prior to the pandemic in 2020 economic growth had been slowing around the world although the unprecedented government stimulus helped prop things up it now looks like we could be back at square one major economies are weakening and the world appears to be slowly sliding into a recession and the threat of trade Wars over tariffs and other geopolitical tensions seem to be pushing it faster down that PA and that’s why today we’re going to do a deep dive into what’s been going on with the world’s economies and what a global recession could mean for you and your portfolio my name is Nick and this is a video you cannot afford to miss let’s start with some definitions just so we’re all on the same page while there are many technical definitions of what a recession is they all involve the same thing a prolonged decline in economic growth at the national level a recession typically means two quarters I.E half a year of a decline in economic growth at the international level however a recession means one year of a decline in economic growth Global recessions can be clearly seen on this chart of global economic growth provided by the IMF the most recent Global recession was in 2020 uh prior to that it was 2009 then 1991 1982 and 1975 all of these recessions resulted in millions of people around the world losing their jobs but only a few of them resulted in a massive crash in the stock market and we’ll come back to those effects a little later on first we need to address a key question what exactly is economic growth as some of you will know economic growth is measured using something called grow domestic product or GDP a GDP is calculated using a very basic formula consumption plus investment plus government spending plus net exports and of course a net exports are calculated by subtracting imports from exports as some of you might have guessed this means that a recession is two quarters of GDP decline at the national level and that a recession is a whole year of GDP decline at the international level for context Global GDP growth was 2.8% last year it’s projected to be 3.3% this year and is expected to rise to the historical average of 3.7% by 2026 however this assumes that big economies will keep chugging along according to weter the US economy accounts for around 26% of global GDP the Chinese economy accounts for around 177% of GDP the Japanese and German economies account for around 4% of GDP each and the Indian economy accounts for around 3% of GDP obviously this means that Global GDP is heavily dependent on the economies of these five countries as some of you have heard the US economy seems to be slowing the Chinese economy has been weak the Japanese economy is trying to to restart the German economy is essentially already in a recession and the Indian economy has likewise been slowing taken together this suggests that the world is headed for another Global recession and it looks like this one could be much more brutal than the ones before the caveat is that economic expansions don’t die of old age they’re murdered variations of this quote have been used by economists since the 1970s and it’s something that was proven by various studies done by the Federal Reserve in the 2010s as the quote suggests economies don’t just stop growing and slip into a recession there is always some bearish Catalyst that causes economies to fall into a recession to be exact there is always some pivotal event that causes individuals and institutions to materially change their behavior such as a financial crisis a pandemic or a large scale war in the absence of such an event the economy continues to grow and the market markets continue to rise as they are fundamentally a reflection of the economy the catch is that there are many potential murder weapons on the table and by the way if you enjoying recession is when global economic growth Falls for more than a year as measured by GDP even though Global G GDP is projected to rise this ultimately depends on the countries that contribute the most to this GDP these are the US China Japan Germany and India where GDP seems to be faltering and where there are many catalysts that could cause them to slip into a recession and this is where things get interesting the primary drivers for GDP vary substantially between countries in the case of the US almost 70% of GDP comes from from consumption and the rest comes mostly from government spending and investment as such all we need to do to figure out where the US economy is headed is to look at what’s been going on with these four drivers of GDP especially consumption naturally a large part of consumption is driven by consumer confidence at least in theory the more confident that consumers are the more money they will spend and the more the US economy will grow in case you uh missed the news consumer confidence as measured by the University of Michigan has been falling off a cliff and not surprisingly this is because of the Tariff fears and whatever else what is surprising though is that consumer spending has been in a strong uptrend in recent years aside from the start of the pandemic and this is surprising because consumer sentiment varied significantly during this period and this suggests that in practice consumer sentiment doesn’t play that much of a role in spending in other words people will still spend money even when they’re not feeling that confident the caveat in this case is that there was a slight decline in consumer spending in January this year and this data was released at the end of February and it’s presumably a part of why the markets declin so much after this data print and it’s not just consumer spending that’s been declining either if you watched our video about Trump’s economic plan you’ll know that they’re cutting government spending too not surprisingly this has resulted in mega Banks like Goldman Sachs and Morgan Stanley lowering their for cost for US GDP this year the catch is that the primary reason why they did this was because of the concerns around Trump’s tariff policies and this is believed to be the same driver behind a decline in consumer spending and I’ll remind you that it also seems to be the driver behind consumer sentiment this is extremely important to point out because it suggests that tariffs or something related to tariffs could be the murder weapon that kills the US economy and sends it into a recession the good news is that tariffs themselves probably won’t be enough to do the killer blow the bad news is