As of August 2022, we are officially in an economic recession. The gross domestic product (GDP) decreased at an annual rate of 0.9 percent in the second quarter of 2022, following a decrease of 1.6 percent in the first quarter of 2022.
I do believe we are still in a bear market as well. If the economy tells us anything, it’s that we may not have seen the worst of the recession yet. A severe economic recession in 2023 is highly likely, and the poor and middle classes will suffer the most.
In this article, I will dive into why I believe we are still in a bear market, the indicators for a severe 2023 recession, and what you can do to best position yourself if the economy does collapse.
The Bear Market
We are still in a bear market because incomes are decreasing (yearly inflation is outpacing yearly salary increases) while the economy is shrinking from rising interest rates and inflation.
The First Indicator – Inflation is Still High
The first indicator that the US economy in 2023 may get squashed is inflation is still sitting at over 8.50% as of July 2022. Even though the Consumer Price Index (CPI) is below 9% compared to June, the CPI is still twice as high as before the pandemic.
Inflation has caused household purchasing power to decrease. Therefore, most households are in a worse position financially now than when they first received the stimulus checks and before the inflation drastically increased two years ago.
Let’s say your annual salary increases at 1% per year. Inflation has increased by 6% in the past two years. Your yearly salary would have only increased 2% compared to the 6% increase for inflation.
If you had $1,000 in your bank account in 2019 and have $1,500 currently, that $1,500 will buy you less now than the $1,000 in 2019 because more money is being allocated towards essential products due to inflation. The problem is that you have had two years of super high inflation. So, you can’t buy as much stuff now with $1,500 as you could have with your $1,000 in 2019.
Today’s bank account balances are still higher than they were in 2019 because of the free stimulus money and not because of real wages increasing faster than inflation. This is a temporary situation brewing towards something more significant.
George Gammon has a great YouTube video explaining in detail how bank accounts are affected by inflation and how even receiving stimulus checks still puts most households in a worse situation today. Even though checking account balances are higher and purchasing power is less.
The Second Indicator – The Bullwhip Effect
We may see another wave of high inflation due to the bullwhip effect. The bullwhip effect is caused by increasing essential product prices and decreasing prices for non-essential products. Walmart and other giant retailers are great examples of this.
Money printing put us in this high inflation in the first place. The government was spending money and handing out stimulus checks. The increased aggregate demand is due to the stimulus checks, and retail stores reopening in 2021 that created an urge for people to spend money and go out again.
Retail stores like Walmart, which are not economists, bought more supply of these non-essential goods in their inventory. It was a sugar rush by the retailers thinking the economy was sustainable at that high aggregate demand.
Then interest rates and inflation for essential products went up, causing retailers to slash rates and decrease non-essential inventory because aggregate demand significantly decreased in 2022 for non-essential products. High inventory led to a cut into the retailer’s profits and margins.
The poor and middle-class households who spent the money from the free stimulus checks on stuff they don’t need are the ones who this will most impact. That’s because the extra money goes towards additional non-essential expenses and raises debt.
High-interest rates have caused households to pay back significantly more than the borrowed amount. Think of monthly mortgage and auto payments being considerably higher than in 2021. Similar property values are paying double per monthly payment now than before.
Another part that drove people to spend money was that mortgages were in forbearance, and student loans were in deferment.
The decrease in expenses created artificial purchasing power that reduced goods and services. The government increased household available cash to keep the economy booming temporarily.
The Third Indicator – Round 2 of Rate Slashes and Stimulus Checks Are Coming
The house has officially passed the Inflation Reduction Act, which means that government will print $430 billion through 2025. The Inflation Reduction Act is not reducing inflation. They are doing the exact opposite and printing more money.
What the government should be doing is decreasing demand and increasing supply. What the government are doing instead is spending more money and rising aggregate demand temporarily while decreasing supply through tax raises on the companies who are producing these goods and services.
One critical point is that there is no such thing as a free lunch. If the government and feds keep doing these temporary props to correct the market, the poor and middle-class consumers always end up paying for it with increased prices.
Wealthy households won’t be impacted as severely as the poor and middle classes because if everything crashes, the rich will come in and buy the assets (stocks and real estate) for cheap anyways.
Printing more money and placing higher taxes on businesses won’t fix inflation.
That’s why 80% of America’s current US dollars were printed between January 2020 and October 2021 ($20 trillion).
The issue was increasing money circulation and decreasing the number of goods and services instead of providing additional goods and services. That would have eliminated the inflation had the number of goods and services increased at the same pace as the money circulation.
Goods and services were decreased through ports shutting down, slashed rates on mortgage and autos (chip shortage also), labor cuts, and businesses shutting down. All while providing free stimulus checks to drive up aggregate demand.
For businesses and households earning below $400k per year, the Inflation Reduction Act will protect you through free stimulus checks. Hence there will be another big boost in aggregate demand to make the economy look like it’s thriving when it will only drive-up inflation instead.
