Recession Soon?? What It Means For You & Your Portfolio!!

[Music] over the last few years the global economy has been under significant strain because of high inflation and high interest rates and it looks like the cracks are finally starting to show this has left some wondering when the economic downturn AKA recession will come others arguing that it's already happened and a few believing that it may never occur at all that's why today we're going to to explain what a recession is when it could begin and what effects it could have on the economy and the markets stay tuned let's start with what a recession is a recession happens when the economy slows the Practical effect of a recession is that lots of people lose their jobs and the markets see massive losses now the last recession arguably occurred in 2007 and it resulted in an unemployment rate of 10% and a market crash of 55% now I say arguably because there's been lots of debate about what counts as a recession one popular adage states that a recession is when your neighbor loses their job and a depression is when you lose yours the technical definition of recession however is two quarters of negative GDP growth for those unaware each quarter is is 3 months long so 2 qu equals 6 months as for GDP meanwhile it stands for gross domestic product and it's meant to measure the economic output of a country GDP measures include consumer spending investment net exports and government spending keep that last one in mind we'll come back to it in a second as some of you will know the US economy experienced a technical recession back in 2022 that's because GDP he declined in the first two quarters of that year as such many have argued that the recession already happened I.E that it's now behind us the catch is that an official recession was never declared in 2022 so this begs the question of who decides when the economy is in a recession well in the United States the answer is the National Bureau of economic research or NB a nonprofit organization ation what's crazy is that just eight economists decide whether there's a recession or not what's even crazy is that nobody knows the criteria they use so in other words a group of eight people at a nonprofit decide whether a recession has happened and nobody knows how they make this decision to add insult to injury the NBR has a history of announcing a recession long after it started it took them until December 2008 to declare the 2007 recession by that point unemployment had already risen to 7% and the stock market had already fallen by 45% now obviously this lag isn't helpful when it comes to figuring out what to do with your job or your portfolio ideally you want to know a recession is coming before it happens so that you can adjust accordingly in theory this is as easy as assessing whether the economy has experienced two quarters of negative GDP or not however if you had followed this approach back in 2022 then you still would have been late that's because the GDP data for q1 and Q2 didn't arrive until August 2022 it takes months for this data to come in meanwhile on the flip side if you see that GDP growth is increasing then you may be tempted to change jobs or buy more assets expecting the good times to continue the problem there is that GDP includes government spending which has gone off the rails in the US and elsewhere presumably because of all the upcoming elections the result is not only that GDP has been abnormally high but many of the other indicators you would normally use to assess the health of the economy have become distorted because of fiscal policy for instance unemployment remains low while the average person simultaneously struggles to find work in in practice then predicting a recession and assessing when we're in one requires doing the work to dig into the data to find the answers that's what we will do next and at the end of the video we'll examine how long a recession could last if it comes as well as what it could mean for your job and your portfolio and if you're 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okay so now that we understand what a recession is and the effects it can have on the economy and the market markets we can take a closer look at which indicators we can use to predict when a recession could begin as you can probably imagine there's no shortage of such indicators and none of them are perfect the most popular recession indicator is an inversion of the yield curve AKA short-term interest rates being higher than long-term interest rates for reference this isn't normal normally long-term interest rates will be higher than short term interest rates to compensate lenders for the opportunity cost when short-term interest rates are higher than long-term interest rates it basically tells you that investors are expecting the economy to weaken in the future funnily enough these expectations of future weakening essentially occur because central banks have raised short-term interest rates when central banks raise short-term interest rates it makes it unprofitable for most banks to lend this reduc reduces lending and borrowing reducing economic growth eventually causing an economic contraction a recession it's believed that it can take up to two years for this so-called lag effect to affect the economy now given that it's been roughly 2 years since the Federal Reserve started raising interest rates we're nearing the upper bound of when the lag effect should kick in and cause a recession the caveat though is that all that aforementioned fiscal spending could be kicking the lag effect can even further down the road more about that in the description moving on now the key takeaway with the yield curve inversion is that it's unclear how long it takes until it causes a recession even so it's useful in so far as it tells you that the conditions for a recession are in place that means all we need is an indicator that can give us some more insight into the timing and severity well one such indicator is called The Duncan leading index which looks at specific measures within the GDP figure particularly those related to personal consumption and private investment the logic is that it's fundamentally these areas of the economy that drive real economic growth which does make sense the Duncan leading index then takes these specific measures and Compares them to broader GDP growth to get a sense of how much much of that headline number is actual consumption and investment versus Reckless government spending when that ratio starts to fall it suggests a recession is on the horizon according to EPB