The global economy is connected.
One event leads to another. In 1929, the overleveraged stock market blew half the world economy to pieces. The world didn't recover for the next 15 years.
Of course, one event was not the sole culprit. One event was never the answer to everything. But it was the first domino that sets the tragedy in motion. In 2008, the Great Recession started from the housing market in the US, spreading into a humanitarian crisis across Europe and Africa. And in 2020, the fear of the COVID-19 pandemic triggered one of the fastest market selloffs in history.
Some shares are yet to recover. The shares of United Airlines are currently trading at half of the pre-pandemic prices.
Sometimes the economy drops and stays down. Sometimes businesses close, and homes end in foreclosures. Sometimes families lose everything.
Economic recession is a cleansing process
Recession is a Sunday morning after a Friday wedding that somehow finished up on Saturday night. And Sunday is vicious. It's hungover when you're not sure if you've had an organ failure from excess alcohol. Should you schedule an appointment with your physician? Maybe you're overdue one.
China has had her Friday wedding. Build, build, build is not a sustainable business model. The second-most populous country in the world is facing her reckoning.
Chinese major property player Evergrande could be the potential trigger this time around. The fear is at its peak for the year.
"Wall Street marks the biggest drop since May as Evergrande crisis intensifies," writes Financial Times. Morgan Stanley's Mike Wilson says that a "20% correction seems likely."
We can observe the ripple effect from one market to another and from one company to the next.
Houses are already a bit harder to buy. Cheap cash is less cheap. Stocks are not the end-all investment most fresh investors hoped for.
The stock markets are riling up as the fear of reckoning has eased. But it might be just that strange Saturday when nobody wants to go to sleep, but they should. Brokers call it a dead bounce. And it's the most dangerous time to be around. It's that strange energy keeping you going when you feel you couldn't.
Maybe this time, we won't feel the global reckoning. But the music has to stop at one point, and we have to leave the party. Nobody likes leaving good times behind.
When do economic downturns stop?
The US economy needs two consequential quarters to spell positive numbers before investors can relax. In real terms, it happens when we purge bad business and behavior.
On that drunk Sunday, the market has to figure out how to survive. We're going to detox, chill and sleep. The strongest among us may hit the gym. Only the fools will continue to drink. The party has to stop. And we've been having a good time for a long.
During every upturn, the economy accumulated bad business and bad debt. Services that no one needs spiral out of excess cash. Developers built apps nobody ever uses. Flip phones are making a comeback. And we're buying stocks like it's bread and butter.
Bad omens of an upcoming recession are all around. Historically, parties run wildest before the police come knocking. So, maybe this time around won't be so much different than 2020, 2008, or even 1929.
But maybe it will. So don't take this article as financial advice, because it's not.
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