A Strange World
All around us we see the same thing: weirdness.
According to a client of mine, a McDonald’s on Interstate 81 posted a sign in the window:
Apply Inside … Work Today!
So anyone with a pulse can walk in off the street and get a job at McDonald’s. No resume? No references? Surely an interview.
Doesn’t that paint a picture of a white-hot economy?
The housing market seems on fire. Another client reported to me that a house in her neighborhood had a bidding war with nine contracts written on the property. The winning bidder paid $52,000 over list price.
And just look around you: in formerly deserted shopping malls, consumers seem to be spending like crazy. Again, a white-hot economy?
But dark clouds are forming on the horizon.
In a CNN interview[1] Ken Rogoff, Professor of Economics and Public Policy at Harvard, said he had met with some top professional forecasters who identified some frightening signs of an “extremely difficult global situation.” According to Prof. Rogoff, with “the lockdowns in China . . . , , war in Europe, and galloping inflation, you have the makings of a perfect storm of a global recession.”
Perhaps to give viewers some hopium, he said, “It’s a pretty scary risk, but not a certainty.”
So what are the signs that have Prof. Rogoff and many other top financial analysts on the edge of their seats? We’ve singled out four economic indicators to watch.
Sign One: The Stock Market
The year began with the markets in nose-bleed territory. January posted record highs for the Dow and the S&P. “As of early 2022, the Dow’s all-time high at market close stands at 36,799.65 points—reached on Jan. 4, 2022.”[2] On the same day, the S&P reached an intraday all-time high of 4,818.62.[3]
But (there’s always a “But”) the bloom came off the rose at the end of January:
The Nasdaq Composite ended the trading day Monday down 9.49% from where it started at the beginning of January, marking its worst month since March 2020—the start of the spread of the COVID-19 pandemic in the U.S.[4]
Since that ominous day in January, the bottom seems to have fallen out of the market:
After hitting record highs in early January, the stock market has lost nearly a fifth of its value — plunging stocks near bear-market territory. The Nasdaq (COMP) is already deep into a bear market. More than $7 trillion has evaporated from the stock market this year.[5]
The bad news from Wall Street has certainly impacted Main Street. Even though a minority of Americans invest in the stock market, when they see red ticker symbols at the bottom of their TV screens, their moods shift significantly. In May, consumer sentiment dropped to its lowest level in 11 years.[6]
When consumers get frightened, they stop spending. Not good for the U.S. economy, two-thirds of which comes from consumer spending.
Sign Two: Inflation and the Fed
And when consumers spend these days, they find that their hard-earned dollar doesn’t buy nearly as much as it did last year. At the gas pump, the one gallon that $3.04 bought a year ago now hits your credit card with a charge of $4.47.[7] Californians must pony up more than $5.96.[8]
To buy the same thing, a consumer who spent $100 in April 2021 will now have to spend $108.26.[9] That 8%+ inflation rate has finally freaked the Fed.
Inflation was indeed a huge problem in 2021, but the Fed sat on its hands and failed to fight the growing inflation forces. The big 8.5% number in March thus prompted Chairman Jerome Powell and his committee to raise interest rates by a half percentage point—the largest jump in 22 years.[10]
[And Powell] said this month the central bank would continue to raise rates by half a percentage point at the conclusion of each meeting until it’s satisfied inflation is getting under control — and then the Fed would continue to raise rates by a quarter-point for a while.[11]
Deutsche Bank recently sounded the recession alarm in a letter to its clients. As reported by CNN Business:
“We regard it…as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel,” Deutsche Bank economists wrote in its report with the ominous title, “Why the coming recession will be worse than expected.”[12]
A gospel truth among stock market forecasters: The markets don’t like interest rate hikes.
Sign Three: Bonds
In the past, many investors fleeing the stock market used the proceeds to buy bonds. But that might not happen this time.
Cash is king, for bond owners are selling, too. As they sell, prices of bonds fall. As bond prices sink, interest rates rise (there is an inverse relationship between bond prices and interest rates). And this time, there’s another big bond owner selling bonds: the Fed itself. When COVID hit in early 2020, the Fed began to increase the money supply by buying bonds on the open market. But now, to hike interest rates, it’s selling off its huge bond portfolio.
All of this bond activity has produced a “yield curve inversion”:
As bonds sold off and investors grew more fearful of an economic downturn, the gap between short-term and long-term bond yields has been shrinking. Yields on the two-year Treasury note briefly rose above those on the benchmark 10-year note in March for the first time since September 2019.[13]
This is a yield-curve inversion, which has preceded every recession since 1955 (producing just one false sign).[14]
Sign Four: Global Chaos
Again, weirdness. All around the world. Russia continues its war-crime adventures in Ukraine, choking off a major source of food to Europe and Africa. With NATO countries and the U.S. stopping purchases of Russian oil, energy prices have soared, contributing to the galloping inflation in the U.S. China has recently been imposing severe lockdown restrictions in its fight against the COVID virus. Bizarre videos circulating on the Internet (and not verified by us) have shown thousands of Shanghai residents screaming from their balconies.[15]
While there has been no official announcement, residents in at least four of Shanghai’s 16 districts received notices at the weekend saying they wouldn’t be allowed to leave their homes or receive deliveries, prompting a scramble to stock up on food.[16]
Just as the world became deathly ill in the winter of 2020, when the COVID virus flew on thousands of airplanes taking off from Wuhan China, the world’s economy is about to catch another dose of doldrums as the world’s second largest economy slows to crawl in its battle with the same virus.
What Now?
What will it all mean? And where do we go from here? And what should you do now?
We’ll send a follow-up email later this week with a consensus of the experts.
As always, we encourage you to pass this article along to family and friends. We would welcome the opportunity to help them preserve their hard-earned assets.