research the Duncan leading index started rolling over in 2021 considering that it seems to have a 2 to fouryear lag then it could be another year before the recession sets in you might think this isn't useful but it is because the severity of the recession can be forecasted using this indicator considering that the Duncan leading index seems to be in freefall this suggests that the upcoming recession if it occurs could be severe I'll quickly note that the Duncan leading index we showed you here is a modified version created by EPB research the link to their video about it is in the description anyways seeing as leading indicators suggest that a recession is indeed coming all we need now is a few to tell us when it's actually here well one of these is called the Su rule recession indicator it's named after Economist Claudia Sam who found that recessions tend to occur around the time that unemployment in one quarter is rising faster compared to the last four quarters this underscores something that you always need to remember when analyzing economic data and that's that it's ultimately the rate of change that matters if unemployment is slowly rising or slowly falling then it typically has a negligible effect if it happens all at once though the effects can be big as you can see the Su rule has accurately predicted every recession we've seen over the last few decades and much sooner than the nbe the catch is that the rule tends to be triggered a few months after the recession has already started this is mainly due to the indicator using a 3month average the S rule is still worth mentioning however because we can use it to confirm when the economy is actually in recession at least in the US for confirmation that the US is in recession the Su rule needs to be above 0.5 it's currently just under 0.4 and Rising steadily suggesting weak economic conditions if the unemployment rate for May Rises more when it's published on the 7th of June then it will be safe to assume that the psalm rule will reflect that fact in a few months time put differently it will provide further confirmation that the US economy is headed for recession mark your calendars now as you might have gathered most of these indicators are inaccurate because they rely on lagging data that's often revised unfortunately there's no getting around this because it takes time to gather data about the economy and even more time to analyze it particularly in the public sector fortunately though there are a few more real time indicators we can use to get a sense of whether the US is in a recession or not oddly enough one of these is apparently unemployment by state which is likewise published every month for context unemployment means that you're looking for work but can't find any now according to former fed adviser Daniel D Martino Booth when the unemployment rate is rising in every state then historically the US has been in recession well the unemployment rate in all 50 states Rose in October last year as a result Danielle believes that the US has been in recession since October 2023 additional evidence for this can be found in the earnings of major retail outlets and fast food companies such as McDonald's which had a rare earnings Miss due to people being unable to afford its food of course McDonald's is supposed to be cheap yet it's becoming unaffordable for many Starbucks Pizza Hut and KFC were other food chains that experienced an unexpected contraction in earnings in Q2 what's strange though is that chipotle managed to Buck the trend by beating estimates macro analyst Jim biano believes that this is because Chipotle portions are large enough to eat for two meals whatever the case by this point you're probably wondering why we're focused on the US well the short explanation is that the US is the world's largest economy as another popular adage States when the US sneezes the world catches a cold if the US goes into recession the rest of the world will too and worse anyhow knowing that a recession could be imminent the next step is to assess exactly how severe it could be assuming it happens at all if you've been listening to lots of content about recessions chances are that you've been given the impression that the next one will be as severe as 2008 this though seems unlikely at least in the US that's simply because there isn't as much debt more accurately there isn't as much floating rate debt recall the inverted yield curve and why it predicts recessions besides making lending and borrowing more expensive it also makes existing loans more expensive the thing is that only 11% of household debt in the US is floating rate as of 2023 in plain English most of the household debt in the US isn't being affected by higher interest rates and the same is true of corporate debt only around 16% of corporate debt will need to be refinanced in the next 2 years to be clear this doesn't mean that the average Aver person isn't struggling they most certainly are however there is a large portion of the US economy that has been relatively unaffected by Rising rates those with lots of cash are even benefiting as they can earn over 5% on their massive piles of money it seems that the consequence of this Dynamic has been a sort of rolling recession where certain segments of the economy are strong and others are weak White Collar jobs are an easy example here big tech companies continue to cut their headcounts but homebuilders are or were struggling to hire for there to be a 2008 style recession there would need to be some major Catalyst like for instance the collapse of Lian Brothers which caused financial institutions to stop lending to each other overnight today there only seem to be two catalysts commercial real estate and Banking and the government itself now if you've watched any of our videos about the commercial real estate or banking crises you'll know the two are intertwined the tldr is that many small and medium-sized Banks invested in Office Buildings which have since become almost worthless due to the increasing tendency to work from home post pandemic while the collapse of these small and mediumsized Banks wouldn't be enough to cause a crisis the resulting run on bigger Banks would be this is precisely why the US US Government bailed out Silicon Valley Bank if it hadn't it could have caused runs on other banks that would have threatened the banking system and speaking of the US government all the spending that it's been doing to prop up the economy has simultaneously created a fiscal problem that could trigger a real crisis to put things into perspective the US