The government is also waiting to print the new Inflation Reduction Act money. That is because they need to bring inflation down since they have never dealt with an 8-9% inflation rate before decreasing rates and printing more money. That explains why the feds have not switched their stance away from fighting inflation quite yet. Expect at least one more basis points increase this autumn.
Nobody will talk about how significant this is because everyone will be focused on the CPI lowering even if the fed’s balance sheet said 9 trillion in deficit spending. Usually, inflation is only at 1-2% in these situations.
The Fourth Indicator – The Feds Focus on Inflation is Temporary
If you have paid attention to the fed’s comments throughout 2022, the fight against inflation is only temporary. That’s because the feds’ goal is to avoid a severe recession at all costs. When the economy slows down enough, more money will be printed, and rates will be slashed to create a temporary boost in aggregate demand again.
The feds are tightening the market by increasing the wall street prime rate by 75 basis points in July. However, the market is saying the feds will reverse course and focus on the economy soon. That’s because the long end of the treasury bonds yield tells investors they would put their cash in short-term treasuries (a little bit more on this shortly). After all, investors think feds are going to lower rates.
Higher rates also indicate a significant recession because riskier assets (stocks and real estate) would go down. If you lower rates, no one knows what environment we will be in, which could lead to a big crash in this bear market. That is what the treasury bond market is indicating.
The treasury bond market is also saying yes to a severe recession because the yield curve inversion on the treasury market has been sustained for quite some time. Inversion means the two-year treasury yield is higher than the ten-year treasury, which doesn’t make sense from an economic standpoint.
In a good economy, the longer the term, the higher the interest rate you would charge due to higher risk. Currently, people are lending the government money by buying treasury bonds for six months at a higher yield instead of a ten-year bond.
Investors are putting money into these short-term treasury bonds with anticipation of cashing them out once the economy severely crashes. Investors are also keeping as much liquid cash as possible. They are ready to buy stocks and assets at the dip.
When the treasury bond market first inverted, it was projecting for 2024, then moved into 2023, but is now at the end of 2022. The treasury bond market inverting is a massive indication that the feds may lower rates earlier than later. They are going from the 5-year treasury bond to the 2-year, 1-year, 6-month, etc., for that higher yield.
Worst case scenario is if we spiral into a severe recession, the average Joes and Janes will get hit hard because CPI could reach 9-10% or higher quickly.
The government will then be in a position where it can’t prop up the economy. There is no feds input, and there is no government input. So, the only thing the government and feds can do is sit back and watch it all collapse.
Therefore, the feds are focused only on inflation now because they want to lower it as much as possible before they print and spend money again to avoid this worst-case scenario. But this will still increase CPI and bring us back to where we were in June or worse.
Will this recession be worse than 2008?
The Eurodollar future curve is saying this recession will be worse than 2008. The Eurodollar is a global bet (trillions of dollars) of the fed’s funds rates in the future.
Let’s say 2022 ends with a fed’s funds rate of 3% and starts inverting (decreasing), then the inversion timeline is also reducing if you go back to the previous paragraphs where you go from the 5-year treasury bond to the 2-year, 1-year, 6-month, etc. for a higher yield.
Inverting the fed’s funds rate is scary because interest rates are increasing on treasury bonds for lesser terms going into 2023.
If you take these inversions that predict the recessions and compare them to past recessions, we are in almost the same spot as we were in 2007. The market is saying at the end of 2022 or early 2023; there will be a significant event identical to the 2007 global financial crisis (GFC).
The Fifth Indicator – The 2022 Mid-Term Elections
A significant factor that is playing into this is the mid-term elections. That is why we will most likely see another basis points increase so the govt can say they did something by cutting rates and lowering CPI only to turn around and print more money.
Also, student loans are supposed to come out of deferment in September. A selling point to increase artificial spending power is to extend student loan deferments or cancel student loan debt. The government has already canceled $6 billion in June.
What You Can Do to Prepare!
Wealth is goods and services, not cash, gold, etc. Money itself is not wealth. Assets that provide goods and services (rental properties and businesses) create that wealth.
To put yourself in the best position possible for a potentially severe recession, keep as much liquid cash at the ready as you can. Wait and see how this bear market reacts first. You could be buying at the peak if you bought today.
Also, investing in future energy is wise because less capital will be going towards fossil fuels. Looking at the recent Inflation Reduction Act, $369 billion is going towards energy security and climate change.
You can refer to these future energies as “hot commodities .” Hot commodities would include uranium, copper, nickel, coal, etc.
An argument that gets made about coal is that burning coal is bad. But we rely so much on these hot commodities that we cannot sufficiently survive without them. Germany is one of the most pro-climate countries and yet is still burning coal to save natural gas stemming from the lack of supply from Russia.
Another example is electric cars. How are they made? Electric cars run on batteries. These batteries include hot commodities that you can invest in.
If we enter a severe recession as the market is pointing towards, being able to act promptly can make you wealthy. More millionaires are made during recessions than in any other period.