that the response to the tariffs could do the trick if it escalates into a fullblown global trade war on the one hand this seems unlikely to happen simply because the US economy is much larger and stronger than the countries it’s threatening with these tariffs it’s also worth remembering that a lot of Trump’s tariff threats appear to be a negotiating tactic and that leads to the other hand which is that other countries may not negotiate even if their economies are weak and closer to falling into a recession a perfect example here is the tariffs on Canada and Mexico whereas Mexico has been open to negotiating with the Trump Administration Canada has been a lot more reluctant to do so possibly because of the threats of annexation anyway China is also threatening to do the same again it could all just be posturing but China is reportedly prepared to go above and beyond to push back against Trump with the Chinese Embassy in the US threatening quote any kind of War once again this could be a paper Tiger postering but the markets seem to be seriously concerned oh sorry I just had to take a video and this ties into the second major economy that’s been struggling and that’s China the exact breakdown of China’s GDP drivers is unclear due to the country’s opacity but multiple sources suggest its government spending exports and investment mostly real estate China’s government spending continues to climb which is expected given that China is a centrally planned economy exports are where things get a little tricky according to trading economics exports from China are still growing but this growth is slowing and has effectively been in a downtrend since last Autumn not only that but the export figures for February came in almost 50% below investor expectations it doesn’t help that most of the western world has been actively trying to reduce Chinese exports due to competition concerns meanwhile China’s real estate sector continues to implode a data from the FED suggests that the Chinese housing prices have been in free fall since 2021 so it goes without saying that investment has been down in that sector further Evidence can be found in the prices of newly built homes in China which have been likewise Contracting for years but appear to have bottomed late last year now what’s fascinating is that the Chinese government isn’t very keen on refling the real estate bubble and seems to be acutely aware of the fact that the world is pushing back on all the cheap Goods it’s been exporting and that’s why the Chinese government has been trying to boost consumption so far this hasn’t worked so well China’s consumer inflation recently went negative for the first time time in over a year the Silver Lining is that this has motivated the Chinese government to act it responded with a $41 billion stimulus plan directed towards increased consumption Chinese Premier Lee Kang specified that this is the first of many stimulus packages that will be passed as part of the government goal of boosting consumer spending in 2025 until that happens the Chinese GDP could continue slowing but again it’s going to take a murder weapon to turn slower growth into a recession and it’ll take a big one since China’s GDP growth is currently around 5% uh for reference the US’s is closer to 3% from our perspective there are two possible candidates a significant escalation of the trade war with the us or a significant depreciation in the Chinese Yuan as a result of all the government stimulus it’s crazy how everyone forgot about the fact that the Chinese Yuan has been slowly decreasing in value against the US dollar in recent years and some of you might recall that we did video about how the Chinese Central Bank was doing everything in its power to prevent the Yuan from devaluing this seems inevitable if China continues spending and it could create civil unrest that threatens the Chinese economy this pertains to Japan and Germany uh the primary drivers of Japan’s GDP are similar to the US with roughly half coming from consumption and the remainder consisting mostly of government spending investment and exports the difference is that Japan’s consumer spending has been flat in recent years and if you adjust for the depreciation of the Yen during this time consumer spending is technically negative data from Trading economics suggests it’s been the same for government spending too flat for years in real terms a negative when adjusted for Yen depreciation lo and behold the same seems to be true for investment and exports and this would explain why Japan’s GDP growth has been fluctuating around Zer for years for what it’s worth the last two quarters have been positive at 0.4% and 0.6% respectively and yet somehow Japan seems to be better off than Germany roughly half of Germany’s GDP comes from exports with most of the remainder apparently coming from government spending well uh German exports have been falling like a stone since late 2022 and this might have something to do with the fact that it cut itself off from Russian energy closed its nuclear plants and tried to use wind and so instead lo and behold German government spending has been increasing exponentially to try and fix these admittedly self-inflicted wounds and chances are that you’ve heard that Germany wants to increase the amount of money that it can borrow at the time of shooting the German green party is reportedly trying to block this demanding that more of this new money be spent on wind and solar what could go wrong in any case the consequence of Germany’s policies can be seen in its GDP figures thoroughly in recessionary territory with the most recent quarterly release being in negative yet again those lucky enough to be close to the German government’s money printer don’t seem to be complaining everyone else seems to be shifting to more political Extremes in protest at the self-destructive policies regardless there’s a reason why I’ve included Japan and Germany in the same bucket besides the similar representation they have in global GDP both of their economies seem to be at risk of being killed killed by the same murder weapon an increase in geopolitical tensions in Japan’s case this could be an escalation over Taiwan or escalation in the South China Sea which some believe is more likely that said geopolitical tensions involving China could end up being good for Japan as it could result in more economic activity moving out of China and into neighboring countries including Japan in Germany’s case