Over the past three years, it seems that an economic recession has become increasingly difficult to pin down. Lockdowns caused a recession, sure. But they came and went... kind of. What is the state of the U.S. and global economy now, and are we qualifying for something akin to 2008-2011? Why has “recession 2023” become a buzzword in the media?
Firstly, it's important to note that the National Bureau of Economic Research (NBER) announces economic recessions. How "honest" is their assessment? That's up to you to decide. Economic factors right now are making many wonder if we aren't in some kind of silent recession, one that is being shoved under the rug for as long as it can.
It's a valid concern, and there are representatives on both sides of the argument. But before we dissect the current economic environment, let's first delve into what a recession actually is.
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What is a recession?
Fidelity's article on recessions covers some broad definitions as well as giving us a hint as to why we may already be in one. Formally, a recession is announced after two consecutive shrinkages in GDP growth, but this doesn't always have to be the case. A yield curve inversion has predated every recession so far, but not every yield curve inversion was followed by a recession. Yep, a little confusing.
However, we can get an idea of what might cause a recession by going over the "drivers". Fidelity outlines four stages of an economic cycle, akin to the four seasons. Needless to say, we are pretty far away from the first two. There is practically no difference between the factors in Fidelity's third and fourth stages, with the latter marking a recession. These are:
- Job growth slowdown or unemployment
- A rise in inflation
- Lower consumer spending
- A buildup of inventories coupled with slowing production
- A decline in profits primarily in the stock market, but others too
- High volatility in the markets
- Lower overall economic output
As we'll soon go over, a lot of these seem eerily familiar. Fidelity tells us that, since 1960, the average recession has lasted for 11 months, compared to 71 months for an average expansion. Obviously, we are nowhere near average times right now. Many view economic cycles as normal, but plenty aren't too happy about the idea of a "forced" economic shrinkage where there's an economic winter just because. All the more so, when one is caused by policymakers' inaptitude.
Why do people think we're in a recession right now?
The answer to that is very straightforward: interest rate hikes by the Federal Reserve. The Fed raised the nominal interest rate by 425 basis points so far this year, a move that was almost unanimously panned and called ill-advised. There are even expectations that the monetary tightening might continue into next year.
The Fed is far from the only culprit in this market manipulation, as most major central banks tend to follow suit. From Britain to Canada to the European Union, interest rates are being raised just as the Fed appears to have halted its massive hiking schedule.
This means, as far as the West is concerned, any recession caused by central banks can essentially be treated as a global recession. There will be no refuge in a neighboring country, figuratively or literally, if a recession hits this time around. Though this holds true of any recession, it once again feels especially prominent now.
Why do interest rate hikes cause a recession?
Raising the nominal interest rate has the effect you'd assume it does: it increases the interest payments on everything. Whether you're talking small, personal loans, mortgages or massive corporate borrowing, everyone is paying extra interest.
Making debt more difficult to pay results in an economic slowdown pretty quickly. On a day-to-day level, it means your loan or mortgage is more difficult to pay off. Best-case scenario, you have less money to spend on various things, causing the aforementioned reduction in economic output.
On a larger scale, corporations suffer lower profits due to weaker economic output on one side and are forced to make larger interest payments on the other. This means downsizing, which in turn reduces the amount of jobs available, or even company closures altogether. We need look no further than crypto exchange Coinbase for an example of a recession unfolding around a company.
Because of lower interest rates, everyone has less money to spend, so risk assets go under. Obviously, that means cryptocurrencies. Less money in crypto means less revenue for Coinbase, which is then forced to lower the amount of job positions. Their revenue projections drastically lower, and they in turn become a contributing factor in this recessionary soup.
Due to the nature of the company, Coinbase might be seen as an extreme example. But the same goes for any company of any size. Let's say you run a gas station, since gas seems to be most sought-after thing right now. Except people are spending less money on gas due to higher prices. And you need to pay more on what is most likely a business mortgage. And your bills have gone up across the board due to inflation. And... you get the picture.
Interest rate hikes are viewed by some as a natural part of an economic cycle. Up, then down. But this is again up for interpretation. Is inflation a good thing to begin with? If not, why do we have it? If every rate hike causes a recession or a market collapse, how can it be a good idea to keep doing them? Plenty of valid questions that you won't see addressed by central bank officials, unless they're retired.
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Why is the Federal Reserve hiking interest rates now?
The timing indeed seems like it couldn't be worse. We're right on the heels of a blow to the economy that was likened to the Great Depression, except this time a global one. How much the global economy has recovered is, again, up to interpretation, and even varies by nation. China, for example, still hasn't gotten the memo and is more or less continuing with the lockdown scheme.
