How Bad Will The Recession Be?
The world is weird.
Some people don’t think there will be a recession.
Some think it will rival the Great Depression.
Which is it?
I often find myself out of sync with the other prognosticators.
And I think that this year will be about in the middle. We're going to have a recession. That is a done deal. The question is how deep will it be?
Most people think that it's going to be bad. The doom and gloomers think that it's the end of the universe, and that we're all going to have to run to the mountains with our guns and our canned food.
But about 50% of economists believe that there will be no recession or there might be just one quarter of negative growth. Now,
I think both of these camps are hallucinating. We're not going to go into a Great Depression, because people always find a way to muddle through. A great depression would be caused by perhaps a war where the United States has to send troops to, for argument's sake, to Ukraine or to China, or there's a nuclear confrontation. But those are all highly unlikely events. Most likely, we will continue to muddle through by having proxy wars, rather than hot wars.
On the other hand, we see evidence that there's going to be a recession and I think that is a done deal. So the economists who believe that there isn't going to be one are going to be wrong.
I've highlighted extensively the effect of the yield curve on future economic performance. We saw the two versus 10 year Treasury yield curve turn negative a year ago, and several months ago, the three months versus 10 year Treasury yield curve turn negative.
Both yiield curves lead the economy by about a year. The two versus 10 called the recession we had last year and the three month/ ten yeare is calling the recession for 2023.
But there's more than that. Fed policy is extremely tight. True. interest rates are not super high. But the rate of increase of interest rates is record setting. And when you do something dramatic, like the Fed has been doing with rising interest rates, it is a shock to the system. It gives people less chance to react and modify their behavior. Instead, it is a punch in the face.
And Jerome Powell and the Fed governors are punching the economy in the face.
At the same time, we see that corporations and governments have record setting debt. So this punch in the face is going to affect corporations and governments the most.
The federal government has the ability to print money, so they will always pay their debts. But does the state of Illinois or California have the ability to print money? No. So they're going to have problems. Illinois could easily default on its debt, and California will suffer mightily. I think that Illinois will probably have to get a bailout from the US government. But many state and local governments are going to suffer in the coming recession. At the same time, they're going to have to be increasing welfare and unemployment benefits, their account their income is going to be shrinking. So their situation is going to dramatically be hurt in 2023.
The big key is actually us, the retail public. We're actually in pretty good shape. In the old days, back in 2008, our balance sheets were terrible. We had huge amounts of debt associated with housing and other forms of debt. But. since 2008, we paid off most of that debt. And now our mortgage debt is in great shape. It's increasing a bit, but it's in still in great shape. Our other debts. such as auto and revolving credit is also increasing, but from a relatively low level.
One of the big reasons is that we decided to put our balance sheets in order after 2008 and then in 2020. They backed up gigantic trucks in front of our house and dropped off $100 bills into our pockets. So we ended up with trillions of extra dollars in our bank accounts.
Now we've been spending like crazy because. of course, Americans don't like to have cash in the bank. They like to spend it and be right on the edge of insolvency. But we still have some of that savings left that can help mitigate any type of recession.
So my best guess right now, is that we're going to see a recession and unless there is some new piece of news, the recession will be a relatively normal size recession. It will be concentrated in corporations with some kickback into normal people. We will also see a number of state and municipalities default on their debt.
So how does this how do we make money from all this?
Well, one big effect will be that we're probably going to see lower interest rates as the year goes on. And that means we should be buyers of bonds and we should be buyers of interest rate sensitive stocks.
I just put together a video on the biotech industry, which will do very very well this year because it is very sensitive to long term interest rates and long term interest rates should be lower as the year goes through.