The bust is here and the boom will come

Tough times are ahead for everyone living in Sri Lanka. From one of the highest officers in the country now imploring that fuel and LP gas be used sparingly, higher prices with product shortages and even a food crisis is well on the cards. 

While the Sri Lankan economy is lying on the metaphorical bed that it solely made – or rather failed to make – globally there is no current ‘Goldilocks’ pick’ either. Coming off the aftermath of the pandemic and other events such as the Russia-Ukraine war, economic downturn is inevitable. So much so that according to some business leaders the best-case scenario is a global recession longer than 18 months. Therefore, there is consolation in knowing we are not alone and this is not the first time.

In October 1929, after a period of great prosperity that came to be known as the ‘roaring 20s’ the American Stock Market came to a crashing halt. The most devastating financial collapse in modern history of the US ensued, and this led to chain reactions in markets abroad. 

Far greater in magnitude than the 2008 financial crisis, this resulted in severe unemployment, drastic deflation and general hardship in almost every single country, kicking off The Great Depression. A period of turmoil that lasted more than 10 years. The causes of the Great Depression while widespread, the root cause is said to be an overinflated economy.

Prompted by the global health crisis in 2020, governments world over took drastic action to cushion the economic fallout and turned to lax monetary and fiscal policy. Through printing money, stimulus packages and subsidies coupled with low interest rates, market participants could borrow freely and excessively leverage their portfolios. 

This caused housing markets abroad to experience a boom while the general economy contacted. There was also a flood of money poured into stocks and speculative assets such as crypto, causing these markets to inflate. 

For example, US automobile manufacturer Tesla became more valuable than the nine biggest car companies on the planet combined even though accounting for 1% of the world’s car supply. The world’s most expensive Non-Fungible Token (NFT), a mere digital image with collector value, auctioned for 69 million dollars.

These expansive measures, while arguably necessary in times of crisis has led to ubiquitous overheating in the general economy and markets. World over, inflation is at record heights while the stock market shuffles through with the speculative crypto space crashing. 

According to Robert Kiyosaki, personal finance expert, the biggest crash in world history is coming, and it will be due to the most powerful financial force in markets – mean reversions. As assets have ballooned greater than natural trends expect, this unsustainability could lead to a natural burst.

During these times, gold and other precious metals would act as store of value. It is documented that in eight out of the last nine US stock market crashes gold has far outperformed the market in subsequent recovery. When faith in intangible assets such as stocks and crypto would fall, trusted safe haven asset classes hold water over time. However, the hardest-hit usually have been known to avoid diversification. This is unadvisable to as manageable risk on a portfolio could be in a recover phase.

Billionaire Ray Dalio proposes that ‘cash is trash’ but there is undeniable merit to holding a percentage of your portfolio in fiat. This because when prices hit rock bottom after the market bubble bursts, having liquidity in order to be able to collect on the cheap price has historically led to some of the biggest fortunes made. 

Therefore, while the real economy would likely undergo hardships in the foreseeable future there is some consolation that markets and economies are in fact cyclical. What goes up will come down, but eventually go back up again.