ISMS 3: Will the US Have a Recession or a Soft Landing?
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Never has the US gov’t caused such a massive move in GDP. The question is, “which way is GDP going?” Will we see a recession or a soft landing?
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Reasons for a recession
- Extreme increases in interest rates are meant to slow down the economy
- The fastest rate-hike cycle by the Fed since the 1980s
- In the 2004 cycle, the target rate was hiked by 4.25% in total
- Same as in the current cycle, but it has now been done much faster
- The massive rise in mortgage rates is dramatically slowing the property market
- This, in turn, leads to crashing prices, which will make people feel less wealthy and hold them back from spending
- The yield curve has inverted, which has perfectly predicted prior recessions
- All recessions in the US since 1968 were preceded by an inverted yield curve
- The average time from inversion until the recession started was about 1 year (about mid-2023)
- The surge in spending supported by gov’t handouts is working itself out of the system
- Since 2Q21, households have demonstrated stronger than usual spending behavior
- Strong wage growth has contributed to more savings in 4Q21 onward
Reasons for a soft landing
- High employment means the economy is robust and can withstand the rate hikes
- Companies are highly profitable, which will allow them to bear a slowdown more easily
- Companies are sitting on tons of cash
- Individuals slowed their spending in anticipation of an economic slowdown
- Democrat party leadership will pump things up (e.g., strategic petroleum reserve)
- US banks are in a strong position, holding lots of cash and gov’t bonds
- Reducing the risk of a financial sector crisis that would exacerbate an economic crisis
- At the end of 2021, the banks had nearly 40% of their assets in cash and securities
- Compared to 13% at the end of 2007
- Gov’t spending is going to be crowded out by borrowing interest payments
- And then politicians will pressure the Fed to cut rates
Click here to get the PDF with all charts and graphs
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Welcome to My Worst Investment Ever podcast hosted by Your Worst Podcast Host, Andrew Stotz, where you will hear stories of loss to keep you winning. In our community, we know that to win in investing you must take the risk, but to win big, you’ve got to reduce it.
Your Worst Podcast Host, Andrew Stotz, Ph.D., CFA, is also the CEO of A. Stotz Investment Research and A. Stotz Academy, which helps people create, grow, measure, and protect their wealth.