We are breathing a lot easier, how about you?
We had been worrying that a devastating recession would plunge the US into chaos…losses…and confusion…
…giving the Fed the smokescreen to go back to what it does best — causing inflation…
…and dooming Joe Biden and his fellow democrats to a single four-year spell in the White House.
Now, finally, we can stop worrying…said the great economist in the oval office:
‘I don’t think there will be a recession. If it is, it’ll be a very slight recession. That is, we’ll move down slightly.’
What confidence rating should we give this remark?
The same as Ben Bernanke’s 2007 report to Congress that the mortgage finance crisis was ‘likely to be contained’?
Or maybe it deserves the high trust rating of Jay Powell’s 2021 forecast that inflation would be ‘transitory’?
On Friday, the Dow opened with a swan dive…and then paddled back to the surface…and finally, flapping its wings, ending more than 800 points above sea level. It was a remarkable performance.
Are investors betting that POTUS is right?
Our guess is that the recession won’t be as slight as he thinks. As Tom Dyson reported last week, households are running a gauntlet between falling house prices and rising rents:
‘“Home prices in the US have taken a turn and are now posting the biggest monthly declines since 2009,” reports Bloomberg last week. “Median home prices fell 0.98% in August from a month earlier, following a 1.05% drop in July”…Black Knight Inc. said.
‘The two periods mark the largest monthly declines since January 2009. “Together they represent two straight months of significant pullbacks after more than two years of record-breaking growth”, said Ben Graboske, Black Knight Data and Analytics president.’
Behemoth belly wash
Businesses, too, are seeing sales fall while their costs increase. The Pepsi-Cola behemoth dealt with rising costs by increasing prices across the board by 17%. But sales did not go up 17%. They only went up 12%…which means Pepsi sold 5% less of its snacks and belly wash.
And if there is one product that is indicative of the economic zeitgeist, it is probably computers. And here’s the latest from Computerworld: ‘PC sales fall off a cliff’:
‘The sale of PCs in the third quarter of the year fell nearly 20% compared to a year ago, the largest drop in decades and the fourth straight quarter of year-over-year declines, according to preliminary research by two analyst firms.
‘The surge in PC sales created by the pandemic and the tremendous uptick in hybrid and remote work is over and no longer adding to computer sales. Back-to-school PC purchases also showed “disappointing results, despite massive promotions and price drops, due to a lack of need as many consumers had purchased new PCs in the last two years,” according to Mikako Kitagawa, a director analyst at Gartner.’
Everybody’s guessing about what will happen next. You never know. But for now, Jay Powell thinks his credibility depends on sticking with his interest rate hikes. We know, too, that investors are still looking for the bottom, ready to hit the buy button as soon as they think it has come. And the president is still in chirpy cheerleader mode. It will take time…and major losses…to wring the optimism out of them.
And despite yesterday’s bounce, we are still in the first stage of this crisis. Interest rates are going up, bonds are going down, and there’s more downside risk than upside potential in almost all asset classes — including stocks.
A two-step plan
And since we promised financial advice…herewith, we deliver.
The general rule: Cash now; Real assets later.
In this, the asset sell-off stage, the best place to be is dollar cash. Stick with dollars…until…
…until that magic moment when investors give up, panic takes hold, and the Fed reverses course. Then, you will want your money in gold, land, antifragile businesses, timber, real estate — anything that might hold its value in an inflationary crisis.
But for now…as long as the Fed sticks to its guns…cash is king.
For The Daily Reckoning Australia