There are a lot of reasons to worry about the economy, but here's one you don't often hear about: the growing spread between treasury bond yields and other types of credit. That spread has been widening for about a year, and it's a cause for concern, says Nicholas Crown, a former Wall Street trader and VP at Barclays Investment Bank. Crown is now an entrepreneur and he both created and plays all the roles in the wildly popular TikTok series "Rich vs Really Rich."
Since he's no longer employed by Wall Street, Crown is free to say what he really thinks about the current state of the economy and where it's headed in the near term. Here's his candid advice for both entrepreneurs and investors.
1. Face reality.
The growing spread between treasury yields and other forms of credit (credit cards, mortgages, etc.) indicates two things, Crown explains. First, financial markets believe that loans to individuals are riskier than they were before--i.e., more people are expected to default on those obligations. And second, people are eager to borrow. "We're in this crazy scenario where we have insane inflation and people still want to spend, spend, spend," he says.
And if they want to keep spending, they can. Crown notes that there are new and different financial products being introduced all the time to let consumers borrow more and more. "Our lifestyle, in my opinion, hasn't adjusted to what's happening in the market," he says. With rising interest rates, this can be bad news for borrowers. "The average person is going to feel the pain more than the large investor asset holders, just because if they're starting to rack up credit card debt, that interest rate of 14 percent is going to 25 percent pretty soon."
Meanwhile, rising interest rates have done little to bring down sky-high housing prices. They won't for the foreseeable future, Crown says, because big investors have been pulling their money out of the equity markets and investing it in real estate, especially short-term rental properties. At the same time, higher interest rates mean many consumers can't afford to purchase homes, so they're forced into the rental markets where rents are rising.
The combination of rising inflation and increasing rents creates what Crown calls a "poverty wedge" affecting many people. "It's getting driven into the average consumer's wealth," he says. "You're getting poorer and poorer because of inflation and because of the cost of your rent." He believes that wedge is getting to a dangerous level.
There may not be much you can do to stop the poverty wedge from affecting the economy, but at least you can mitigate its effects on your own household and business. If you have credit card debt or other debt with interest rates that can rise, prioritize paying down or eliminating that debt. Make the lifestyle changes you need to so you can stay debt-free. In your business, look for ways to cut expenses. You'll be in good company--many organizations, including Microsoft and Google, have announced cost-cutting measures.
2. Invest in you.
There aren't that many attractive investment opportunities right now, Crown says. "We have this complete pandemonium and confusion in the market. Cryptocurrency--the regulatory environment is scary, in my opinion. We have no idea what's going to happen there. So why don't we start to reinvest in ourselves?"
The classic example, he says, is a dentist who puts $100,000 into the stock market when he or she could better invest that money in hiring another dentist or upgrading the office to make it more appealing to patients.
Another great way to invest in yourself is to learn new skills. "A lot of people said during Covid that they were going to go back to school and do all these projects," Crown says. "If you didn't do that then, now is the time because you're not going to find yield out there with your investments. But you might find yield by upskilling. Continuing education is getting cheaper and cheaper. There's no excuse for not investing in yourself."
3. Double down on entrepreneurship.
Crown thinks, despite the economic headwinds, this is one of the best times for entrepreneurship. One reason is talent. "There's going to be a lot of available talent," he says. And now that remote work is more of a norm, "you have the entire world as your talent pool."
Skilled people are becoming more entrepreneurial, opting for gig or contingent work, and that means you have many more options for hiring them. "You don't need to hire someone full-time anymore. You can hire them on a fractional basis." As a business owner, he says, "We're taking high-quality talent and saying you can rent it." It's a game-changer for solopreneurs especially, he says. "You can move mountains as one person now."
With all these opportunities out there, and the financial markets in turmoil, it should be an easy decision, he adds. "For an entrepreneur like me, it's an absolute no-brainer to reinvest like wild into my business instead of the public markets." It might be a no-brainer for you too.