The Capitalist Investor - Episode 120

Which scenario is real, which is false? A) Meme stocks like GameStop and AMC are currently outperforming the market substantially. B) A leading actor slapped a comedian on stage, on live TV, and won his first ever Oscar Award on that same stage not long afterwards.

Trick question, both events are real. We may be living in a very unpredictable world but here, we’re able to at least predict what the news you’re reading looks like.  If the headlines haven’t been completely overtaken by the entertainment industry’s latest moment, they probably contain the word or at least imply recession. This week, Mark, Derek, and Luke come prepared with the latest, most gravitating topics that are hard to ignore by anyone who keeps up with the news or indulges in social media. But Episode #120 of “The Capitalist Investor” is more than just headlines. Fuel shortages, airport nightmares, golf scores, Hollywood drama, meme stock trends –– the guys set the scene up to bring diverse perspectives on the latest topics. And they don’t miss.

Outline of this Episode:

  • [1:50] Teeing up: Trump’s latest statement
  • [4:50] Months of recession warnings are catching up
  • [14:40] Fuel shortage and flying nightmares
  • [19:40] Watching, clapping, smacking at the Oscars?
  • [25:15] The meme dream and the return of growth stocks

What are the signs of a recession and what do they mean?

We know you’re aware of the news and conversations about an incoming recession, everyone’s heard or read the word “recession” at least once this past month. We all have our own insinuations about recessions but not everyone is aware of the indicators we use to predict them or fully understand what they mean. 

If history can paint a clear pattern that allows us to predict when a recession will hit, we have to at least pay attention to it. Before previous recessions, experts and economists have paid attention to specific indicators that, when fulfilled, tell them a recession is approaching. 

Some indicators that experts look to measure recessionary outcomes fall within the Leading Economic Index (LEI) year over year changes. When they dip below zero, typically, a recession is possible within the next few months. Currently, we have a few indicators plummeting towards the negatives right now.

Again: We have to refer back to the yield curve.

We touched on yield curves a bit in the previous episode, but we want to call your attention to them as they relate to past predictions and indicators. 

In the past, people have strongly used the three-month and 10-year yield curve inversions to strongly predict recessions. The Federal Reserve Bank of San Francisco released a report in 2018 finding that part of the curve between the three-month and 10-year yields has the largest reliability for predictions. 

But Barron’s recently reported that the two and 10-year yields are the most surveilled. Over a span of 40 years, their inversions have correctly predicted six recessions since 1978 with only one false positive. Bloomberg reported that on Tuesday, the two-year yield passed the10-year for the first time in 2019. That’s a sign.

So what causes the yield curve inversion phenomenon?

Fundamentals explain that the longer someone holds onto a bond, they should be paid more since they are giving up their money for a longer amount of time. In a typical setting, short-term interests are lower than long-term rates –– so the slope shows higher yields for long-term investments. 

But what’s happening is people are buying long-term treasuries in a surge, driving up their demand and driving down their yield at a faster rate than short-term yields. 

People are selling their short-term treasuries because they don’t hold a lot of confidence in the short-term economy. They are bracing for a recession because every time this happens, it has come down the road in a year or two’s time.

Can history always be an economic indicator?

We don’t have the most concise conclusion right now on whether we can use these indicators to ensure a recession is approaching. 

The last two years have been so unprecedented, we’ve never seen anything like what’s happened. We’ve never experienced a global pandemic in our lifetime. Inflation returned quickly when so much money was flushed into the economy striking such a large surge in demand –– we’ve never seen inflation rates regenerate at that pace. 

It may be hard to use historical measures because this current environment is nothing we’ve ever encountered. This isn’t to say that a recession isn’t coming. It’s most likely in our path. But it’s hard to look at history and compare it to the times we’re living in now.

We knew inflation was bad, but did the Fed act swiftly enough and prepare?

What if the Fed started hiking and combating inflation like people suggested a year ago when the first signs of inflation started creeping up? Could that have alleviated what we’re experiencing today, would the news be less saturated with recession headlines? 

Months ago, the Fed finally confessed that inflation is not transitory –– they knew they had to be careful with the crisis, but it still seems like they missed largely on their timeline. 

If inflation was combatted earlier on, we could’ve at least had an advantage in our corner right now. We currently have no secret weapon to combat this contracting economy. 

While the Fed is trying to cushion the landing as they continue to rapidly hike neutral rates, they’re treading into dangerous waters. They started the hiking too late, and it’s barely making a dent in inflation. 

A recession is poking its head around the corner –– it’s not that we are concerned the Fed is hiking us toward a recession, but that they might still be hiking while we’re in the recession. 

But everything we’re seeing today isn’t entirely the Fed’s fault. The government also has to answer for the way it created artificial demand by saturating the economy with massive fiscal stimulus checks. 

We’ve been focusing largely on historical patterns, indicators, and how to forecast the possibility of a recession. But if there’s anything the Fed and government should be focusing on in the future, it should be to not to repeat today’s history. 

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Keep Listening to The Capitalist Investor:
Episode 15:
Spending Strategies in a Bear Market, Ep #15
Episode 31:
Handicapping the 2020 Election, Ep #31
Episode 47:
11 Investments in Your Home That Pay Off, Ep #47
Episode 63:
Jeff Bezos and Amazon: Past, Present, and Future Ep #63
Episode 79:
7 Ways Biden Plans to Tax American Families (Part II), Ep #79
Episode 95:
5 Beaten Down Stocks to Buy on the Dip, Ep #95
Episode 111:
Special Episode – Talking Energy with Daniel Turner, Ep. #111
Episode 127:
Retail Earnings Tank & What The Heck is Greenflation? Ep. #127