The Calm Before the Storm

A year ago two significant events shook the foundations of the global economy: the war in Ukraine and the the United States Federal Reserve raising interest rates. These in turn have caused massive downstream consequences, including for example the layoffs in tech giants, and the rapid collapse of Silicon Valley Bank. It makes me wonder if we are at the end of an economic cycle. While the situation does not yet rival the 2008 financial crisis, I have a growing concern that this may be just the calm before the storm.

Boat in the storm

In 2020 we had to deal with the massive (overreaching?) response to the Covid-19 pandemic. This caused inflation not seen in our generation, and in an effort to combat inflation and stabilize the economy, the Federal Reserve started raising interest rates at the fastest speed ever. This seemingly necessary move, however, led to a sharp drop in the stock market, leaving investors reeling and questioning the decision. The rate hike coupled with a massive commodity supply chain disruption caused by the Russian sanctions not only affected the stock market but also sent shockwaves throughout the global economy, causing instability and uncertainty.

Following the stock market’s plunge, the world witnessed a massive decline in the valuations of cryptocurrencies. The Crypto apocalypse saw billions of dollars wiped out from the market in just a matter of weeks. This in turn raised questions about the long-term viability of cryptocurrencies and the stability of the digital asset market. Right at the worst time, when central banks are starting to explore national digital currencies.

The tech sector, which many of us considered immune to economic downturns, has not been spared from the recent turmoil. Most big tech companies announced significant layoffs. This decision has not only impacted employees but has also sent a wave of concern throughout the entire tech industry. Tech has been the most important engine pushing economic growth over the last decade.

A recent development is the decrease in usage of the US dollar for international trade. For the past 70 years the US dollar has been the reserve currency and main trade currency around the world. But a series of recent agreements are threatening to put that in jeopardy. Of course part of the problem is self-inflicted. US established sanctions are a reason for these deals. But it’s concerning for US-based companies and investors. We can probably expect continued persistent commodity inflation for the next few years.

Finally, a sudden but logical consequence was the failure of SVB. The Silicon Valley Bank run, fueled by rumors on Twitter, led to a rapid collapse; leaving investors and customers scrambling for answers. This has raised concerns about the stability of the banking system as a whole. Given how rising interest rates and office occupancy rates are moving it’s likely that commercial loans will start defaulting in the next few years and will bring a whole swath of regional banks down with them.

It is becoming increasingly obvious that there are cracks are popping up in the global economy. While the current situation is not as dire as the 2008 financial crisis (yet?), I have a growing sense of unease that this may be the calm before the storm.

The road ahead is uncertain. Personally, I am spending a bit of time planning what steps to prepare. For example, consdiering what are likely second order consequences of the end of this economic cycle and how to better avoid substantial losses.

Written on April 15, 2023