Let’s start with the macro view: specifically, when will the recession start?
I am on record as expecting a recession last year, and it does not appear that a recession started last year, so what’s the deal?
The deal is that “fiscal stimulus” is still a thing. The federal governments in both the USA and Canada, and many other countries, continue to run significant deficits, and that stimulates the economy and delays the recession. However, government spending is significantly lower now than it was during the events of 2020 and 2021.
Source: Federal Government
At some point, the stimulative impact of government spending is reduced, and that time is now.
In addition, interest rates are higher now than three years ago. While higher interest payments are a stimulus for the rich who hold deposits, it’s not the rich who spend a significant portion of their income on consumption. Lower-income people do, and higher interest payments curb their spending, which is a drag on the economy.
The Fed in the USA knows this, and that’s why, later this year, they will begin to lower interest rates.
When?
Historically, there is, on average, a 10-month lag between the last rate hike and the first rate cut. While some are hopeful for a rate cut in March, that appears unlikely. A safer wager would be May or June (unless the stock market crashes or one of the current wars gets worse).
An interest rate cut is obviously good for bonds, so my portfolio is “bond heavy.” Unfortunately, I’ve been “bond heavy” for a year, and my position is only up slightly (excluding interest, which increases the return), so I was early on this trade. I’m fine with that because it’s a low-risk trade. There is no chance interest rates will go up a lot, so while I may not make a huge profit on my bond position, I don’t expect to incur losses, so I’ll sit, wait, and collect the interest.
As for the stock market, it is, over the long term, heavily influenced by the money supply (which makes sense) and global M2 is dropping. That’s not good for stocks. Perhaps the boomers who hold most of the stocks will decide that cashing an interest cheque each month is safer than playing the market swings, which can drive down equity prices. If equities drop, boomer selling could help the downturn pick up steam.
That decline in the wealth effect can start the recession, and that’s where I think we are going.
Or not. What do I know? We’ll wait and see.
The Macro View
by JDH on January 27, 2024
Let’s start with the macro view: specifically, when will the recession start?
I am on record as expecting a recession last year, and it does not appear that a recession started last year, so what’s the deal?
The deal is that “fiscal stimulus” is still a thing. The federal governments in both the USA and Canada, and many other countries, continue to run significant deficits, and that stimulates the economy and delays the recession. However, government spending is significantly lower now than it was during the events of 2020 and 2021.
Source: Federal Government
At some point, the stimulative impact of government spending is reduced, and that time is now.
In addition, interest rates are higher now than three years ago. While higher interest payments are a stimulus for the rich who hold deposits, it’s not the rich who spend a significant portion of their income on consumption. Lower-income people do, and higher interest payments curb their spending, which is a drag on the economy.
The Fed in the USA knows this, and that’s why, later this year, they will begin to lower interest rates.
When?
Historically, there is, on average, a 10-month lag between the last rate hike and the first rate cut. While some are hopeful for a rate cut in March, that appears unlikely. A safer wager would be May or June (unless the stock market crashes or one of the current wars gets worse).
An interest rate cut is obviously good for bonds, so my portfolio is “bond heavy.” Unfortunately, I’ve been “bond heavy” for a year, and my position is only up slightly (excluding interest, which increases the return), so I was early on this trade. I’m fine with that because it’s a low-risk trade. There is no chance interest rates will go up a lot, so while I may not make a huge profit on my bond position, I don’t expect to incur losses, so I’ll sit, wait, and collect the interest.
As for the stock market, it is, over the long term, heavily influenced by the money supply (which makes sense) and global M2 is dropping. That’s not good for stocks. Perhaps the boomers who hold most of the stocks will decide that cashing an interest cheque each month is safer than playing the market swings, which can drive down equity prices. If equities drop, boomer selling could help the downturn pick up steam.
That decline in the wealth effect can start the recession, and that’s where I think we are going.
Or not. What do I know? We’ll wait and see.