A 2-day warning can be the difference between safety and peril if a hurricane is coming toward your town. Even a 5-minute warning can make all the difference if a tornado is about to hit your home. I know many of us find ourselves at home and are trying to manage the significant and seemingly daily change that is going on in our world, country and city. My intent in this post is for each of us to slow down and reflect on the short and long-term economic impacts of a “shelter in place order” to a US economy who’s GDP is 70% comprised of consumer spending. My hope is that in considering these things it helps you proactively position yourself through this season of change. Change can be devastating to the unprepared and those unable to adapt, but is an opportunity to the person who can anticipate change and adapt quickly. My encouragement is to expect significant change in the coming months and year and to make decisions that enable you to help your family, your community and your livelihoods.
A domino effect or chain reaction is the cumulative effect produced when one event sets off a chain of similar events. The term is best known as a mechanical effect and is used as an analogy to a falling row of dominoes. It typically refers to a linked sequence of events where the time between successive events is relatively small. It can be used literally (an observed series of actual collisions) or metaphorically (causal linkages within systems such as global finance or politics). The term domino effect is used both to imply that an event is inevitable or highly likely (as it has already started to happen), and conversely to imply that an event is impossible or highly unlikely (the one domino left standing).
As Ray Dalio highlights in “how the economic machine works” one person’s spending is another person’s income. Our income and our economy is linked together. This interconnection between us all creates somewhat predictable domino effects to our economy, local markets and our personal income. Our current movement toward shelter in place will create a domino effect that will impact a vast majority of business and livelihoods. Our reduction in spending will reduce others’ income which will in turn reduce the income of unnecessary spending and increase the income of those services which will become more necessary. This will impact many businesses which will impact jobs. Impacted jobs will impact people’s ability to pay rent, mortgages and debt. Countries, businesses, and people’s ability to service the debt will impact asset prices.
A recession is upon us, and in general, recessions last for 9 to 18 months. That can be scary, but for those who stabilize early, recessions create the opportunity to buy assets at greatly discounted prices. I encourage each of you to consider the domino effect of current policy decisions, not only for this week, but the impact they will have on our economy in the coming months and year so that you can be prepared to make better long-term investment decisions.
Here are some good principles to consider given the current state of our economy: