International Forecaster Weekly

RECESSION OR NOT, HOLD ON FOR A BUMPY RIDE

By Dave Allen for Discount Gold & Silver

On yesterday’s Financial Survival podcast/radio program, I observed that getting the price of oil down is really the whole ballgame when it comes to how, why and when the Federal Reserve plans to bring down inflation.

And if it doesn't go down – substantially – then the Fed will only go harder and faster on rate hikes to try to scale back demand – ill-advised as that may end up being.

Whatever the case, that level of unwarranted monetary tightening will mean markets further spiraling downward and sending the economy into a recession sooner – and possibly deeper – than we think. 

 

Guest Writer | June 17, 2022

By Dave Allen for Discount Gold & Silver

On yesterday’s Financial Survival podcast/radio program, I observed that getting the price of oil down is really the whole ballgame when it comes to how, why and when the Federal Reserve plans to bring down inflation.

And if it doesn't go down – substantially – then the Fed will only go harder and faster on rate hikes to try to scale back demand – ill-advised as that may end up being.

Whatever the case, that level of unwarranted monetary tightening will mean markets further spiraling downward and sending the economy into a recession sooner – and possibly deeper – than we think. 

Best Hope for Stocks, Bonds and Precious Metals Is a Recession

In fact, stocks are free-falling into bear territory, Treasuries aren’t far behind and gold and silver are scratching their heads, wondering how to react.

In fact, more analysts like Axios’ Mike Phillips are saying the best hope for stocks right now is a recession “that crushes inflation and allows the Fed to slow, stop or even reverse rate hikes.”

Down 23% so far in 2022 (as of yesterday’s close), it's the ugliest year for the S&P 500 index since 1962. The tech-heavy Nasdaq is down even farther, 32%.

The drop has sent over $9 trillion worth of paper wealth up in smoke, delivering a psychological shock – and a worrisome financial blow – to millions whose retirement is largely in stocks.

Energy costs are driving this slump. The price surge is deeply unsettling to world economies — and Russia just complicated matters further by cutting natural gas flows throughout Europe.

But it's also what rising energy costs will do to inflation (i.e., push it up even more). 

It's how central banks like the Federal Reserve will react to energy-driven inflation (i.e., push rates up).

And most recently, it's what the Fed's reaction to this energy-driven inflation will do to economic growth -- push it down, potentially way down.

Facing persistent inflation, the Fed delivered its largest rate hike in 40 years the other day – 0.75 percentage points. 

An increase like that is akin to stomping on the country's economic brakes sharply, increasing the risk of recession.

Despite the recent beating equities have taken, the Fed's announcement on Wednesday was initially greeted with open arms by investors. The S&P 500 rose 1.5%, and the Nasdaq jumped 2.5%.

A new inflation scare this morning -- natural gas costs surging because of Russia – helped to reverse that short rally and then some.

Now, just two days later, huge Fed rate hikes that threaten many believe will sink economic growth sounds like a bad thing for precious metals and stocks – but with inflation still climbing, some economists say it isn't necessarily so.

Essentially, they argue, investors – especially the big, institutional ones – are saying they prefer a sharp, Fed-induced economic slowdown if it quickly gets inflation under control. 

In theory, that could allow lower interest rates to return after inflation is overpowered (but guess what: prices that are a lot higher than the level the Fed prefers is going to stick around for a while).

We know that ow-interest rates have been rocket fuel for the stock market over the dozen years since the end of the Great Recession.

Far too many Americans often see the stock market as an economic indicator – many of them thanks to relentless Wall Street propaganda that constantly tells them that.

But the linkage between economic growth and stock market performance is surprisingly weak, and some economists believe a link doesn’t exist.

But don't recessions hurt corporate earnings? And don’t falling earnings make stocks fall? Earnings are an important component of stock prices, and they tend to fall during recessions. 

But recently, interest rates -- essentially the yield on the 10-year Treasury -- have played a more important role in setting stock prices than earnings.

Why? Because interest rates largely determine the valuation multiple – aka the P/E (price-to-earnings) ratio – that investors use to determine how much they're willing to pay now or over time for those presumed future earnings.

Higher interest rates equal lower valuations, and vice versa. So, even if earnings fall, stock prices can still rise, if valuations surge. 

And those valuations are largely a function of interest rates, which are largely determined by the Fed.

Thus, the sooner investors think the Fed can stop raising interest rates, the better it will be for stocks – and more importantly, for gold and silver. 

If You're Along for the Ride, It's Gonna be Bumpy

With the Fed’s procrastination, it was always going to be a challenge bringing inflation down without triggering a major economic downturn. 

Yet, the Fed’s most recent messaging implies that it’s accepted that the path to lower prices will be through lower jobs and GDP.

While the Fed seeks to embrace Goldilocks and avoid a recession, its members recognize that a “whatever-it-takes” clash with inflation will inflict collateral damage on the economy.

Inflation is now public enemy Number One. So I wouldn’t expect the Fed to relent and offer relief just because the stock market keeps dropping or layoffs start surging, as they have in the past.

When prices jumped last year, the Fed saw it as a temporary phenomenon. They called it “transitory.” 

Then, starting late last year, it took a more aggressive stance and started talking about tightening credit – seeing a sanguine pathway where growth would continue but inflation would come down.

Now, Fed officials are projecting concern that high inflation will become entrenched, and its chair says the Fed will do what it has to do to stop that from happening – whatever the consequences.

At Wednesday’s post-meeting press conference, Powell said, "The worst mistake we could make would be to fail" in bringing down inflation. It's not an option…We have to restore price stability.” 

He insists that "there are pathways" to bring down inflation while keeping the labor market strong, but that "those pathways have become much more uncertain thanks to factors that are not under our control," such as Putin’s war in Ukraine.

In new Fed forecasts, the median Fed official now expects the silly headline unemployment rate to rise 14% to 4.1% at the end of 2024, up from 3.6% now. 

Translated, that means over 8% when you include discouraged job seekers and those working part-time even though they’d like a full-time job (the government’s so-called U-6 unemployment rate). 

Less than three months ago, the Fed had been expecting the jobless rate to hold steady for the next two years.

Now, on the one hand, a 4.1% headline unemployment may not be all that alarming (aside from the fact that it grossly misrepresents reality) – it's been higher than that 80% of the time since 1947.

Still, there are no examples in recent decades of the headline rate rising by half a percentage point or more in any sense other than a recession. It's possible in theory, but in practice, it just doesn't happen. 

In Powell's words, bringing down inflation is ultimately in service to a better situation for workers. 

"We don't seek to put people out to work," he told us this week. "But we also think that you really cannot have the kind of labor market we want without price stability."

The bottom line, ladies and gentlemen? The next several months and likely couple of years will be a bumpy ride for the economy – and households – regardless of whether we technically end up in a recession or not.