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Finding Silver Linings in a Hurricane

2022 has proved to be one of the most significant years in recent decades for both the world and the global financial institutions. Reeling back from COVID 19 to mounting
record inflation across continents and the largest European land war since WWII, global stability seems to be breaking down. The three major buyers of US treasuries, pumping liquidity across the global markets now topped up and in speaking on this JP Morgan & CO. CEO Jamie Dimon presented our situation as “That hurricane is right out there down the road, coming our way” That hurricane is coming our way is the effects of huge volatility across global markets and the new era of QT (Quantitative Tightening) like we have never seen in our lifetimes.

Are we in the calm before the storm?

The predictions of an incoming recession by the end of the year comes from three major factors affecting the US economy and the global economy at large: overheating, asset bubbles, and black swans. Overheating is occurring from as the economy is peaking following the 2008 mortgage crisis and its subsequent recession. The name refers to the process at which national
unemployment is reaches a low and the consumer price index is continuing to rapidly increase creating a positive feedback loop that pushes products prices higher as companies and firms fight over employees through wage increases

This can result in run on inflation and a disconnection of prices and wages that could bring the economy to a halt through strict federal intervention.

At the same time the optimism and demand over high growth stocks and overvalued companies continue to rise becoming clearer to investors and value holders that an asset bubble is reaching its breaking point. This coupled with fears of overheating and federal intervention causes investors to lose their high growth and risk stock to more conservative and value-based companies that lead to a quick drop from grace.

However, both factors alone could be dealt with by forward minded economic policy from the Fed, unless there is a “black swan” event. The pandemic and the invasion of Ukraine are both events that were unpredictable for investors and policy makers to plan for and can lead to volatility in manufacturing, distribution, and consumer markets.

With rocketing gas prices following the Russian invasion and production delays and closures due to new covid strains in China, the Fed’s soft landing is looking ever harder to act successfully with such a tall order.

What’s the Federal Reserve doing to stop this?

In 1994 the federal reserve was able to for the first and only time in history, successfully pull off a soft landing. A calculated strategy to moderately scaling back the economic growth to avoid a recession by raising interest rates to prevent overheating and tame inflation. On June 15th, 2022, the Federal Reserve announced a raise of three quarters of a percentage point, the most aggressive attack on inflation and overheating since 1994. Hawkish action and leadership from the fed might help tame the now record high inflation facing the US and global economies, but far too aggressive measures can cause a sudden collapse of the economy and lead to the foreclosures of many companies and firms struggling as is. Interest rates affect you directly as prices may go down, but the cost of borrowing loans will become increasingly difficult

“We’re certainly going to see the cost of borrowing escalate relatively quickly“

Said Chester Spatt, a professor of finance at Carnegie Mellon University’s Tepper School of Business about new federal reserve spikes. What this boils down to is a growing fear of an unsuccessful soft landing, market volatility continuing into the year, and either recession or rampant inflation.

How can I prepare?


How can I prepare?

Lean down your business expenses, analyze your current business’s expenses and costs to understand what the most efficient and profitable route you can take. It is crucial for your business to be able to operate under the least amount of costs possible while pushing production of products or services to your limit to create a substantial savings. You need to spend money to make money but do so in a comprehensive manner that considers your industry’s volatility and your production cost to truly know what you can and cannot live without. Be creative, find new
suppliers, cut down unprofitable products or services, or move your capital into a niche currently not exploited


Pay off debt

Now is the best time to pay off debt and loans that may be hanging with you or your company into an uncertain future. While not an easy task, the road ahead will become more perilous and will require business leaders and companies to be lean and disciplined with their balance sheets to curve the effects of a contracting economy. If your company is burning money to pay off high interest rates loans, it is vital to try and clear off as much of it as possible before rates continue to rise, and loans become harder to find. On the off chance that certain loans or debts are need it is also a good time to hunt for banks offering lower interest rates and higher savings rates to make the money on hand you do have to increase over the long-term


Build cash reserves

The best way to prepare for the unexpected is by having a well-developed cash reserve available. Keeping track of your account receivables to make sure clients and customers have paid in full or an on track to pay for your products or services is vital in the months before a recession, especially those that may have a large interest from overdue notices. Don’t be forced into bankruptcy, keeping transactions rates low, building credit lines as well as promoting more equitable deals with more cost prohibitive expenses. Depending on the size and scale of your company you can take more intense actions on cutting down expenses and building a savings like leasing equipment, going paperless if you have not already done so, use payroll debit cards, collect cash in advance, or renegotiate current production expenses.

Silver linings

Prepared, creative, and optimistic business leaders can turn an economic downturn to their benefit. By being one step ahead of the market trends and keeping your business in a lean shape during the beginnings of a recession give your company a step ahead of the competition suffering from similar problems. Drops in stock prices can also be a blessing for those who had
foresight to drop inflated stocks for value investments and can now buy normally expensive stocks for wholesale prices in a bear market. Having a save reserve to then diversify your capital in a wholesale market can get smart diligent companies, who might have had a glass ceiling during economic growth, out from under and see their future be a far more promising one. Recessions and economic downturns are a part of the cyclical life of the economy, we all find ourselves at one point in our lifetimes confronted by this fact. But, with wise counsel, diligent preparedness, creative company strategies and a lean efficient business model, companies can not only survive a hurricane but thrive.

During uncertain and volatile times like these it’s important to have a financial partner you can rely on for sound advice and counsel.

NodusBank is at your disposal with a long history of fiduciary expertise and a record of successful ventures with our partners. Contact us to have a clear and stable plan for the unpredictable future we are facing.