15 Reasons Why We're Headed Toward a (Very Bad) Recession
One chart and one blurb about everything impacting the markets.
Let’s talk through what the hell is going on.
Instead of a traditional Week Ahead post, we thought we should instead pull together a “everything you need to be thinking about” post.
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We knew this was coming, and now it’s here.
That doesn’t mean it’s a time to be happy about being right, sad about seeing stocks & crypto bleed, or angry at investing as a whole.
It means it’s time to make a plan and execute upon it.
Over the coming several quarters, we have a chance to methodically invest dollars that will compound exponentially throughout our lifetimes. For the average person, following the instructions in this post will do wonders.
If you’re new to personal finance in general, this video might help.
The Biggest Catalysts Causing This Market Crash —
We could go in-depth about every single one of these factors — but that’s not the point of this post. Below are the 15 primary things you should be watching (in no particular order).
Supply Chain: This chart may be hard to see, but it’s the average congestion at critical ports throughout the world. That top line you see is Los Angeles. The next is New York. You think the news is accurate when they say that China lockdowns can be blamed for bulk of supply chain issues? The average time for a ship to spend in port in Shanghai is 0.975 days. For Los Angeles — it’s 8.25 days.
Inflation: As we saw last Friday, inflation rose +8.6% in May — the highest annual increase since 1981. The higher it goes, the less affordable everyday goods and services become. As shown here, inflated energy prices are putting millions of Americans behind on their most essential monthly bills. We need inflation to decrease at some point in the coming years to keep our economy afloat.
Fed Rates: The FOMC is raising rates at the fastest pace since 2008, which is why we’re having market performance like 2008. The Fed is essentially crushing the markets, to destroy demand, to limit inflation. More here.
Major Dilemma in Bonds: Entities (including the US government) issue bonds for two main reasons — to raise money for operations and to pay down debt. Essentially, when you buy a bond you’re loaning an entity your money — to be paid back (with interest) over a period of time. When interest rates rise, bonds come with higher interest payments — this means more income for the person buying the bond.
The dilemma bond buyers are facing at the moment is if they should buy bonds now — or wait. As just mentioned, folks who buy bonds make more money as interest rates rise. It’s no secret that the Federal Reserve have intentions to increase interest rates for the coming quarters. Hypothetically speaking, why would someone buy a bond today that pays 4% interest if they can just wait a few months and the same bond will pay 6%? The Fed essentially bought up hundreds of billions of treasury bonds during the pandemic to prop up the economy, and now that they’re trying to unload them — people aren’t buying.
Gasoline: You know this pain as well as we do. The price of gasoline is soaring and there doesn’t seem to be an end in sight. JPMorgan has predicted that the US could surpass an average gas price of $6.20 / gallon by August.
The Russia / Ukraine Conflict: Speaking from a purely economic perspective, the US is getting crushed by this situation. The US imports iron, steel, oil, vodka, and an array of agricultural materials from this region. Beyond being impacted by a lack of imports, we’ve added to our inflation issue by giving Ukraine nearly 9x more aid than any country in the world.
Hiring freezes, layoffs, and over-stocked stores: Market crashes, profit margin compression, and broken supply chains naturally lead to job firings and devastating impacts due to improper planning. Coinbase and StitchFix just laid off 18% and 15% of their employees, respectively. Meta, Netflix, Twitter, and Uber have all frozen hiring. Major retailers like Target and Walmart have admitted that they have way too much inventory — which will, alongside rising fuel costs, eat into their profit margins. Companies weren’t properly prepared for a recession, from both an inventory and workforce perspective.
Food Shortages: A leading global health figure recently warned that the next worldwide crisis could come in the form of food shortages, and be “just as deadly” as an airborne pandemic. If the extremely sad baby formula shortage in the US didn’t raise red flags for you, here’s your warning. Global fertilizer costs have risen to all-time highs, common foods like chicken and lettuce are seeing issues given shortages and production prices soaring, and farmers predict that we’re going to “see a lot of empty shelves.” While it likely won’t impact the US as much as other parts of the world — food shortages are a very real issue.
Luna and (Potentially) Celsius Network: Celsius and Luna are two crypto companies that unfortunately overexposed their customers to risk — causing some to lose everything. We’ve been active Celsius customers with a small portion of our holdings, but left the platform amidst clear signals that they weren’t properly managing their assets. It’s always a good idea to move your crypto holdings to a personal wallet like MetaMask if you’re worried about keeping it safe. With companies like these failing (or getting close to it), the broader crypto market suffers.
Technically, Not a Recession: This is your friendly reminder that a recession is categorized as two consecutive quarters of negative GDP growth. We had our first negative quarter since the beginning of the pandemic in Q1.
