Recession
If you are an active investor in the markets your mind is focused on one thing: are we headed towards a recession?
The question of an impending recession is completely valid. The Nasdaq is down 22% from the start of the year. The S&P 500 is down 13%. The Russell 2000 down a whopping 18%.
The only two sectors that have outperformed the broader market is utilities and the energy sector with its 50% return in the first five months of 2022.
We have already had one quarter of negative GDP growth and the probability of another negative quarter is rising fast. In addition, the Federal Reserve is actively raising interest rates to slow demand and curb price inflation.
As interest rates rise, the cost of capital increases, which subsequently lowers demand as investors go into preservation mode. The goal of the Federal Reserve is quiet simple — raise interest rates high enough to cause a mini-recession. The mini-recession will cause individuals and businesses to low their demand for goods and services, which in turn will “hopefully” decrease the price of commodities and labor across global markets.
From an academia standpoint causing a mini-recession to curb inflation works. From a practical standpoint the Fed just spilled gasoline in a house built of hay while recklessly lighting a match.
The Federal Reserves only goal is to target an arbitrary inflation rate. Historically this rate has been 3.5% annually. Since the early 90s, the Fed has been successful in targeting this guided rate of inflation.
Since COVID-19, inflation has gotten out of control, and appears to be on a trendline headed even higher.
When inflation first started to head higher the Fed said that inflation was just transitory and that this too will pass. The Fed and policymakers have now backed off of the “transitory” language and instead are blaming third parties such as Russia and “greedy” corporations.
The Federal Reserve and Policymakers will likely continue to blame others for the high rates of inflation and the impending recession we are about to fall into. As public unrest begins, there needs to be a scapegoat to point your finger at and blame. Greedy corporations will become this scapegoat.
I’m predicting that over the next six months as inflation continues to go higher policymakers will enact new policies that tax corporations at a higher rate in an effort to “punish” the corporate greed. They will name these new policies something like American’s Fair Share or Corporate Price Gouging. Throughout this entire time I doubt anyone in public power will blame the Federal Reserve or their own colleagues in public office for our higher prices.
Don’t get me wrong, I do think the Russia/Ukraine war is partly to blame for higher energy and food prices. But it is not the only thing driving prices much higher. Years of massive money printing combined with the lax nature of taking on more debt are the biggest culprits to the demise and fall of the fiat currency and global hyperinflation.
Global debt is completely out of control. It grows more everyday and is backed only by a currency that is doomed for failure.
When the world’s biggest economic powerhouses are levered so high with debt the only thing that keeps them upright is the ability to grow GDP at a higher rate than what the debt grows at. Should growth stop, it all ends.
We are close to being at the end of the line with this funky money fake fiat currency. Years of overspending and overprinting are beginning to catch up with us. When the enviable does catch up with us it is Game Over.
I have been talking about how fake money printing and overspending will get destroy modern economics as we know it for years. I’ve been preparing my portfolio and personal life to withstand a potential economic devastation not seen since the Weimar Republic days.
To prepare my portfolio I almost exclusively hold companies that can make their entire valuation back in a couple years of free cash flow. I don’t buy overvalued tech stocks that are trading at a 3% free cash flow yield. I buy real companies that are asset heavy and attempt to buy these assets at a significant discount to fair market value. If you do this enough, over a full business cycle, you should end up ok.
In terms of preparing my personal life for a hyperinflationary environment, I have a closet full of hard currencies (gold and silver) and just recently bought a home with a low fixed 30-year interest rate. I think holding long duration debt at a low interest rate will do well in an environment where the replacement costs continues to go up.
Finally, I own a significant amount of assets tied to commodities. As commodity prices continue to go higher, cash flows continue to get stronger. My favorite idea right now is a warrant play on an oil and gas company that is poised to sell itself over the next 12 months. Should a sale not occur, the potential free cash flows should be enough to make the current valuation very compelling.
Stay safe out there an get prepared. We are headed towards unprecedented times. A recession is looming and equity valuations will get crushed. My cash pile continues to grow and I plan to allocate most of the cash to beaten down securities when the blood is pouring in the street. Don’t buy low and sell high. Buy really fucking cheap when everyone is panicking.
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well I'm pissed. 8% in one god damn day! You know after my portfolio full of things that are unavoidable like energy post great earnings. I'm used to up and down, but seeing 8% in a day is enraging.
How much of the equity bubble from the last few years do you attribute to ETF/index/passive investing? It's funny because 95% of the personal finance gurus out there say "don't pick stocks, just buy index funds early and often". That advice has generally worked well in the past, but when everyone and their mother does this you have a large chunk of investors in America indiscriminately buying into the market with a blind eye to valuations, pumping everything up and up and up regardless of market conditions or the underlying securities that are represented in the funds that are purchased.
"Be greedy when others are fearful"