Preparing for the 2023 Recession

by JDH on December 24, 2022

On this very cold and windy day here in Ontario (and most of North America), our thoughts turn to the holiday season (Merry Christmas and Happy Holidays to all) and to the impending recession in 2023.

Obviously, we are already in a recession, but I get it: until unemployment increases, the Powers That Be will not make the official declaration.

A recession will be declared because we have an inverted yield curve.

An inverted yield curve is generally seen as a sign of an impending recession. A yield curve is a graphical representation of the relationship between bond yields and their maturities. Typically, longer-term bonds have higher yields than shorter-term bonds, which means the yield curve is upward-sloping. An inverted yield curve occurs when shorter-term bond yields are higher than longer-term bond yields.

Historically, an inverted yield curve has been a reliable predictor of a recession. In the past, an inverted yield curve preceded most recessions in the United States. The yield curve had inverted before every recession since the 1960s, except for the most recent recession, which began in 2007. However, an inverted yield curve does not guarantee that a recession will occur, and it is not the only factor considered when predicting a recession’s likelihood.

There are several theories as to why an inverted yield curve is often a sign of a recession. One theory is that when investors expect economic conditions to deteriorate in the future, they will demand higher yields on shorter-term bonds as compensation for the increased risk. This can lead to an inverted yield curve. Another theory is that when the Federal Reserve raises interest rates to combat inflation, it can lead to an inverted yield curve. Ultimately, the relationship between bond yields and the likelihood of a recession is complex and multifaceted, and it is not possible to say with certainty whether an inverted yield curve will lead to a recession.

Why did I put those last three paragraphs in italics?  Because I didn’t write them.  They were written by Artificial Intelligence (the ChatGPT AI from  You be the judge whether or not those last three paragraphs are accurate.  I think it’s both cool and scary that I can type in a question (“does an inverted yield curve lead to a recession?”) and get a three-paragraph answer in a few seconds.

The most common use of ChatGPT (currently free) is to create content for websites.  Great!  The SEO scammers don’t even need to hire a writer on Fiverr; they just type in the question, generate the content, cut and paste it onto the webpage, and boom, they are in business.

But I digress.  My point is not that AI is taking over the world.  It already has.  My point is that an inverted yield curve generally leads to a recession, and that’s what we can expect for 2023.

Stocks decline before a recession, which is why I’ve had a substantial cash position for all of 2022.   Once the recession is officially declared, stocks will be close to a bottom, and that will be the time to deploy your cash.

I am buying bonds (via TLT, although I may explore other vehicles), and I suspect Bitcoin and gold will be good investments in 2023, but I have not yet pulled the trigger on those investments.

So, that’s the plan.   Take a week off since nothing happens over the holidays, and let’s see how it goes in 2023.