The International Monetary Fund (IMF), a multilateral financial organization, has issued harsh warnings in its latest reports. In short: “The worst is yet to come.” This particular phrase was pronounced last Tuesday by the Fund’s chief economist, Pierre-Olivier Gourinchas. Here we are talking, of course, about the economic projections for the coming year. In many ways, we will be worse off than now. In fact, The agency forecasts that by next year at least a third of the world’s economies are at risk of slipping into recession.
The IMF is not always accurate in detail with its forecasts. However, the major players on the world political and economic scene frequently read their reports. And, often, they take these reports very seriously when making decisions. Therefore, reporting is not just a matter of the future. Actually, this has a lot to do with the present, because Those “opinions” and estimates influence the sentiment and expectations of today’s investors.
For this year 2022, according to IMF data, a world economic growth of 3.2% is estimated and for the following year only 2.7%. In other words, growth will be lower. Which usually means less income. This is detrimental in more ways than one. For one thing, it hits corporate income. Therefore, it puts pressure on investors to readjust their valuations. On the other hand, due to falling income, unemployment tends to rise. In other words, money is not as abundant as it used to be. Y This fall in demand has its consequences for consumption and investment.
Now, this “pessimism” is not a conspiracy. Observing, describing and forecasting is not creating FUD. In other words, it is not a question of being an inveterate “bassist”. If there are gray clouds on the horizon, saying that the day is beautiful and sunny does not help much. These caveats are not intended to discourage you. What is sought is to inform so that the storm does not catch us off guard and without an umbrella.
Actually, it’s not the end of the world. We well know that the economy has its cycles. We have had a long period of prosperity and optimism. And now a less buoyant period is coming, caused by the excesses of the bonanza, but very necessary to heal the system. Now we have to tighten our belts and pay with sweat for the abuses of the past. As simple as that.
What is the cause of this economic slowdown? Due to inflation, central banks have been forced to reduce their purchases and increase credit costs. And, given the very modest victories of these measures in this fight, surely, in the coming months, the central banks will have no choice but to continue to increase in intensity. I mean, it is not unreasonable to assume that next year 2023 there will be more monetary brakes than those implemented so far.
As the IMF points out through its spokesman (Pierre-Olivier Gourinchas), the Russian invasion of Ukraine continues to “powerfully destabilize” the world economy and has led Europe to a “severe energy crisis”. The conflict, of course, is directly related to worldwide distortions in the supply of oil, gas, wheat, and other items. This generates strong inflationary pressures and great obstacles to growth.
The slowdown in the Chinese economy is, of course, our other big headache. The restrictions due to the Covid-zero policy in China are causing even more problems in the production and distribution chains. This also generates strong inflationary pressures and great obstacles to growth.
This Asian giant in trouble means that Latin America will also be in trouble thanks to a possible drop in the price of raw materials due to low demand. On the other hand, the strength of the dollar, for some markets that quote their sales in dollars, reduces profits. And, to add insult to injury, the weight of debts in dollars is now greater with this more expensive dollar. So, with less income and more debt, the forecasts and arguments for an economic slowdown in the coming year find their justification.
What does all this mean for the investor? Well, it means that cash is now one of the most attractive options. If, during a bull run, the rallying cry is “Cash is Trash”, during a bearish streak, the rallying cry is “Cash is King”. Investors, in times of volatility and uncertainty, typically seek refuge in cash and bonds because of the stability and predictability they add to portfolios. Also, cash has a huge advantage during a down cycle. It gives us a greater purchasing power during your order. I mean, the investor with deep pockets will be able to take more advantage of the opportunities that normally arise at the beginning of the recovery.
Of course, the naive investor usually buys very early in the bear cycle. That means that, because he buys in the first drops, he often buys too expensive. You run out of cash very early in the cycle. And then, out of stubbornness, blindness, or idiosyncratic fanaticism, you tend to lengthen your unrealized losses by lying to yourself under the guise of being a “long-term investor.” At heart, he is not a long-term investor. At heart, he is an investor (without risk management) who bought too high and is missing many opportunities by insisting on lengthening his unrealized losses. The long-term (intelligent) investor, on the other hand, buys cheap and stretches profits long. The most sensible thing is to lengthen the gains and cut the losses. Not the other way around. This is true for all time frames. Applies to both traders overnight and for investors with horizons of 20 years or more.
As strange as it sounds, the markets are not a literal reflection of the economy. What we normally call the “economy” is the world seen through different indicators and reports. These data generally look to the past to understand the present. What we normally call the “financial markets” is the future seen through the sentiments and expectations of investors during the present. Dissonances occur when the future is thought to be very different from the present. In other words, it is possible to be pessimistic about the present and, at the same time, be optimistic about the future. That was what happened during the pandemic. The real economy was bad. But the markets were experiencing a boom.
Now we are experiencing the opposite process to what was experienced during 2020. The real economy, now, is not all bad. However, the forecasts are not very encouraging. Therefore, the financial markets are in their pessimistic phase. What will 2023 be like? Better or worse than 2022? With this forecast in mind, investors are making decisions today.
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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