Different countries have approached the economic slowdown differently, though there was some uniformity. In the case of the Fed, it does what it knows: print money. In a few months, it printed trillions of dollars as part of a monetary stimulus to deal with the lockdowns. One might argue that an easier way to deal with the lockdowns was to simply not have them, but that's a subject for another piece.
Issuing the bulk of U.S. dollars in circulation had the expected effect. It ballooned risk assets, many of which were already overvalued. Inflation climbed to a 50-year high, and we started hearing things like "gold standard" and "death of the dollar".
The current hiking schedule is primarily an effort to preserve the dollar, and then preserve its status as the global reserve currency. Each of the two is important in its own right. As the pre-eminent currency of the world, the dollar can't just go on an inflationary run like the Japanese yen with only the people's prosperity on the line. Countries are going to start questioning how good of an idea it is to have the greenback as the global reserve currency. And, perhaps more importantly, they'll go and throw their fiat in the hat for the next in that position.
To avoid having any of that, the Fed wants to restore the dollar's credibility, whatever it takes. The efforts so far have been... of limited effect. Inflation continues to flirt with the psychologically-gruesome 10% rate, practically every market has taken a beating, and everyone's calling for a reversal.
A reversal would not only worsen inflation and essentially make the hikes pointless, but it might also bring another bout of quantitative easing. Prior to recent times, when's the last time you heard of "quantitative easing" being thrown around as prominently? That's right: 2008-2011, the global financial crisis.
Below: Peter Schiff discusses the 2023 outlook for inflation, recession, stocks, and precious metals with David Lin, anchor for Kitco News.
Are we in a recession already?
There is surprisingly little to suggest we aren't considering how optimistic sentiment has been. We can actually list why it doesn't look like we're in a recession, and it's a brief list:
- The U.S. dollar is strong against other currencies
- Bond yields have risen in the short-term, but remain historically low
- The labor market seems okay even though businesses are downsizing
- The Federal Reserve is being hawkish?
On the other hand, the list of reasons why we might already be in a recession is compelling to say the least:
- Inflation is around 50-year highs
- The benchmark rate isn't nowhere near that of the 1970s, when the hiking schedule actually worked to subdue an inflation rate this high
- Consumers are spending less because of this, among other reasons
- Various markets are in various stages of collapse: despite Fidelity's article saying the stock market posted good profits, a stock market crash was officially confirmed
- Companies are downsizing and, for the most part, greatly reducing their growth and profit forecasts
- All of this is, more or less, only starting to gain traction as opposed to being the exhausted end of an economic rout
From analysts to the everyday person, opinions on whether we are in a recession differ. Officially, we aren't. But who's making the official announcement? A September poll showed roughly 76% of Americans believe the U.S. is in a recession. While belief often lacks evidence, this is one of those "if it feels like it, it probably is" cases.
A CNBC poll done this month said that the majority agree we aren't in a recession, but then went on to reveal that 49% of small business owners believe we are in one. That's a pretty huge figure: it's exactly 1% away from the poll not being able to claim majority opinion on no recession. And these business owners are front and center when it comes to economic conditions: they might have a better idea of whether a recession hit than analysts and pundits.
Those that are more optimistic on the current state of affairs still feel that a recession in 2023 is pretty much unavoidable. This tells us that, for all intents and purposes, we might as well be in one and should act accordingly.
Investing for a recession in 2023: what's hot and what's not?
There aren't many assets one can safely bet on in times of a recession, and the reasons for it are fairly obvious. Precious metals are one exception, with gold being fairly ahead of the "competition." Gold has jumped from $1,650 to above $1,800 in recent weeks despite interest rate hikes being the biggest downwards driver for the metal.
This now only showcases its resilience, but also tells us there are plenty of tailwinds waiting to propel the metal higher and higher. Its fall from the latest all-time high of $2,070 posted in March only came as a result of these hikes, and it seems as eager as ever to return to them.
Inflation, economic downturns and crises are hallmarks of a recession, and they're some of gold's primary drivers. So we only need to say so much about why gold outperforms in such an environment, and most importantly, why it's one of the few investments that aren't risky when the economy is shrinking.
Those with an eye for a little more risk can always expand into other precious metals:
- Silver: Undervalued historically and relative to gold, but fairly dependent on the manufacturing sector
- Platinum: Similar to silver, but especially undervalued relative to platinum and with a lot of room for upside with slight changes to the automotive sector or regulations that surround it
- Palladium: Pricey, but an "emerging" precious metal that has grown in popularity, is very scarce and has pulled back from consecutive all-time highs in recent times
Silver is known for its far cheaper price compared to gold. Platinum used to be more expensive than it, and palladium recently surpassed it. Between these four, there's plenty of room to create a robust portfolio that will preserve wealth and provide ample returns in an environment where it seems more and more difficult to do so.
Worried about a recession in 2023?
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