Until recently, the possibility of a recession was not raised. There was talk of a much-needed slowdown to cool down an overheated economy. But talk of a recession was going too far. Despite the new monetary measures, moderate growth was still among the expectations. This has changed. Today the outlook is definitely much more uncertain. Uncertainty is our daily bread for investors. Consequently, the market has become more conservative. The dollar goes up, T-bonds go up and risk assets go down. The price of Bitcoin has been hurt by this dynamic.
Many economists expected a recovery similar to that experienced after the housing crisis of 2008. But I fear that this is no longer the case. In many ways, the matter has gotten out of hand. And the authorities find themselves in a much more complex crux. To make matters worse, the answers have been quite late. The labor market, inflation, and the supply of raw materials. Those are the big headaches. Of course, the situation is even more complicated due to the historical moment that we have had to live in this opportunity. War conflict in Europe, geopolitical tensions, logistics crisis, an increasingly fragmented society, etc. We are walking on thin ice.
The conservative current could be tempted to blame the United States Federal Reserve for all the ills of the world. That is, the idea that everything is due to the increase in the money supply. However, I’m afraid things are more complicated than that. The labor market, for example, does not stop emitting mixed and contradictory signals. The labor market was hit very hard by the pandemic. He recovered quickly. And now we have labor shortages in many sectors. Overheating at work, of course, adds fuel to the fire.
Of course inflation is too much. Especially in used vehicles, real estate, food and energy. But you don’t have to be a genius to know that we have in our hands serious problems in the distribution and production chains. In this globalized world, production is concentrated in certain points. This is good, because it lowers prices. However, it is a very vulnerable system. The moment one of these points registers a problem, the world’s supply is in danger. The congested ports, the lack of containers, the factories with more orders than they can process and shortages in many items. Supply failures exert inflationary prices.
Before the pandemic, the oil market suffered from overproduction. Countries with greater capacity for production chose to earn more by producing more. Now production levels are well below what is required. Production was stopped abruptly. And getting back to pre-pandemic levels is no easy task. Therefore, the price of crude oil is through the roof. It is obvious that the situation in Ukraine and the sanctions against Russia do not help at all to lower the price of energy. The first to suffer in this case are the Europeans who depend heavily on Russian supplies. New sources are sought to compensate. Biden has already made certain announcements in this regard. Similarly, some Gulf countries have made similar announcements. However, heProduction is not something that can be raised overnight. Take your time.
Of course, the economy can be cooled by reducing the money supply. By reducing liquidity, demand is reduced. In this way, everything cools down. The measure is certainly necessary, but extremely dangerous. The United States Federal Reserve has begun to raise interest rates. And it will continue to do so for the rest of the year. Credit is becoming more expensive. Which means cheap money no more. It will still be quite cheap, but not as cheap as before. On the other hand, the Reserve will begin to reduce its books. That is, it will gradually start selling the government and corporate bonds it has bought. I am referring, of course, to QE.
We must remember that quantitative easing (QE) is a relatively new instrument. In many respects, it is in its experimental phase. Certainly, it has given very good results. However, it is not an entirely mastered weapon. We are already beginning to suspect that an abrupt withdrawal of such stimuli could cause major disruptions. In conclusion, the withdrawal of liquidity is a necessary evil. However, we can jeopardize growth. In other words, the winds of recession are felt.
However, We have two scenarios. On the one hand, we have the scenario of slow growth. Here we are talking about moderate economic growth, characterized by a less flexible money supply, but flexible enough to be able to avoid a recession. That is, productivity, corporate income, and prosperity, but at half speed due to less easy monetary policy. This is the preferred scenario for the stock market and the crypto market. On the other hand, youWe have the recession scenario. Here we could speculate that the key element is oil and other raw materials. That is, if the economic machine does not have the capacity for growth, unfortunately, there will be no growth. In addition, we could add to this equation the high levels of private debt.
To do? Well, there is no consensus among investors. As usual, we have the pessimists on one side and the optimists on the other. What happens is that the days pass, the news arrives, and the market alternates when it comes to its sentiments. For a week, the optimists win. During the other, the pessimists win. This environment of constant doubt brings volatility. The origin is unknown. And that brings nervousness. There is no clarity. Y that uncertainty keeps investors from taking much risk. Consequently, assets like Bitcoin suffer.
Of course, it is still too early to make any price predictions. However, it is already becoming quite clear that these are times to cultivate patience. The buy and wait strategy is still valid. Fortune favors patients. The markets tend to exaggerate. They usually exaggerate out of fear and exaggerate out of greed. Without a doubt, many investors live by self-delusion. Too often, we forget a great truth: Markets fluctuate. The ups and downs are normal. Today we are up. Tomorrow we are down. Everything changes. We must expect the unexpected. So are the markets.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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