by Zain Jaffer
Economists refer to something called a K shaped recovery when only certain sectors recover but other sectors decline [https://www.investopedia.com/k-shaped-recovery-5080086#]. We are seeing this right now, a bifurcation with different results for different groups of people. People who are holding the high flying tech stocks like Nvidia, Microsoft, and other tech bellwethers are benefitting from the Artificial Intelligence (AI) craze. Investors in the Bitcoin Exchange Traded Funds (ETF) may see good profits if their price targets are reached. Bond holders are now getting around 5% annually on their US Treasuries as opposed to just above zero percent.
Then there are the ordinary Americans with little to no savings. Many are drowning in increased rent, electricity, food, fuel, mortgage, car loans, credit card bills and even student loan payments.
There are also the real estate developers who found out recently that their calculations of cash flows from their multi million dollar office space investments no longer make sense, especially since they needed to renegotiate their debt at higher borrowing rates. Their tenants now see little value in occupying several floors since many of their employees now work from home a few days in a week. AI has also cut back the need for some jobs.
In the midst of this the US Government still continues to spend as if inflation was a trivial thing. The Federal Reserve embarked on a steady rise of interest rate hikes that now make mortgages around 7-8% from the previous 3%. An increasing share of government debt is now devoted to paying the interest on the debt, above military, healthcare, social security, and the costs of running the bureaucracy.
Debt fueled businesses are in trouble because of higher servicing costs that their revenues may not be able to meet. Unlike the tech high flyers who do not rely so much on debt because of their cash flows, traditional businesses are floundering. Take a look at the S&P 500 and the Russell indices. Many small and medium sized businesses are feeling the pinch these days.
Some economists and fund managers are so worried about the way interest rates, inflation, and government overspending is happening. Rey Dalio, who runs the large investment firm Bridgewater Associates, asks in his recent April 2024 article [https://www.linkedin.com/pulse/do-you-have-enough-non-debt-money-ray-dalio-cfffe] whether investors and fund managers have enough non-debt money in their portfolio.
Non debt money is money that is not debt based, or based on a promise to pay by someone. Stocks for example are a promise by the company to pay back the investor based on future cash flows. Bonds are a promise to pay by the government based on an agreed maturity duration and interest rate. Both stocks and bonds are debt based money. Dalio says that only gold or precious metals, as well as crypto, are the only non debt money he is aware of.
The world is entering into a phase that we have not seen in decades. Assumptions about the safety of stocks, bonds, traditional business assumptions have to be tempered with the possibility that what we know to be true based from experience may no longer be true moving forward.
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