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Why I’m Not Worried About a Recession

James Altucher

Posted June 06, 2022

James Altucher

Recession. Recession. Recession. You can’t go a single day without hearing some pundit tell you how worried you should be. In today’s ALC, James will take the contrarian position and reveal all of the reasons he’s not worried about a recession. Read on.

Reasons I am not worried about a Recession

James Altucher

Everybody’s talking about the impending recession.

Here are the reasons I’m not personally worried about a recession.

This doesn't mean there won't be one.

It just seems that with current conditions as they are it would take a lot to force the economy into a "technical" recession (2 down quarters in a row of negative GDP)

Monetary supply is at an all time high

When there's a lot of money in the economy, people spend it. When money is taken away from the economy, people don't spend as much. When they don't spend as much, businesses don't do as well, don't hire as many people, and the economy experiences negative growth and a recession.

The graphic below is the supply of money in the United states. You can also see how the money supply acted during recessions. It usually flattened out.

The spike in monetary supply we are at the tail end of is the biggest spike in history. Money supply changes usually take 12-18 months before their effects are seen in the economy. Note in 2009 how the money supply appeared to do a little spike in the middle of that recession but the recession wasn't over until months later.

The Federal Reserve has said they will reduce money supply starting this month. Or slow it down at least. So that means 12-18 months before recession hits (in the usual case. It could be different this time. Who knows?)

But given the spike in money supply we just went through I think it will take awhile before THAT money even fully makes its way through the economy (which is why we are experiencing inflation).

IMG 1

Inventories

During a recession, there's usually a lot more inventories than sales (because on the rise up, companies were buying in anticipation of increasing sales. And on the way down, nobody's buying but there's all this stuff on the shelves.

When there's a lot more inventories than sales, companies STOP buying new inventory and this often leads to  recessions. If there's too much toilet paper on the shelves, it means Walmart is not selling so much, so they stop buying from Procter & Gamble, who lays off people, etc = recession.

Right now the inventory to sales ratio is very low, even when compared with good times. See the chart below. This means companies have to still re-stock their shelves. Which means that money is spent until inventories are back to normal levels. This usually means no recession is happening any time soon.

Right now, the inventories -to-sales ratio (chart below) is near an all time low. Which means a lot of money has to be spent to make things "normal" unless people stop buying. People would stop buying if they couldn't get a job, for instance, and if the unemployment rate was very high. But...

IMG 2

Jobs Jobs Jobs

Usually in a recession, companies stop hiring. So people who want jobs and need money can't get jobs or money. So everyone stops spending.

But see the chart below. That's the number of available jobs in the US.

There's a TON of jobs available. Basically, anyone who would want a job now can probably get a job. There's 11,500,000 jobs open. There would have to be a very very sharp drop in jobs available for people who want jobs to not get jobs.

I haven't really heard too many reasons why people aren't looking for jobs as much. Maybe they saved money during Covid? Or changed their lifestyle so they don't need as much money or don't need a regular job? I have no idea. I don't think anyone has.

This is part of the inflation issue. If nobody wants these jobs, companies have to raise salaries. This is part of what creates inflation. If people are making more, they are willing to spend more for products, hence inflation. And companies presumably pass on the costs of higher salaries to their customers (this is unclear to me if it actually happens but that's the theory. The reason it's unclear is because most products are priced by the market and not by a corporations whims.)

To be fair, this is the sort of data that scares the Federal Reserve into slowing the economy down and causing a recession. But you can't just make 4 million available jobs disappear. Nor does it happen overnight. Again, 12-18 months from this point, minimum.

IMG 3

Yield Curve

Everyone always talks about this mysterious "yield curve" going negative. What is it? What does it mean?

Basically, if I invest in something for ten years where my money is frozen for those ten years, I expect higher reward because I am taking greater risk. I want 10% per year, for instance, if I have to lock my money up for ten years.

As an extreme counter-example, if I'm locking up my money for 1 day, I don't need to make an annualized 10%. Even if it goes down a little bit I'm getting the money back tomorrow so I don't care as much.

The problem is that sometimes a 10 year US-issued treasury bond might occasionally have an annual yield / dividend, less than 2 year treasury bond. Why would that happen?

It's because people think the economy is going to experience inflation. If you think the inflation rate over the next two years is going to be 10% (hypothetically) then your two year bond you invest in needs to yield more than 10% per year if you're going to make "real" money after inflation. So you won't buy the 2 year bond unless it yields that and the 10 year bond might look safer to you.

You can see in the chart below: this is the chart of the 10 year bond minus the 2 year bond. If it's positive, it means the ten year bond's yield is higher than the 2 year bond's yield. This is a sign that people think the economy is growing in a healthy way.

Whenever there's been a major recession, the yield curve goes negative about a year or so before.

Note: it did go negative in the last month or so. Now it's positive again. When there was a lot of inflation in 1980, it went wildly negative.

So, I would say this graph suggests recession is a danger, but maybe in a year and not before then.

IMG 4

What is a recession anyway?

Here's the definition: when the National Bureau of Economic Research says there's a recession. It used to be defined by two down quarters in "real" GDP growth. (the "real" means, growth minus inflation). But now the NBER basically says it's when a bunch of bad things are happening, they might call it a recession.

Because I have a question. Sometimes the economy can still be technically growing, but if there's a lot of inflation (forcing a bunch of economists to adjust the growth down) is it still a recession even if the economy has more dollars being spent? Maybe.

Does the market go down during a recession?

Not always.

Here's a chart of the S&P performance during every recession.

IMG 5

What does the market do after a recession?

Maybe the reason the market goes up, on average, during a recession is because people are anticipating what will happen AFTER the recession:

IMG 6

Summary.

Some parts of inflation will probably get better soon:

Anything caused by "supply shocks".

For instance, the lack of goods coming from China because of repeated Covid shutdowns will at some point end and those goods will stop going up in price.

The price of oil is inflated right now because of Russia/Ukraine. Hopefully this conflict ends soon and the price of oil stops inflating.

The housing market and rental market has become inflated for various reasons: A) lack of trees being cut down for 2 years doing Covid means it's more expensive to build a house right now. B) eviction moratoriums has driven up rental prices in urban areas because there's a lack of supply as landlords are still not able to evict people who haven't paid rent in 18 months. The moratoriums are over but now the landlords have to go to court. So there is no supply.

The other type of inflation: monetary supply inflation, occurs when a lot of money is printed up (as was the case the past two years) and there isn't sufficient economic growth to absort the new money. This is why there appears to be negative GDP growth right now.

I think this second type could continue if the stock market continues to fall and that will cause a technical recession.

But it won't be a big one. The economy will absorb it once the supply shocks are over and once the stock market finishes falling (hopefully it has already but we'll see).

Big recessions are like in the financial crisis of 2008 when people were afraid all the banks would fail. Or in the mid-70s when OPEC stopped sending us as much oil as we needed.

Regards

James Altucher
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