Recession question answered | Seeking Alpha

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President Joe Biden, Treasury Secretary Janet Yellen, all the money printers inhabiting the Federal Reserve and virtually the entire deep state of Wall Street are still busy trying to convince you that a recession. it is unlikely. Well, here’s some news for all of them. It is no longer a question of whether or not we will have a recession. The recession is already here. The only question is, to what extent will the recession.

The consumer is being attacked on all fronts, and its consumption accounts for almost 70% of GDP. Falling real wages, rising debt service costs, falling cryptocurrencies, falling stock prices and the mistreatment of bond values ​​are severely damaging your financial health. And soon at a nearby theater, there is a real estate accident. Instead of house prices rising by 20% annually as they have for the past two years, the rate of appreciation of house prices should decline rapidly. Home accessibility is at an all-time low, while new listings and price reductions are on the rise. Home equity withdrawals have been greatly reduced due to rising mortgage rates. And now, the depreciation of real estate values ​​closed the bad habit of consumers to rely on the extraction of capital to increase consumption.

The final blow to this history of consumption will be the labor market. A growing number of U.S. corporations are freezing hiring and / or firing.

All of this is exactly what the Fed wants and must go through to bring inflation back to 2%. However, the Fed has an abysmal track record of hitting anything, especially when it comes to inflation and its targets. The Fed was unable to get inflation to rise to its 2% target for most of the period 2008-2020. Then, with the help of the Treasury, he managed to keep inflation soaring beyond 2%. In fact, it reached 8.6% quite quickly with the launch of a massive helicopter money scheme following the COVID-19 outbreak.

And it is this insoluble inflation that prevents Mr. Powell gets it anytime soon, despite a blatantly obvious recession that looks him in the face. Existing home sales were 8.6% lower in May this year compared to the same period in 2021. This is the lowest reading since June 2020, during the early stages of pandemic-induced closures . Can it really be possible to have an expanding economy when existing home sales are falling so sharply? In May, the seasonally adjusted annual rate of housing permits to build a home decreased 7% month-on-month. And real homes fell 14.4% m / m. This drop in housing starts was the largest m / m drop since April 2020.

The June Philadelphia area manufacturing survey contracted 3.3% against a projected gain of 5.5%. New orders in this survey fell 12.4 from a positive of 22.1 last month. Does this sound like a growing economy? No, he doesn’t. First quarter GDP read -1.4% and the Atlanta Fed’s now GDP estimate for the second quarter is 0.0%. This means that the US economy shrank during the first six months of 2022. This is a recession by technical definition or any other honest measure of the economy.

No wonder consumer sentiment is at an all-time low. Despite this recession, the Fed’s Gong Show master stated at the June FOMC press conference and also in his testimony before Congress that the American consumer and economy are very strong and can support monetary policy. most brutal in history. Maybe Powell should try his luck with stand-up comedy.

Instead of the animations you’ll find in the main financial media, I’ll offer the two main reasons why this bear market is so much worse than any bear market since homo sapiens started roaming the earth.

  1. Asset prices are falling and the economy is shrinking at the same time: inflation is at an all-time high. This means that, for the first time ever, the Fed is forced to raise rates in a recession. In fact, we have the most aggressive hiking cycle ever. Powell is raising the rate of Fed funds in increments of 75 basis points, while quantitative easing destroys $ 47.5 million in money supply each month. That is, until September, when it will increase to $ 95 billion a month. Powell now says he wants the Fed funds rate to be 3.25-3.5% by the end of ’22.
  2. The second reason this bear market will be epic is that the total amount of outstanding debt is greater today than at any other time in history, both in nominal terms and in terms of GDP. By the end of last year, corporate debt had soared to $ 11.6 trillion, which is 48% of GDP and a record high. And total non-financial debt has soared to $ 65 trillion, which is another record and an incredible 270% of GDP. What we actually have is an 84% increase in corporate debt and a 94% increase in total non-financial debt since the Great Recession! A higher amount of arrears leads to a greater economic disruption.

To make matters worse, it’s not just the United States that is in such a dire situation. A lot of the world’s major central banks are fighting in virtually the same battles. Here is a list of countries that are in the process of increasing borrowing costs: USA, Australia, Chile, South Korea, Brazil, Britain, Canada, Czech Republic, Hungary, Israel, India, Mexico, New Zealand, Norway, Poland, Saudi Arabia, South Africa, Sweden, Switzerland and the entire European Union are expected to join the parade this July.

Despite all the damage done to the stock market, the valuation of shares as a percentage of the underlying annual output of the economy is higher today than at any other time in pre-2020 history. stock market as the percentage of GDP is currently 155%. That’s more than ten percentage points higher than the NASDAQ bubble peak in 2000 and more than 50 percentage points higher than it was at the start of the Great Recession in December 2007. As a reminder, the NASDAQ went lose 80% of its value. between 2000 and 2002, and the S&P 500 fell 57% from October 2007 to March 2009. That is, those in charge of raising the fund should continue to end up with very stinky fingers until the inflation is eliminated and the recession is fully included in stocks.

Then, a new bullish market should emerge, but it will be affected by the stench of stagnation. That is, the buy and hold portfolio, 60/40, died a long time ago and will not rise soon. Inflation / deflation dynamics intensify with each boom / deflation cycle, and this requires a different investment approach than most Wall Street firms offer.

Original publication

Editor’s note: The summary peaks in this article were chosen by the editors of Seeking Alpha.

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