The Joseph Effect

Ancient Egypt thrived during the seven years of famine because of Joseph’s plan. During the seven years of plenty that preceded the famine, he made sure that sufficient supplies were stored and saved. This put the Egyptian Empire in the enviable position of having enough food for their population, and the extra they sold to their neighboring countries in need. Based on this biblical story, mathematician Benoit Mandelbrot coined the phrase The Joseph Effect, which describes how movements over time tend to be more likely a fragment of a larger trend or cycle rather than being completely random.  In other words, future events are largely influenced by past events. In this article I want to explain how this concept can impact on our current financial situation and help us to plan for the future.

The macro

The financial world of today seems dramatically different than it was as recently as the beginning of the year.  Global events from Russia’s invasion of Ukraine, commodity shortages, rising inflation, and a return to higher interest rates have impacted on markets across the world, and across asset classes.

When looking at the very big trends, since the great recession of 2008/9 a tremendous amount of money has been printed globally, with liquidity looser than we have ever seen and interest rates at historical lows.  This free money has probably contributed more to asset price appreciation than any other factor as low-cost access to cash fueled asset price increases with investors looking for where to invest the available cheap capital.   Low interest rates have pushed up real estate prices, as favorably low payments made owning real estate more affordable.

People invested in high-tech, cryptocurrencies, EFTs, speculative stocks and real estate, earned more money and then looked for more places to put their earnings to work. We were living in the equivalent of Ancient Egypt’s years of plenty. However, when the cycle reverses the opposite effect is felt.

When the US Fed began taking money out of the system and starting raising interest rates at the same time, the impact was felt immediately.  With liquidity impacted, sectors started to contract, leading to a popping of the technology and crypto bubbles, with price decreases reaching 60-70% or more.  The domino impact on other industries continues to be felt and I think we’re not quite finished hearing about surprises, especially in innovative, unregulated areas where the unanticipated seems to be happening daily, with hedge funds, crypto brokerage firms and bankruptcies an everyday event.

Globally we are all going through an adjustment. No-one knows how long this will last. Governments are raising interest rates in an attempt to put the brakes on inflation. As they continue to pull money out of the world economy, the adjustment could take years.

The micro

In the meantime, prices are rising locally in Israel and companies are announcing layoffs. Similar stories are being heard in most countries across the globe. Whether or not there is a degree of consolation in the fact that it is not only us affected, is debatable. In Israel currently, our economy is strong, and inflation, though higher than we have seen in recent years, is lower than in other western countries like England and the US. However, the question now is how do we – individuals – navigate this new reality?

Covid-19 taught us that we can cut back and limit our expenses when necessary. In 2020, the travel industry literally ground to a halt across the world as countries shut their borders to foreigners and implemented lockdowns for their citizens. During that period the high-tech sector continued to thrive as markets, despite the initial crash, recovered very quickly and rose to new heights. Much of that afore-mentioned extra money was invested and re-invested in the tech sector and other speculative investments. And now as the travel industry is recovering, the high-tech market has been among the hardest hit during the current market downturn, with companies losing value and starting to adjust by letting go their employees. There are no guarantees, no matter what industry you are in. But you can always focus on your future and prepare accordingly by putting away money for a rainy day.

Don’t focus on current inflation or interest rates, and the rising price of gas. Don’t be caught up anxiously when another increase is forecast or when your shopping bill seems to have gone up 10%.  Look at the big picture and try to adjust to the new reality.  If you’ve been fortunate enough to see your income remain stable or increase, take advantage and up your savings rate. Use the years of plenty to prepare for years of uncertainty ahead.

Can things turn around very quickly and go back to the ‘plenty’?  They can.  But I believe the chances are higher that once the tide has started to turn, it will take us more than a few months to steady the boat and return to good times. There is over a decade of excess liquidity to mop up and it is likely to take a considerable amount of time to right previous policies.  And if I’m wrong and it turns around faster than expected, your increased savings will only help you later in life.

Our current reality in the summer, when the kids are off school and are looking to be entertained, is an excellent opportunity for you to discuss your financial situation and the economy in general. Share with them what the rising prices mean to you all, and how it will impact their summer. Speak honestly – we don’t know how long this will last and how we will all be impacted. Explain to them the importance of a long-term strategy. That education will benefit them throughout their lives, as they see how Joseph’s plan of using the ‘years of plenty’ to cover the ‘years of famine’ can be repeated to their benefit, as the cycle turns.

Joseph became viceroy in Egypt due to his planning. We may not achieve that height, but in a time of increased uncertainty and financial insecurity, we can make an effort to take better control of our financial reality and future.

Behatzlacha raba.