Everything is Connected
You might have heard earlier this year that the “Everything Bubble” has finally popped.
The truth is that these days all bubbles are “Everything Bubbles” because we live in a highly interconnected world.
The “Everything Bubble” that popped recently was the direct result of a sustained period of cheap money that had a profound impact on everything from traditional stocks and bonds to real estate to private tech startups to foreign investments.
Everything is connected by a series of rubber bands in such a way that plucking one rubber band plucks them all.
The concept of “flight to quality” is difficult to make sense of when everything is correlated. The decade plus trend of rates going down fueled investments that proved to be very sensitive to a more normalized rate environment. All assets have been artificially inflated and therefore all assets are correcting and in the process of stabilizing at new levels (which will allow the rubber bands to stop vibrating).
And to be clear, nothing is exempt from “Everything”. For instance, China’s real estate problems are connected to the world in such a way that everyone should care. Trading partners like Japan and South Korea could be hurt massively if China enters a recession because there will be a major decline in the demand for their exports. Australia supplies raw materials to China and a weak Chinese economy will impact trading volumes significantly. And even the US will be impacted. China is a major importer of commodities, such as oil, copper, and soybeans so a slowdown in the Chinese economy could hurt the US mining and agricultural sectors.
What this means is that if any country’s entire economy or any economically important sector within a country catches the flu then everyone that interacts with them catches a cold.
The solution: Be prepared for increased volatility across all investment categories. And be prepared for everything to be cyclical. There’s not much that you can do except have a long time horizon and invest in opportunities that can weather storms.