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The Mental Recession
There is a General Desire for a Recession
People are really tired of being super positive in the face of adversity.
Recession fears are all over us, with very clever analysts digging up every quantitative reason to support this view. I have a slightly different take on the subject, per the conversations I have had with random people and from studying psychology extensively.
Many address the markets and finance in general as something that can be reduced to numbers and spreadsheets. Yet, our economy emerges from millions of collective psyches brought together via transactions, that ultimately are expressions of emotional states. For this reason, the markets are indeed a dashboard of humanity´s collective psychological state.
I wrote some time ago about how I believed people had (and continue to have) a need to grieve what we have experienced in the last few years. Recently, I am increasingly hearing people say things like: “Do you realize we lost 2 years of our lives?”, “I was in my mid twenties and suddenly I am 30”, “I think we´ll go back to that life in the fall”. I sense of a continuation of this trend and it may already be apparent to you that it explains much of what we are seeing in the markets.
Most people have this lingering sensation I describe in their mind (which is not incompatible with wanting to spend) that they have been robbed of their time and have been left with a general feeling of distrust, not really understanding what has happened. As we have tentatively made our way out of the pandemic, people have indulged in intermittent consumption sprees with a great sense of relief, with the fear of new freedom restrictions lurking over them. The emotional hangover has persisted across the board.
What strikes me most about all this is how dire things seemed from March 2020 onward, yet how brilliantly the stock market performed. It seems like the end of the world, yet the market continue power ahead. Today, in contrast, we have reasons to be bearish, but they seem to be getting relatively amplified and as I said at the beginning of the post, with lots of highly technical people hyper-rationalizing economic variables in this direction and plenty of “great leaders” vowing for a downturn.
Whilst during COVID many of industry´s leaders could have gone on TV saying it was the end of the world, many did not and chose to have a positive attitude. Whilst in turn today we are struggling with inflation, many of these leaders do choose to go on TV and say that a terrible recession lies ahead. Whether we do indeed have a recession ahead or not, which remains entirely possible, what seems to have changed is the way people frame things.
My theory is that this orientation towards a recession stems from the general need to grieve or at least to stop being so positive in the face of adversity - people are tired. This is not something that each of us has to feel deeply at a personal level for the overall macro psychological landscape to take on this shape. It can quietly lie in the very back of our subconscious mind for it to play out spectacularly across the markets and economy. To be more granular, it does not even have to occur at the level of the general population to play out in the markets - just in the minds of people that work in finance.
Now, as a psychologist will tell you, this force may manifest a whole range of ways. People may choose to sell stocks and go spend it all on having fun, whilst analysts get really bearish or right the opposite. No one knows, but so far, it seems that people want to have the summer of their lives whilst the market wants a little bit more red action.
Below, some thoughts that build on this idea.
Signals from Retail
Consumers are eager to spend and analysts are eager to forecast a recession.
One thing I have noticed in myself and those around me is that the eagerness to travel is really creeping up. Whilst I am tired of over spending in local restaurants, I cannot wait to travel and experience new places. Yesterday, Target disclosed in its Q1 ER that luggage sales are up 50% - can anyone relate?
This data point from Target suggests we may see travel expenditure go up relative to local expenditure - a sort of bifurcation, which is quite different from not wanting to spend as much anymore. What further information we do gather in this sense from Walmart, Target and co, in terms of spend / top line?
Walmart said yesterday that some people are dialing back on things like clothes and shifting to “cheaper brands or smaller items” across the board, but then, the company also said that “some customers have sprung for new patio furniture or eagerly chased the flashy new gaming console”:
“If you look at the demographics of the U.S. and lay our customer map on top of it, we’d be really close to the same thing,” Biggs said. “And so you’ve got some people who are going to feel more pressure than others and I think that’s what we’re seeing.”
Target said that customers now have new priorities and are shifting towards spending on travel. The company also stated that physical and digital store traffic rose 4% YoY - not really a sign that people do not want to spend.
“Customers bought decor and gifts for Easter and Mother’s Day celebrations. They threw, and attended, larger children’s birthday parties — leading to a jump in toy sales. They also bought fewer items like bicycles and small kitchen appliances as they booked flights and planned trips.”
Now, it is true that the profits of both companies have been hurt by inflation (higher cost of goods sold, transportation etc), but so far there do not seem to be strong signs of consumers dialing back, but rather of them spending differently. A strong bear case here is that if you take nominal sales numbers and normalize for CPI, sales are down YoY on real terms by a wide gap. Still, I see people willing to blow their savings to have a really fun summer, because they want their time back.
Home Depot said on Tuesday that it has not seen a change in consumer behaviour as of yet and that if anything, consumers are trading up. HD may be a bit of an outlier, in that home prices have been going up quite steadily in the past few years. We will have to come back to this one if and when the RE market changes direction within a relevant time frame. The same applies to Lowe´s- people are trading up.
So, whilst inflation is very destructive force to the economy which needs to be brought under control, so far what we have is plenty of signals that consumers are eager to spend, albeit in a different way (not looking at screens all the time anymore) and that analysts are eager to forecast a recession. Additionally, many are using this kind of doomsday forecasts as a self-promotional stunt.
Robert Kiyosaki has been saying for almost decades now that a great and terminal crash is coming. Of course, crashes do happen but then the economy bounces back. No matter how many times he gets it wrong, people continue to follow him and other doomsday advocates because its a really easy emotional kick. We are seeing a lot of this in financial media outlets now.
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