this could potentially be an escalation in the war in Ukraine but even if the war does end Germany’s economy will continue falling if it doubles down on its existing policies finally we have India whose GDP is currently growing at an annualized rate of 6.4% which is actually incredible what’s not so incredible though is that India’s growth has been contracting since early 2023 when it hit a high of 99.7% and this might have something to do with the peculiar composition of this GDP believe it or not but almost 60% of India’s GDP comes from consumption with most of the rest coming from investment this is believable when you realize that India is technically the largest country in the world by population and continues to experience robust population growth at the same time the Indian government has been doing everything in its power to get its massive population on the economic tread B through things like digitization the result has been a booming economy and lots of foreign investment however something seems to have changed in mid 2023 according to Reuters there was a notable decoupling between GDP and consumption during this period with consumption falling while GDP continued to rise the continued rise in GDP was presumably due to the continued rise in foreign investment which fueled a rally in India’s stock market the thing is the rally ended last September believe it or not but the decline consumer spending seems to be due to the same thing driving India’s economic rise its population growth the massive increase in the supply of labor has pushed wages down making it harder for the average Indian to spend as much money as they did before as for the decline in India’s stock market well that’s a no-brainer Trump’s election and the threats of Trump’s tariffs with India’s population not expected to Peak until 2060 it looks like consumption could continue declining meanwhile India’s economy could be in for the same volatility headwinds come in from Trump’s tariffs but tail winds from companies that are gradually moving their operations out of China and into India due to a combination of costs and geopolitical risks overall though India’s GDP should continue growing the murder weapon though in India’s case is a Timeless classic and that’s social unrest arising from falling wages in fact we already see early signs of this Indian prime minister Nena Modi has been in power for over a decade and that’s just because he was very popular with the voters in recent years though opinion poll suggests that his popularity it has been slipping and this is evidenced by the fact that Mod’s party lost its parliamentary majority in the 2024 Indian election can you guess when Mod’s popularity started falling that’s right sometime in 2023 when Indians reportedly started to feel their wages declining to the point that they started cutting back on spending if this trend continues then political pressure within India could continue to increase and this brings me to the big question and that’s what all of this means for you and the markets the answer depends on whether we see any major economies get murdered in case it wasn’t clear enough the US China Japan Germany and India are all being threatened by the same three murder weapons the risk of a trade War triggered by tariffs geopolitical tensions or escalation and internal political issues as scary as these three seem to be none of them seem to be particularly deadly are the risk of a full-blown trade War seems objectively low given how weak most economies are geopolitical tensions seem to be de-escalating rather than escalating and the peak of internal policy division was arguably sometime last year be it in the US or elsewhere remember last year was a big election year globally if we’re being honest the pr primary reason why everyone seems to be concerned about global recessions seems to be related to short-term economic data that’s driving short-term price action in the markets make no mistake the two are closely linked in the modern day if the markets were to continue crashing this would eventually cause economic growth to contract because of the wealth effect or otherwise but just like the economy a stock market rally doesn’t die of old age it’s murdered and this is because a lot of the money in the market comes from passive flows which continue to automatically buy unless there’s some sort of Crisis that triggers all the algorithms to sell concerns around trade Wars politics and internal politics do not seem to be sufficient to kill neither the economy nor the markets at least not yet but for the sake of entertainment let’s assume that there’s a murder weapon of some kind some Catalyst which results in material changes in behavior of individuals and institutions this would not only trigger a sharp decline in global GDP but it would also trigger a sharp decline in the markets which would likely push Global GDP further down given how intertwined the economy and the markets are millions of people would lose their jobs and millions more would lose most of their net worth to put things into perspective the last two Global recessions specifically 2009 and 2020 caused Market to Fall by 50% and 30% respectively and in retrospect the only reason Market fell by 30% in 2020 was because governments and central banks around the world stepped in with insane amounts of monetary stimulus it’s safe to assume that the same thing would happen again if we were to see a global recession today and it’s easy to forget the Pandora’s Box that was opened during the pandemic it was the first time that governments sent money directly to Consumers you can bet that they will use this tactic again to revive the markets and the economy if either or both start to go into cardiac arrest the outcome would be another 2 to 3 years of practically fake economic growth fueled by government spending that would inevitably result in even more inflation forcing interest rates higher and causing this fake economic growth to disappear then we’d be right back at square one and some would say this has been the case since the 2008 financial crisis all we wondering is how long it will continue for and that’s all for today’s video if you want more more awesome macro and crypto content then check out our latest video right over here and if you’re not subscribed to the channel yet you can do that right over here thank you very much for watching and I’ll see you in the next one
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