The US Treasury Secretary Janet Yellen explained at a New York even that she does not think the US is going to have a recession. But I think she’s wrong.
In 2019 I wrote a post warning that a recession was likely right around the corner. I also predicted that when it happens the stock market would fall 25% to 30%.
The US was in a recession the following year. And the S&P 500 bottomed at 33% from its all time high. Okay, I was a bit off. 😅
This time is probably not different
Right now, a lot of the same signals I’ve warned about before are flashing red once again.
In today’s post I’ll go over some data and evidence to suggest a recession is about to hit the U.S. Personally I believe the recession has already started, but we won’t get confirmation until July 28th.
If you want some ideas on what to do if there’s a recession you can watch my 5 minute video here, where I give some suggestions. Personally I’m paying down my debt and hedging downside risk by shorting the market. I’m not sending buy orders of any new stock positions until I see evidence that the market has bottomed. When stocks eventually start heading higher I want to be in a good position to buy up incredible companies at cheap prices. 🙂
So what makes me think the US is heading into a recession this year?
- Spike in the price of oil.
- Yield curve inversion.
- Policy uncertainty.
- Mortgage rate spike.
- Record low consumer sentiment.
- Cass freight index going negative.
The energy price shock
According to this Bloomberg article, in the past 50 years, every time oil prices rose 50% above trend, a recession followed. This chart below shows the price of oil in green, and grey bars as recessionary periods. Notice how recessions usually occur shortly after a spike up in the price of oil.
Yield curve inversion
The graph below shows the difference between the 10 year treasury yield and the 2 year treasury yield. The vertical gray bars on the graph represent periods of recession.
This is one of the best predictors of an upcoming recession. Over the last 50 years, every recession was preceded by a yield curve inversion. 😮 I’ve marked with arrows the different times the curve has dipped below 0. A recession occurs about 20 months on average after a yield curve inversion.
The curve inverted earlier this year in March. So a recession is likely going to happen before the end of 2023.
Economic Policy Uncertainty
This index measures policy related worries around the world. It climbed to 339 a few months ago. The last time it increased over 300 was right before the 2020 recession. It’s hard for society to prosper when people feel uncertain about economic policies.
Mortgage rate spike
The carrying cost of buying a home now is basically 100% higher than it was a year ago for the typical American.
This is of course unsustainable. So either interest rates have to fall, or home prices have to come down. And short term I don’t think interest rates are going to fall. 😂
So a 20% or 30% housing correction in the U.S. is probably going to happen over the next 1 to 2 years. Obviously each state and county will behave differently. But I expect lower prices overall. And in Canada, maybe a 10% to 15% price correction because we have a stronger immigration program to keep demand from falling too much.
Consumers sentiment at record low
This index measures how confident consumers feel about their personal financial situation. Since 1952, when data was first collected, people have never felt worse.
The negative views are primarily attributed to high inflation.
The US economy is primarily driven by consumption. When consumers pull back from shopping the economy suffers. Less spending also translates to less sales and profits for businesses, impacting the stock market.
Declining of the Cass Freight Index
The Cass Index is a monthly measure of rail, trucking, and air freight volume. It turned negative year over year earlier in 2022. In the past when this index goes negative the country’s GDP tends to follow.
The bottom line
As usual, there are no certainties when it comes to economic forecasts. There are only probabilities, and exceptions always exist. But when a lot of evidence is showing there’s a high chance of a recession coming, it’s a good idea to pay attention.
For most reader I would suggest you create a cash buffer for unexpected expenses. Have a backup plan for your job as well. Start gathering what you need in case your employer has to downsize. Learn new skills where you can. You might have to live on a tighter budget. Now is the time to prepare, not when the recession is confirmed, housing is down, unemployment has spiked higher, and economic conditions worsen. 🙂
And if you’re fortunate enough to put away savings month after month, be prepared to scoop up stocks after they’ve bottomed. You can index invest or pick individual stocks as long as they’re high quality businesses.
The actions you take over the next 3 to 6 months will greatly impact your financial security in 3 to 6 years.
Random Useless Fact:
Cell phones in 1973 could only provide 35 minutes of talk time before running out of battery.