My intense stretch of travel speaking to agriculture groups nationally and internationally provides a vantage point for real-time economic reconnaissance. This allows one to connect the dots of economic data and be on the frontlines of emerging trends in the business community.

In the last column, our discussion focused on the convergence of a possible economic flip where prices decline, but inflated costs and interest rates remain high, resulting in financial stress. Another focal point was where the central banks would eventually land on interest rates. Now, let's move forward.

Banking issues

Regional banking issues in the U.S. and the large international bank’s financial challenges sent ripples through the banking sector including regulators who provide oversight. A lesson here is how quickly it occurred and the convergence of events that catapulted the crisis. Overzealous lending to the technology sector and startups, and investment strategies with bonds, along with internal and external regulators missing these actions brought these events forward.

These missteps have the equivalent of a 1 to 1.5 percent rise in interest rates by a central bank. Credit is tightening across all sectors, particularly in small businesses, which includes many farms and ranches. Where one will first notice the squeeze will be in operating lines of credit, which impacts financial liquidity. Remember, whether it is a country, bank, business, or household, financial liquidity is the first chokepoint in the tightening side of the credit cycle or a downturn.

Higher interest rates have reduced the “TINA” effect on land values. TINA is an acronym for “there is no alternative.” Investments in land are now being challenged by investments in certificates of deposit and treasuries, particularly with the older generation who are becoming more risk averse as they age.

China

Chinese citizens, who saved $2.4 trillion in the three-year COVID-19 lockdowns, are paying down mortgage debt rather than spending, despite low mortgage rates. The Chinese citizens are concerned about a possible economic downturn and losses in equity markets and are electing to prepay debt. Collective mortgage debt on homes in China is between $5 and $6 trillion and is structured on variable interest rates. The Chinese economic growth has a ripple effect on energy demand and input costs. As a result, we will have to watch the Chinese citizens' spending habits very closely.

Green energy and fossil fuels

The considerable economic incentives for green energy investment in the U.S. and abroad will result in inflation and an unstable environment for energy. When estimating costs and expenses in the future, expect volatility that can quickly be accelerated by geopolitical strategies. Be careful to think through the unintended consequences for the “next big thing” in green energy.

When it is all said and done, be vigilant about monitoring financials, stay financially liquid, and have a sound marketing and risk management plan!

To read the first part in the series, check it out here.