Written by 2:11 pm abroaden weekly insights

WTF x AWI #076 – A very dark Black Friday

black friday trading

Hey there, and welcome to issue #076 of WTF is going on with the Economy?! x Abroaden Weekly Insights: the #01 investing and economy newsletter for people living abroad. 

Black Friday (and the Omicron variant)

Last week, America celebrated its most-famous holiday known around the world as Black Friday. (Thanksgiving is better but hasn’t gone global yet). 

Black Friday gets its name because, traditionally, retailers start to make a profit for the year from that day on. In that sense, the ‘black’ is from the accounting term profitable instead of ‘red’, which indicates a loss. 

This year, Black Friday was a lot darker, though, and not just because of lackluster sales. 

Instead, the news of a new “variant of concern” of the novel Coronavirus sent shivers down the global economy and stock markets

Throw in the current wave in Europe coupled with new and potential restrictions just in time for the holidays, and the situation looks bleak.

So, with the dung hitting the proverbial fan, are we about to take some giant steps back? Maybe, but let’s put the situation into perspective. 

First, Friday’s sell-off was a combination of irrational investors panic-selling and others leaving the market for pre-planned reasons. 

Everyone has diverse goals and needs. Investors are no different. It’s impossible to look at a broad market sell-off and conclude that there’s been some unified decision made by millions of people. 

People who are short-term trading likely would’ve sold anyway. For them, they’re more about making a quick profit than riding compound interest to riches.

Chumps who were in for a longer ride and decided to exit when the news hit live up to their title: chumps.  

If your goal is to build your wealth by long-term investing, selling whenever there’s bad news will set you back years, if not decades. 

Despite that being sound logic, people still panic-sell when they see others doing it, even if they don’t know their reasoning.

We see these sorts of sell-offs happen every time there’s a whiff of bad news. Now, 21 months into the pandemic (😃🔫), adverse developments only phase the impulsive long-term investors. 

Second, it’s way too damn early to know the real impact of omicron. 

We literally only learned about this variant four days ago (it just so happened to be on Black Friday). Even if it’s been circulating before that, we just don’t know enough about omicron to say what measures — if any — governments need to take. 

As investors, we need to stop once again giving weight to the news (who ran with this) and politicians (who have a conflict of interest between health policy and career preservation). 

Instead, health experts and other bodies are far better sources, and, in the nuance that dictates their profession, their message is clear: it’s too soon to draw any conclusions

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In a lot of ways, though, we already are reacting with a longer-term view. Friday was just a normal market bump.

The virus first appeared on our radars two years ago next month. In the ensuing time, we’ve shown how resilient we are in the face of extreme adversity. Our fear of omicron and how we react to it will shape the economy’s trajectory, not the variant itself.

In the short term, travel could be the biggest casualty here for us living abroad, hoping to go home for the holidays. It’s undoubtedly concerning (not least since most of us couldn’t travel last year). 

For now, as reasonable people striving to be rational long-term investors, our best bet is to carry on as usual, stay diversified, and continue to take deep breaths (it helps). 

European Inflation is up (but don’t get out the Xanax just yet). 

This week, European countries began releasing preliminary inflation data for November, which at first glance, wasn’t fantastic.

First, Germany reported a 29-year high of 5.2% Year-over-Year (YoY) 

Then, Spain’s national statistics agency stated that inflation in the Iberian heavyweight (no offense, Portugal) hit 5.6% YoY, also a 29-year high. 

Finally, numbers for the Eurozone itself came out, hitting a higher-than-forecast 4.9% YoY.

Not good, but digging a bit deeper and looking at the situation with some perspective certainly paints a different outlook. 

We’re still feeling the impacts of a global supply chain crunch powered by an enormous demand for goods (even if it’s easing).

Additionally, year-to-year comparisons right now are mostly useless considering how much 2020 was an outlier. 

Transport costs are one of the key inflation drivers right now, with airfare up significantly compared to a year ago. What were we doing in November 2020? We were sitting at home, not traveling since the borders were shut. Of course prices are up compared to then. 

Food prices paint a different picture.

Food, on the other hand, is only increasing moderately. Here in Spain, for example, prices increased by 1.7% annually. 

That means if you spent 10 EUR on a tortilla, fuet, manchego cheese, and a 6-pack of San Miguel last November, you’d pay…17 cents more this year for the same super meal. Not great, but certainly not life-changing. 

For reference, Argentina’s food YoY inflation was 54.1% in October. That means the same 10 EUR meal last year will cost 15.41 EUR now. We’re not even close to that dire situation, and there’s plenty we can do to prevent it.

There’s also a tremendous amount of job creation and economic activity right now, which increases prices. The great resignation, a tight labor market, and people spending their pandemic savings all are moderately driving up prices. 

Many economists, including those working at central banks, believe that these pressures will ease early next year. Again, they don’t have a crystal ball (and neither do we). Yet, their views shouldn’t be ignored as they’re the ones who can ultimately pull the levers on the economy. 

When the central banks decide it’s time to act against excess inflation, their first move is to stop buying bonds (loans to governments and companies) from investors. Doing so takes excess cash off of the market, which helps to cool the economy. It’s not clear when the European Central Bank will pull the trigger here, although the consensus is that they’ll start sometime in the second quarter of 2022. We’ll definitely write about it when it happens. 

To help you understand the situation better, how it’s measured, we highly recommend checking out the ECB’s inflation dashboard. This interactive tool breaks down different sectors, and the weight they receive in calculating inflation. You can compare countries to each other and filter out dates. 

Take a look when you have a chance!

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