Hello Recession!!

Well the first read on GDP for the 2nd quarter came in much weaker than expected at a -.9%. This follows a contraction of 1.6% in the 1st quarter. While the ‘talking heads’ debate whether it is or isn’t a recession my only question is whether it is short and mild or long and deep?

So the next Fed meeting isn’t until September so we will see plenty of data before that meeting, but each piece of data that is released will determine the Fed’s direction—just my guess is that 75 basis point increases are in the rear view mirror.

The 10 year treasury is now at 2.73%–off 3-4 basis points—is it headed lower? Guess we just have to wait and see–so many moving parts in the global economy (energy and employment being key).

44 thoughts on “Hello Recession!!”

  1. The recession/inflation analysis is pretty straightforward.

    Stipulations:

    The Fed cannot produce more oil/food/housing. So all they can do is to create “demand destruction” if they want to lower inflation.

    The top ~25% is not harmed by high inflation, other than maybe lower stock prices. They can still afford everything they want.

    The bottom ~75% cares about high inflation because they CANNOT afford everything they need/want.

    Binarily Jay Powell has two choices:

    1) Cause a “hard landing” which means ~ 2% to 3% of workers lose their job. They will be unhappy, but the other 73% will be happy with lower inflation as long as they do NOT lose their job. Jay will be remembered as Paul Volcker the 2nd. Jay KNOWS what will happen, but in a million years, he CANNOT publicly state: “a lot of you are going to lose your jobs and we are have going to have a recession.”

    2) Start easing monetary policy through lower rates/Quantitative Easing/etc. Inflation will rage. The 2% to 3% of workers will keep their jobs. All 75% will be unhappy with high inflation. Jay will be remembered as Arthur Burns the 2nd who was credited with letting inflation spiral out of control in the 1970’s.

    Each III’er will have to decide which way they think Jay will go. It will probably guide your investment implementation.

    1. I think one difference between Burns and Jay is that Jay keeps pounding the table on inflation being the primary problem. I don’t remember Arthur Burns being that adamant…I could be wrong? In the 70s, we had high inflation AND a rotten economy. And rates on long term bonds were in the high single digits on their way to double digits.

      There is absolutely no way Jay can let 10 or 30 year treasuries even approach 10% because of the size of the debt. But the fairly good economy gives the Fed cover to raise overnight rates to 4% or more. His statement that we are at “neutral” rates is baloney.

  2. Fed announces a rate hike and the next day rates on treasuries go down?? I especially can’t wrap my head around the 13 week T-bill going down? This market is weird.

    Oh well my 401k loved the last couple of days, especially since I have a REIT fund.

    1. The market is forward looking. Everyone and their brother knew this .75% rate hike was coming a month or two ago. The market had already priced future rate hikes into the treasury rates.

      Now that we are in a recession, many are thinking the Fed will have to pivot sooner from hiking to neutral to eventually cutting. Hence the weakness today in treasuries

      1. Aren’t rates going down a sign of strength in the bond market? That means more people are buying.

        I do understand why longer term bonds invert, people wants the safety of getting that rate for a long period of time and expect the shit to hit the fan and rates to go down more. I really don’t get the 13 week going down. Oh well, all bonds/pref’s I own are tied to 3M Libor which is going the way I expected.

  3. “ It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.”
    -Harry Truman

    I agree with Truman. Whether it’s a recession or not (or something worse) depends first and foremost on the jobs market. Recession defined as two quarters of negative GDP is something the media made up. Neither the 2020 nor 2001 recessions met that definition.

  4. Well I see the ‘wordL’ is out. WS et all have been told to call it a….

    TECHNICAL RECESSION

    1. Come on, get with the program – didn’t you here – Two consecutive quarters of negative GDP is a recession when Republicans are in charge. Two consecutive quarters of negative GDP is NOT a recession when Democrats are in charge.

      No matter how much the morons in DC want to gaslight the public and try to change the definition , we are now in a recession (a recession with 9.1% inflation).

      Market likes it for income stocks however as they think the Fed will now have to picot much sooner

      1. hard to believe it’s a recession when we still have help wanted signs everywhere and long lines at Starbucks, at least that’s what I see here in Indiana where the latest local unemployment is an unbelievable 1.8% according to the St. Louis Fed.

        1. It’s a recession.

          Just look at some recent earnings / guidance announcements from companies that are good indicators of consumer sentiment

          Walmart now expects operating income for the second-quarter and full-year to decline 13% to 14% and 11% to 13%, respectively. Meanwhile, adjusted earnings per share is now expected to fall 8% to 9% and 11% to 13%, over the same respective periods. “The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars,” CEO Doug McMillon said. “We’re now anticipating more pressure on general merchandise in the back half.”

          Stanley Black & Decker Q2 profit plunges 80% – For the full year, Stanley Black & Decker (SWK) now sees adjusted EPS of $5.00-$6.00, down from prior guidance of $9.50-$10.50, including a ~$4.25/share reduction from weaker H2 revenue, primarily due to slower consumer demand in Tools & Outdoor and moderated expectations for price. “As the softening of the demand environment accelerated rapidly during the last portion of the quarter, we began taking immediate corrective cost actions, which we are continuing to implement,”

          1. “ It’s a recession.

