The 2022 Outlook Part 1 - Tailwinds Shift to Headwinds
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"The more extended the advance, and the higher valuations become, the more stable and promising the investment can appear to be, when judged through the rearview mirror." John Hussman
The first part of my 2022 outlook looks through the front windshield and contrasts 2021’s tailwinds to 2022’s growing headwinds. While no one knows what 2022 holds in store for investors, my concern is that it should not foster the same optimism as 2021. The economic and financial environments are shifting rapidly. Relying on the recent past, as Hussman warns, may be hazardous to your wealth.
It's all about growth
Before looking forward, it's worth explaining how economists assess economic activity.
Most economic activity is measured in percentage growth terms and not nominal terms. To stress the importance of this nuance, consider the following:
If the government gives consumers $1 trillion to spend, it will boost GDP by at least $1 trillion. In our example, the stimulus will boost GDP to $21 trillion from $20 trillion, equating to 5% growth. Without government stimulus and excluding any new economic activity, GDP will retreat to $20 trillion in the following year. As a result, GDP will decline by 5%. While nothing changed with the economy, the 5% decline will be considered a recession. To avoid zero or declining economic growth, again assuming no other activity, the government will need to provide at least $1.01 trillion of stimulus.
As I show above, stimulus boosts economic activity. However, it detracts from economic growth rates unless it grows each year. This fact will become important in my 2022 outlook as the government will not likely replicate the massive amount of stimulus doled out over the prior two years. Can the economy make up for it?