recession or isolated recessions bringing growth down.
EPISODE 26 - INFLATION
There are many ways of computing inflation, but the universal metric is a mixure of PPI, CPI, CCI, and employment.
The PPI is the Producer Price Index and it is a measure of the costs producers are paying to deliver the poducts and services the sell. Another valid metric is the PMI - the Purchasing Managers Index. It measures their confidence in purchasing more raw materials (production) based upon purchase oders they are receiving. Both is these are leading indicators - what will happen.
The CPI is the Consumer Price Index and measures what consumers are paying. It is based on a basket of goods and services and measures how each item changes over time. This is a real time indicator - what is happening. A companion to this metric is the CCI. It measures how confident are consulers, based on the CPI, they are about the future. It has a direct impact on their willingness to purchase anything beyond the neccesities.
Unepmloyment is a trailing indicator and measures the impact of a downturn in manufacuring and serives - if you don't have the work, you don't the employees. The reason most companies are reluctant to start here because of the costs of layoffs even though it is tempting to start here. Labor makes up about 30% of your costs and a controllable expense.
The global forcast is inflation will continue until 1st or 2nd QTR of 2023 before begining a decline. But that assumes the government and their central banks make the right moves.
EPISODE 27 - INTEREST RATES
Given our opening statement about the misuse of credit - making the cost of borrowing too low and hiding the moral hazard of taking on debt, inflation was built into their policies. This is also the major cause of economic bubbles.
So what happens when inflation gets out of control? The standard response and one of several tools is to raise the cost of borrowing. By raising rates you make the borrower think smarter about the hazard of the loan especially if the market is contraction. This logical response harms a number of individuals and industries as unintended consequences. It destroys the housing industry: construction, real estate, etc. and the home owner. Suddenly your home is worth less and the number you can buy it shrinks because it is now outside their budget.
In the United Staes we have raised the interbank rate to 3.75% and will increse it in 2023 to 5-6%. Now add the usual 3% margin banks place on top of what they pay you have interest rates at 8 to 10%. And that is for the best customers, imagine the impact credit card rates?
The forcast for 2023 is the global interbank interest rates will stabilize around 4.25-4.5%. This is a world-wide number and what will happen in your country will be different.
EPISODE 28 - SUPPLY CHAIN
Given our episodes today, we hit on different aspects of price, the supply chain is another place to look because of the supply / demand issue.
Price, if we strip out all of the government distortion, is nothing more than a balance point between demand (people wanting to buy) and supply (how much of it is available).
Here are 4 things to track to determine the supply chains impact on pricess.
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