US Economy Crashes Headlong into Recession!
The comments below are an edited and abridged synopsis of an article by David Haggith
Goldman Sachs, arguably the most bearish bank out there, forecast that the US has a 35% chance of seeing a recession in about a year. Deutsche Bank, the second-most bearish bank, said that the US could go into recession in late 2023. Their predictions missed the mark: The US is already in a recession.
It came unexpectedly; no one realized that the Fed had the yield curve locked in by the massive amounts of bonds it was purchasing. It could not price in a recession in advance. However, the Fed unlocked it by tapering out of QE. That was key, and now it’s clear that the US was in a recession last quarter before the yield curve was freed.
The recent 1.4% drop in GDP was a crash compared to the 1% growth that was the expectation. Not only is it 2.4 percentage points worse than expected, but it’s 8.3 points below the previous quarter. With the exception of the Pandemic Plunge, there has never been a drop this steep in GDP.
This recession will get worse before it gets better, but there is time to maneuver. If you kept your money in stocks or bonds, you’ve already seen some losses but the bumpiest part of this ride hasn’t even begun.
Some investors think this is good for stocks because the Fed will not tighten quickly, but it is naive to think that will save the stock market because we are already in a rapidly plunging recession that will tear everything apart.
The Fed will be hesitant to tighten and it still has inflation to deal with, which will take more time to beat than the Fed can spare. It knows it must be seen as fighting inflation and not fanning the flames. It knows how hard inflation is to tame—and that includes stagflation, which this is (inflation in a stagnant or falling economy).
Any bounces in the market are likely to be short-lived because it is all false hope. The stock leaders of the market have fallen off a cliff, and most are deeply in their own bear markets, even the FAANG stocks. There are a lot of shortages and a lot of recession still to come, and Fed tightening is beginning when the economy can no longer take any tightening.
The market is ready for some Fed relief, but it’s not coming. The Fed will be tightening into the recession, and a lot more bad news is already lined up.