government is apparently spending as much as it does during recessions only there isn't one makes you think in any case a lot of this spending is being financed by borrowing this involves selling pieces of paper called bonds to investors these contain a promise to pay them back the borrowed amount plus interest naturally there are concerns that Bond investors will be less likely to buy if this spending continues that's just because this spending is likely causing a lot of the inflation we're currently seeing if it continues then the value of $100 being lent at 5% interest today may only be worth $80 in real terms by the time it's paid back to compensate for this Bond investors will want higher yields the issue is that the US government would have difficulty paying these higher bond yields the bigger issue though is that this would translate to lower bond prices and US bonds are the primary form of collateral in the financial system if they lose their value too quickly the Global Financial system could implode barring these two catalysts though the recession is likely to be mild and shortlived if it comes at all as we've learned it's possible that we're already in it and it's even possible that we're already exiting it some countries such as the UK are reportedly coming out of their recessions per their Q2 GDP prints anywh who this brings me to the big question and that's what effect a recession would have on the economy and the markets if it occurs make no mistake these are two very different things the former has to do with your job and the latter has to do with your portfolio now here is where things get interesting historically the economic effects of a recession have been felt the most by those working in Industries closely related to consumption such as retail Hospitality travel and Manufacturing this is why many analysts focus on manuf facturing related indicators to spot recessions as with the unemployment rate though the manufacturing indicators have been warped by all the fiscal spending which is focused on infrastructure development more importantly this means that you're unlikely to lose your job if you work in manufacturing if a recession comes at least on paper in case it wasn't clear enough those of you working in areas like retail hospitality and travel may be at risk of losing your jobs but only if there's a severe recession as I mentioned a few moments ago a severe recession is unlikely unless something in the financial system or the economy breaks note that this Catalyst doesn't need to be domestic per se it could be geopolitical food for thought now when it comes to the effects that a recession could have on your portfolio this really depends on the assets that you hold it goes without saying that if you hold stocks belonging to companies in the industries that are likely to be most affected your portfolio will probably take a beating again though the exception is manufacturing where companies could continue to perform well due to infrastructure spending regardless of any recession if you're wondering which companies specifically just look at what exactly governments are spending money on microchips weapons energy the list goes on similarly Commodities could paradoxically perform well during a Cession in so far as they're used in the infrastructure projects that governments are funding assets such as bonds would probably rally as there would be a flight to safety from other assets namely risk assets but this depends on inflation if inflation is low when the recession starts then bonds will perform well and risk assets that are sensitive to money printing like crypto would be the first to Rally after the fud driven dip note that there wouldn't even need to be any money printing per se investors would expect it automatically but if we enter a recession and inflation is high then bonds may not be the safe haven to turn to instead inflation Hedges such as gold would be better options as a fun fact investors tend to accumulate gold leading up to Bare markets and recessions say did you hear that gold recently hit an all-time high now in all seriousness inflation could complicate things and when you combine High inflation with economic weakness you get stagflation which is notoriously difficult to get hold of that's because stimulus causes more inflation whereas raising interest rates to fight this inflation causes more economic weakness this is extremely important to point out because if you're into crypto or other assets that benefit from money printing you need to know that this stimulus may not come right away if the recession is coupled with high inflation recall that it's assumed that the money printer will just turn on at the first sign of a recession aside from the fact that this stimulus may not come as quickly if there's High inflation it may also not be as big as investors expect this is because of what I just mentioned a few moments ago the risk of more inflation according to famous hedge fund manager Ray Delio we would likely see a mix of everything we would see a combination of governments reducing their spending restructuring their debts redistributing wealth from the rich to the poor and central banks printing money as Ry highlighted in his video about how the economy works these tools will need to be balanced in order to deleverage without issues the impact on the markets in a stagflationary environment will therefore be mixed and it will require more active rather than passive investment this is something that's been predicted by many Market analysts and this prediction seems to be coming true if history is any indication though we ain't seen nothing yet and that's all for today's video folks so if you learn something new be sure to smash that like button to let us know if you want to keep learning subscribe to the channel and ping that notification Bell and if you want to help others learn about what a recession is and whether it's coming share this video with them as always thank you so much for watching and I will see you in the next one Aros Ari aen or goodbye [Music]

Channel: Coin Bureau

Views: 123,240

Keywords: recession, interest rates, recession explained, personal finance, jerome powell, are we in a recession, federal reserve, how to predict a recession, recession uk, fed interest rates, debt, credit crunch, economic recession, housing market forecast, inflation interest rates, 2007 great recession, consumer price index, what is recession in economics, what is recession, coin bureau, crypto

Id: RBDtFgLwtbE

Length: 23min 47sec (1427 seconds)

Published: Sun May 19 2024