Is a Recession Looming? (Ep. 45)
Follow me on Twitter: https://twitter.com/heydave7 Follow me on Instagram: https://www.instagram.com/heydave7 Watch this video on what a 10x company is, https://www.youtube.com/watch?v=r9HtG-jJSTY Watch this video on how new tech goes mainstream, https://youtu.be/gVsFsydllNo Check out my archived articles/posts on Tesla and investing: https://teslamotorsclub.com/tmc/threads/articles-megaposts-by-davet.23473/#post-485768 This morning the Dow dropped 2000 points. And trading was halted for 15 minutes at one point due to the circuit breaker rule which pauses trading when there’s a 7% drop in the market. There’s lot of questions going around. What’s going on? Where is this headed? There’s no overly simplistic answer to this question, since there are many factors and each of these factors are changing over time. The best thing to do in my opinion is to try to understand the major factors and what they mean. 1. Infections are rising outside of China. And it looks like just a matter of time before the total number of cases outside of China will outnumber the cases inside China. Italy has enacted a partial lockdown of northern Italy where 14 million people reside. Cases in the U.S. are on the rise. And cases have been reported in over 100 countries. South Korea is showing some good signs as they are reporting a decreasing number of daily cases over the past several days. People are asking how will this affect the economy? And where is this headed? We know that it is spreading rather rapidly. The death rate might not be as high as being reported because most cases are mild and go undetected. As countries take action, events are cancelled. Travel decreases. People going out and spending might decrease as well. The economy can slow down, and the question is how much will it slow down and for how long. So, there’s a lot of uncertainty and unknowns at the moment. 2. Oil price wars Saudi Arabia and Russia had an agreement for the past 4 years to control oil production, but that agreement recently ended. And they weren’t able to work out a new agreement. Russia refused to lower production, and Saudi Arabia just announced they are going to increase oil production. Increased oil production means lower oil prices. This means probably gas prices will go down. But it also means that a lot of smaller oil companies that are sensitive to oil price changes will likely go out of business. And since the energy sector is a big part of the U.S. economy, we will likely see a loss of jobs in that sector. 3. Interest rates hit record lows The yield on the benchmark 10-year Treasury touched a record low of less than 0.4%, while the 30-year Treasury yield slid below 1%. These are both record lows. Investors are buying bonds offering super low yields, which means there’s a big appetite for safety. And this highlights investors’ concerns about a global slowdown. And maybe a move away from higher-risk assets. 4. Recession The big question many people are asking is if all this will lead to a recession. A recession is a lagging indictor and usually means 2 quarter of negative GDP growth. So, you don’t really know if you’re in a recession until after 2 quarters show negative GDP growth. But here’s the essence of a slowing or even shrinking economy. Oftentimes, there’s a drop in confidence regarding the future. This leads to less spending. Which lowers the revenues of companies Which lowers their profits Which lowers their growth targets Which lowers the multiple investors are willing to give Which lowers stock prices Which lowers people’s retirement funds Which lowers confidence, and lowers spending. The cycle is often broken when people get confidence to spend. Stock get cheap and big smart money buys in Companies get more efficient Consumers start spending again. We still need to see how much Coronavirus will impact the overall economy and how much it will slow the economy. But in the short-term the Coronavirus impact does seem to be growing, and we’ll have to monitor what’s going on. 5. Government intervention In the U.S., the economy is existential to the Trump administration. Meaning, a poor economy lessens his chances of re-election So I’d expect Trump to explore options for a government stimulus program. Governments around the world have motivation to try to mitigate the stock market damage and the economic damage being caused by Coronavirus. We’ll see what happens in the coming weeks. Disclaimer: All content on this channel is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor. No guarantee is given regarding the accuracy of information on this channel. Author is long TSLA at time of original video publish date. Tags: Tesla, TSLA, Elon Musk, Model 3, Model Y, Cybertruck, Investing
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