            Just look at some recent earnings / guidance announcements from companies that are good indicators of consumer sentiment”

            Earnings are down because margins are reverting to the mean from all time highs. This is just capitalism at work, not necessarily a sign of recession. A recession would be Walmart laying people off.

            1. I was referring to their comments on greatly weakened consumer demand / sentiment which has impacted their earnings and guidance

              And plenty of companies have already announced layoffs – here is a quote from a recent Forbes article

              ” The gloomy sentiment has ushered in waves of layoffs among recently booming technology and real estate companies, and corporate giants including Amazon and Walmart have both signaled a slowdown in their hiring needs, with Walmart executives pointing to “overstaffing” as a drag on disappointing profits last quarter.”

              https://www.forbes.com/sites/jonathanponciano/2022/07/08/labor-market-added-372000-jobs-in-june-as-layoffs-rise-and-recession-fears-grow/?sh=2b53700e79bc

              If you don’t want to believe a recession is upon us, feel free to believe anything you want. I myself will rely on the data to make my investing decisions and you can’t dispute the facts that we have had two quarters of consecutive negative GDP growth and things continue to get worse from a consumer demand / sentiment perspective.

              1. “ If you don’t want to believe a recession is upon us, feel free to believe anything you want.”

                I believe the recession is yet to come rather than being on us. If it was already on us, that would be bullish as the end of it should be in sight if its a mild one and markets bottom on average three months before the end.

                1. Agree. 2 quarters of negative growth is not the definition of a recession but it is an indicator that we are getting close.

                  1. >> LOL – Don’t be gaslit by the corrupt DC Admin and compliant media as they try to redefine it.

                    Pretty sure you’re the one doing the trolling here.

                  2. There’s no politics allowed on this forum, yet at least 50% of your posts are political, so maybe you’re the one who needs to change?

                    P.S. Why does it actually matter whether a recession is officially called or not? It doesn’t change the real economy in any way. So why are you such a troll?

                  3. P.P.S. Maverick, you have no idea how easy it is to ignore you! I only comment when you are 100% stupid, as opposed to your regular 50-75% stupid.

        2. Tons of signs here: work today get paid at the end of your shift. Boston Market had a sign on their door “we’re closed due to lack of employees” when I went there Monday. Certainly no lack of jobs on the low end.

          1. I see that everywhere I go. I went to my favorite Teriyaki last week for takeaway; there was a notice on the door that said they were closed this week because of staffing issues.

            1. Yep…a neighbor told me the local Burger King has shut down the dining area (only open for drive thru orders) on multiple days due to staffing issues.

              I like my own cooking so I don’t eat out much except when traveling.

  5. In normal times the fed would be targeting the 2 year treasury. These are not normal times with CPI at 9.1%. I believe they will try to bring the fed funds rate above the core PCE which currently stands at 4.7%. Tomorrow it will be updated. If they do raise rates above core PCE, a lot of things are going to be breaking along the way.

    1. New Issue: Morgan Stanley (MS)
      Non-Cumulative Preferred Stock, Series P
      Size: $250mm
      Expected Ratings: Baa3/BBB-/BBB-/BBB(high)
      (Moody’s/S&P/Fitch/DBRS)
      Perpetual
      Price Guidance:: 6.875-7.00%
      DRD/QDI Eligible: Yes

      1. This one may be tough to get out of the gate at a good price for us regular folks

        With a yield like that maybe it would push down the other issues a little.
        Fingers crossed

        1. I’m looking at current yields on many underwater preferreds. Swapping to 6.75 coupon with IG ratings is a strong possibility.

          1. I think we may have already seen the best IG prices.
            I just bought Bhfan as it is still reasonable.

      2. EarIy Bird: Thank you for all of your contributions to Innovative Income Investor. Very much appreciated!!!. I check the SEC website for 424B2 Filings regularly and saw the Morgan Stanley filing. I view the documents for the size of the issue and the first call data. How do you estimate the interest rate that Morgan Stanley and other issuers are going to pay?

        1. The rate talk and pricing information I provide is obtained from various broker/dealer relationships.

      3. What wrong with this picture???????? Morgan Stanley World Class Company issuing a 6.875% preferred???

        1. Not sure, honestly.
          But IF I can get it near par
          There is nothing wrong with it …………

          However, it does kind of sound too good to be true.

        2. What it was a case of the old switch a roo. Talk small size at a high rate, get em fighting over allocations then slip em a lower rate and 4x the deal size. But hey there have been very few deals, the demand is an indicator if you ask me

          What I did notice was the ratings. I thought their pfds were split rated. Now all show IG

  6. Inflation better start plummeting quickly or the Fed’s going to be in a really tough spot. 10-year telling us that inflation will plummet. Is the 10-year right?

  7. And….the negative .9% is robust enough where it is not on the knifes edge of .1 or .2%. It seems definitive.

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