A quick disclaimer upfront: All information given in this presentation is researched and intended to be educational and illustrative to the specific topic, as always. Any companies, products, people, or other items mentioned do not constitute an endorsement, recommendation, or relationship. Every owner has to do their due diligence, as the decisions and responsibility about any investment lie with the owner. This information is not financial advice.
What is a recession?
A recession is a market condition in which the overall economy stagnates sharply for a sustained period of months or years. In a global recession, this condition is extended to several nations at the same time, which experience economic problems almost simultaneously due to financially overlapping systems and practices. Therefore, the global gross domestic product (GDP) is taken as an indicator. This condition indicates that a negative growth rate prevails in the market segment, which is influenced not only by the consumption of goods but also by other key figures such as the unemployment rate, lower-wage payments, and lower trade volume in import and export, and the bank interest rate.
How is a recession formed?
The origin of a recession is unclear. Scientists are trying to identify indicators for this type of crisis (national or global), but there may be various influencing factors.
The global change in the world situation is a huge factor. Take, for example, the current pandemic situation, in which the world is restricted in its trade, as well as in its tourism and integrity. Research for medicines, special arrangements for interaction in everyday life, and the procurement of goods due to a shortage of labor in factories that supply the entire world hinder the progress of a world market. the sudden increase in the cost of providing new medicines, special payments to keep people working, or even financial support for the people leads to a change in the debt budget of any nation that wants to recover these costs in other ways, such as increasing taxes. Due to the driving condition of the market recession, the monetary resources become scarcer, which leads to reduced consumption for goods that are already scarce and have been increased in price due to the market situation, which again lowers the purchasing power. Due to the reduced consumption, the manufacturers' costs are not covered either, which leads to the closure of factories and the termination of employment, which can result in an increased unemployment rate.
With this example, it is very easy to see that one disease trigger can already cause huge damage to the world market situation, especially if it then spreads quickly in our globalized world. However, there are other factors that can cause a recession, such as wars, shortages of essential goods, sudden price increases in the supply of globally traded goods, or stalled growth due to national circumstances.
One of the most famous recessions of modern times followed the Lehman Brothers crisis in 2008, when Lehman Brothers Inc, a U.S. investment bank with a 164-year history and at the time the fourth-largest investment bank in the U.S., went bankrupt due to the high-leverage business model that required it to raise billions of dollars every day. They invested in risky mortgages, which made the whole system of investment fail once the housing market began to fall. As a result, the Dow Jones dropped over a period of time until March 2009 to reach a low which was 53% from its peak point in 2007. The financial system was suffering, funds were missing and money was short at that time. Investors tried to withdraw as much money as possible from the banks and secure it against losses, which caused existential problems for the banks and severely attacked some business models. The long-term result of this banking crisis for subsequent generations has been increased unemployment, increased costs, and reduced wealth, which are particularly noticeable among millennials today. Only the knowledge we have gained through such a crisis is available and beneficial to those who are born now, as hopefully, they will not make the same mistakes.
What is the Impact on the trading markets?
The trading markets - as described in the examples above - can of course be strongly influenced depending on the world situation. A pandemic prompts some people to withdraw funds from savings and keep them ready for the crisis, while a banking crisis virtually burns up their own savings. The reaction in the market is always the same:
A decline in the economic markets and the associated shares and bonds. The markets lose value, the companies in which investments have been made lose their individual value, and the money is withdrawn from the market. This also applies to the new, very young crypto market, because there the market is somewhat more unbound, but fear is also a factor here to withdraw one's private funds from the decentralized and indeterminate financing and to prepare for emergencies.
An overall stagnation of the market begins, which can also lead to companies being forced to close due to the lack of monetary resources as a result of the reduced opportunities for investment.
When does a recession end and what happens afterward?
A recession ends when a new market or business cycle begins. This means, on the one hand, the resolution of the current problems that originally led to a recession, but also the driving force that can revive a market. No one can determine the exact point in time, even though a maximum duration of 12 months is usually assumed here on the basis of past crises.
One thing is certain: at the end of every recession, a new market cycle follows, much stronger than the previous one, creating not only new opportunities but also a new market situation that is better than the previous one. Purchasing power is coming back, companies are growing stronger than ever, and opportunities are improving.
The only question to ask here is when - until then, we all need to encourage each other to hang in there and wait, because patience is the key. Together we will get through it, like everything else.