Recession – Yes, No or Maybe
Until this last Tuesday, September 13th, I was harboring some hope that inflation was indeed , at least to some degree transitory, and the Federal Reserve would have a little room to be less aggressive in its efforts to slow the economy, and just maybe avoid a “hard landing”.
Despite their tremendously bad history of hiking rates and avoiding recessions, my hope was that as fuel prices came down - and since fuel prices affect the larger worldwide economy - inflation numbers would be positively affected. Unfortunately, high inflation is still with us, and likely for a while.
The odds now firmly favor a recession within the next 6 to 12 months. As I’m writing this (Friday, September 16), FedEx stock is down more than 30% and the company is saying they’re seeing a sharp slowdown in they’re business. Since FedEx is a global company, investors are paying attention to it and markets are rattled.
There are companies saying they’re not seeing a slowdown – yet. However, they are starting to see hesitation by their customers to spend. Even I’m taking a possible recession into the equation when making personal and business decisions.
There is a laundry list of things that we’ve never seen before and so how this will all end is up in the air.
Here are several notable differences between this rate tightening cycle and others:
- We had 12 years or so of Quantitative Easing (QE), no we’re facing several years of Quantitative Tightening (QT). The Federal Reserve has $8.5 Trillion of Treasuries and Mortgage-Backed Securities on its balance sheet and is looking to significantly lower this amount. Since they started this reduction on September 1st, the yield on the 10-year Treasury has risen by 5.5% and 30 yr. mortgage rates are now average above 6.5%.
- The housing market is likely in a recession already, and since most home buyers are payment buyers, when their monthly payments are several hundred dollars more than it was just six months ago, less people will purchase homes and prices will likely stagnate or drop. On the other hand, the people who bought or refinanced at or near the interest rate bottom will be reluctant to “trade up” or even downsize unless they can for cash, which may help buoy prices for a time.
- We still have an ugly war between Russia and Ukraine that could further upend the balance of power and economies around the globe.
- Our national debt is over 100% of GDP. The last time inflation was this bad and the Fed was this aggressive was under Paul Volker and debt to GDP was 30%.
- We have an “inverted yield curve, meaning longer term rates are lower than short-term rates. This is not normal because if you loan money for 2 years vs. 30 years, you expect to get a higher interest rate because you’re taking more risk. 12 of 14 times this has occurred since WW2, we’ve gone into a recession within 12 months.
With this backdrop, it’s certainly hard to make the case we’re not headed into recession. The only question is when, how severe and how to position your investments
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