Wednesday, April 26, 2023

Recession is Coming



Recession is coming.

No one likes to hear it but a storm is brewing. The Federal Reserve wants inflation below 2% and it's going to get it by forcing the US economy into a recession. (How we got here? That's for another email.)

By consistently raising short term interest rates in an attempt to bring down inflation the Fed has inverted the yield curve. (Where short term rates are above longer term rates.) If you notice below, a 2 year rate higher than the 10 year has preceded every recession throughout the entire data series.



Source: Federal Reserve

It can take a while for pressure from an inverted yield curve to work its way through the economy but there are already a few signs.

Temporary help is already negative on a year over year basis and it leads full time employment.



Source: Federal Reserve

Continuing claims for unemployment have also turned up on a year over year basis. Like the employment data it's not screaming Recession just yet, but the direction higher coupled with continued yield inversion will send more people to the unemployment office. The COVID lockdowns broke the graph, so here is the data before, after, and with COVID.





Source: Federal Reserve


So, how can you prepare yourself for the upcoming financial storm?

Raise Cash: I've been slowly reducing the risk of client portfolios. I suggest you do the same in both your investment accounts and personal financial profile.

Liquidity: This is not the same as cash; do you have excess buying power on your credit cards, lines of credit, etc.? Untapped debt you can access during a recession can help one get through the rough patches or capitalize on the dislocation.

Shopping list: I'm already building one for assets to purchase during the upcoming financial storm. This doesn't have to be stocks, bonds or market related items. Are you planning on a vacation? Consider deferring the decision until prices drop.

Counterparty Risk: How will a recession affect those you do business with? This could be an employer or a business partner. Do you have any loans or financial commitments coming up in the next two years? Now would be the time to consider how a recession would affect those relationships.

Opportunities arise during the chaos of a recession, which can counterbalance the inevitable disruption which occurs during an economic downdraft. Don your metaphorical financial rain coat and get ready.