As you can see in the chart below — the market usually takes a deeper plunge to the downside once it’s official. Q2 GDP estimates are set to be released on July 28th. While the stock market is a forward-looking entity and we all expect it, there likely wouldn’t be a “bottom” in the markets until after a recession is theoretically declared.
Bank of Japan / the Japanese Yen: The Japanese yen has incredibly reached its lowest level against the US dollar since October 1998. To keep this brief, the Bank of Japan (their central bank) has repeatedly committed to keeping rates low. Going against the rate-raising tendencies of other central banks (like our’s), Japan has chosen to make its weakened currency less desirable for investors and more desirable for the exports of the country.
Instead of raising interest rates to protect Japan’s currency, their central bank is now buying more of their own bonds in an effort keep their market propped up. This is the definition of pushing pain to the future and not taking inflation (or GDP numbers) seriously.
Japanese financial markets are currently in the process of losing any semblance of a fundamental-based foundation. As global inflation increases, they print more money. As global inflation eases, they’ll need to slam on the brakes even harder than we are currently in the US. In today’s interconnected global financial system, a major collapse by the world’s third largest economy would be devastating.
Don’t Forget the VIX: The VIX is the volatility index AKA “the fear index.” The VIX represents the market’s expectations for the relative strength of near-term price changes of the S&P 500. When the VIX goes up, it means people are expecting increased volatility in the stock market. Historically speaking, the VIX has typically exceeded 45 before we saw a true “market bottom.” It’s hovering around 33 at the moment.
Consumer Sentiment: This is an often ignored economic metric due to its relatively small sample size. Regardless, the University of Michigan’s Consumer Sentiment Index has reached an all-time low. The index focuses on three things: 1) how consumers view their own financial situation, 2) how consumers view the overall economy in the near-term, and 3) how consumers view the economy in the long-term. For most of the readers of this post — you’ve likely never seen such uncertain conditions in your lifetime.
Soaring Credit Use: According to the Federal Reserve, revolving credit (which is mostly comprised of credit card balances) grew at an annualized rate of +19.6% and totaled $1.104 TRILLION in April. This broke the pre-pandemic record of $1.1 trillion. Remember — one of the macro goals of the Federal Reserve is raising rates is to crush demand, consequently limiting runaway inflation. Demand seems to have not yet been crippled as people continue spending on their credit cards. If the debt can be paid off, the problem isn’t necessarily the use of credit itself. Let’s pay close attention to the ongoing trend of the total debt being carried by Americans (shown below).
CEO Confidence: Last but not least, the esteemed US CEO Confidence Survey came back with brutal results for Q2. The measure now stands at 42, falling off a cliff from 57 in Q1. 61% of CEOs confirmed general economic conditions were worse for their business. 60% of CEOs expect economic conditions to get even worse. Here’s the most annoying part — 54% of CEOs said the primary action they’re taking to effectively manage rising costs is by passing it on to customers.
Where is the Bottom?
Below is a chart we shared in early-May with the Founding Members of Rate of Return. It shows a sad but reasonable prediction for where we see the market heading if we take into consideration the S&P 500’s historical forward P/E ratios during the last four bear markets (post-internet).
Please note that this is just a squiggle on a chart and not specific. The main takeaway here is to be patient — this isn’t a sprint to the finish line. We’ll likely see continued volatility throughout 2022 and perhaps 2023. Reminder to read this post.
All of these issues won’t be solved at once. Many of them may not get solved at all. However — we have bull markets and we have bear markets. This is a bear market that is spiraling toward a crippling recession. Please make a budget. Please build up a savings account in case you or a loved one have job complications. Please stay disciplined and do not be afraid. Not to be cliché — but this really is when millionaires are made.
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Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
you mentioned somewhere that you haven’t bought any stocks in your “active portfolio” but are DCA in to your retirement portfolio - can you explain what that means? Would this be a good time to put more money in retirement accounts that are invested in ETFs, mutual funds, etc?
Austin, given the market volatility, the crazy denial of Japanese governance, and the coming recession (75 basis point increases as far as the eye can see), I think it's time to pause and give thanks for Joe Manchin, who almost single-handedly defeated the $5 Trillion deficit bomb that was BBB. Needless to say, many of us saw this coming. Washington did not and went about business as usual. A President that promised to kill fossil fuels has done just that and we're all paying the price.
Over the last few weeks, I bought more Dutch Bros. but a good chunk of my dividend-paying ETF money is now on the sidelines, waiting for opportunities.
One request, and I don't know how to do this (hopefully you do). When I click on your charts, they don't get any bigger and I can barely read them. Is there some way we can make these expandable?
As always, thanks for everything!