Nick Hodge,
Publisher
April 4, 2022
I want to be clear: I believe there is more pain coming for US stocks and the economy.
Inflation that was denied by those in power for nearly two years is now at the highest level in 40 years.
That’s longer than I’ve been alive.
As the oldest of the millennials with an entirely new generation behind us, that means nearly 140 million Americans have never seen the economic conditions we currently face.
Never is a long time.
Inflation at its current rate causes recession. The money that goes in our mouths and cars is not going elsewhere, which means everything else slows down.
That’s an easy enough concept to grasp.
But we have many more factors at play.
- We’re coming out of a global pandemic that roiled supply chains, causing further pain.
- We had exceptionally good economic and earnings growth in 2021, and 2022 is going to be exceptionally bad by comparison.
- We have a major international conflict that has created unique energy and economic sanction dynamics.
- We have a Fed that thinks it knows what to do despite being wrong on inflation for years while simultaneously fostering the worst wealth inequality in American history.
Happy Spring!
Yield curves are now inverting as a result. That’s when the bond market will pay you more to borrow money for a short time than it will for a long time.
For example, you could get paid more on two-year bonds than on ten-year bonds recently.
This, of course, is economic insanity. You would never charge someone less to borrow money for two years than for ten years.
But it gets more insane still because the 30-year and five-year bond yield also inverted this week. The last time this happened was before the sub-prime-induced great financial crisis in 2006.
This is one of the most accurate “recession coming” signals you can get. The two-year and ten-year yield has inverted ahead of every economic recession (gray) since the 1970s.
Indeed, the stock market sold off some 12% to start the year but has clawed back some of those losses over the past two weeks.
You may have seen some headlines along the lines of “Stock market delivers best weekly performance in two years.”
I’m gonna stick with “ever” as my time frame on which to base decisions. As in, a recession comes every time the yield curve inverts.
We remain defensive and long of havens while simultaneously reducing exposure to non-haven early-stage speculations that money flees from in tougher economic times.
Nick Hodge
Publisher, Resource Stock Digest