Now that the shockwaves have settled, it’s time to take stock (pun intended) of the financial situation. On 5th August, the Dow was down over 1,000 points, and the Nasdaq fell 3.5%. Meanwhile, Japan saw it’s biggest stock market crash since 1987, with the Nikkei losing 4,451 points and closing 12% down. This is on the back of previous news that described a robust, quickly recovering US economy (shortly before the crash, it was reported that the US faced its lowest recession risk in two years). So now it’s time to ask the two big questions: what the hell just happened, and what do we do about it now?
What the hell just happened?
A number of factors, all happening at once, caused the sudden crash:
- The Sahm Rule was spotted by analysts
- Greed in the world of carry trades
- An AI bubble that may be forming
1. The Sahm Rule was spotted by analysts
The Sahm Rule was created in 2019 by economist Claudia Sahm (currently chief economist at New Century Advisors). It states that a US recession is impending if the country’s three-month average unemployment rate increases by 0.5% or more, measured from the previous year’s low. This rule is said to have predicted every US recession since the ‘70s.
(If you want more specifics, here’s a YouTube video).
The Sahm Rule did in fact occur; and unemployment figures have risen in the US. The country expected to add 150,000 jobs in July, but only managed 114,000; and this drove US unemployment figures that month to 4.3%. This is one of the highest points since the post-Covid economy in late ‘21.
Here’s the tricky part though: Claudia Sahm herself says the rule may be broken this time.
Here she is explaining why, in this odd situation in 2024, her rule may not succeed in predicting a recession after all. In previous cases where the rule applied, unemployment happened due to layoffs. Companies weren’t doing well, and people were getting retrenched.
But in 2024, the spike in unemployment isn’t due to mass retrenchments. Instead, it’s due to a surge of people returning to the workforce, in the aftermath of Covid. When this happens (a spike in the supply of workers), the job market takes time to adapt. New openings have to be created, companies have to be ready to expand their payroll as revenues normalise, etc.
So whilst the stock market crash is partly fueled by fears of a US recession, we don’t yet know if it’s a reality.
2. Greed in the world of carry trades
To simplify this a bit, it involves traders borrowing currencies with low interest rates (the Japanese yen in particular) and using them to buy assets with a higher return. For example: if the Japanese yen has zero interest, then you can make money by borrowing in yen and using it to buy, say, a US bond that has a 3% coupon rate.
The yen has been a favourite currency for this for almost a decade, because Japan used to have negative interest rates, to stimulate its economy. This practice only ended earlier this year.
Once Japan started raising interest rates (among a few other factors), the yen rose significantly against the US dollar. This yen rally means the aforementioned carry trades are no longer a good deal – and the investors involved in them may be liquidating their positions to reinvest elsewhere. This has an adverse effect on several markets, and Japanese stocks in particular have taken a pounding.
Part of the reason it’s so bad is that, for the past few years, carry trades like these have been very lucrative; and market exuberance drove investors to take on ever bigger positions. Right now we’re seeing the fallout from that.
3. An AI bubble that may be forming
You’ve probably heard enough about AI to make you sick this year; and some analysts are worried that a massive, AI-fueled tech bubble is forming. Or that it’s already formed, and is about to burst.
Right now, we’re sitting on an AI bubble where huge silicon valley players have invested about US$1 trillion. You’ve probably used or played with ChatGPT at some point right? Well you may not realise it can cost US$700,000 per day to operate ChatGPT.
And all of the AI craze is still largely in start-up, experimental, or drawing board stages; most – if not all – major AI companies have yet to turn a profit. AI-driven tech is rapidly becoming one of the riskiest, and most expensive, industry forays in our century. And as these pioneers continue to burn money, there’s a looming threat that confidence will erode, and several multi-billion dollar initiatives might lead to nothing (except a huge crash in the tech sector, that is).
Some of the recent market crash may be due to early jitters over all this.
Okay, so now how do we survive and thrive?
First off, some potentially good news. In light of the crash, the Fed may cut interest rates in the US. This is done to stimulate the US economy; and it has a direct impact on Singapore. Our bank housing loans, for instance, tend to move in tandem with US interest rates: when the Fed cuts rates, home loan repayments also tend to get cheaper (for non-HDB loans).
This might be great for you, if property makes up a good portion of your portfolio. It’s not guaranteed that the Fed will cut rates though, so I wouldn’t start celebrating just yet.
That said, there are two main ways a single digit millionaire can make survive this, or possibly benefit off of it:
1. For long-term investments, do nothing
That’s right: nothing. Don’t panic and rush to liquidate your unit trusts, blue chips, bonds, etc. By the time you’re reading this, the market has already crashed. The prices are already lower. Sell now, and chances are you’ll sell for less than you bought. This sort of panicked reaction is a classic example of “buy high, sell low.”
Remember it’s not yet certain that the US is headed into recession, as its fundamental numbers are still good. It’s also unclear if fears about the tech sector will pan out, or if the dust will soon settle from our carry traders’ greed-inflicted disaster.
If you’re planning for a long 20 or 30+ year investment horizon, all of this is likely to be another hiccup that will be obliterated by time; and the damage you could cause by panic selling may be far worse.
2. Start saving more aggressively if you can
If a crisis does come, it will be an opportunity…if you have money. Otherwise it’s just a crisis. But you want to be absolutely loaded for bear if and when a recession hits: when stock values plummet, when developers fire sale their properties, that’s when you have an opportunity to snap up undervalued assets.
This can even mean switching to plain old savings accounts, in preparation for what’s about to come.
3. Rethink plans for upgrading your property until this is over
Lower interest rates may sound like an enticement to buy that new condo, but be careful: if you sell your property during an economic downturn, it can mean weaker offers, as prospective buyers turn cautious.
Conversely, there may be a rush into real estate, as investors turn to traditional safe havens like gold, bonds, and yes – property. This can result in a “sell high, buy high” situation, where the replacement property costs so much, it more than swallows any of your previous gains.
That said, an opportunity could appear in Core Central Region (CCR) properties, as this is where affluent foreigners prefer to buy or rent. During market downturns, property values and rental incomes here are often the first hit, as companies wind down housing allowances and switch to local hires. This may represent an opportunity for buyers with sufficient cash reserves (see point 2).
In general though, it’s a risky and volatile time to be buying such big ticket items.
It’s still early days yet, and the prediction of a US recession (which tends to send the rest of the world into recession also) is currently one-in-four. It’s still hard to predict what’s around the corner for now; but panicking, or sudden asset reallocation, isn’t likely to help.
For help specific to your situation, reach out to us on Single Digit Millionaire.
