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Friday, July 29, 2022

Don't Let Biden B.S. You, We're In A Recession

Above, the meter reading of Biden's claim of no recession.

Traditionally, when we have two consecutive quarters of decline in the U.S. economy, the country is in a recession.

This was what has happened. We had two consecutive quarters of decline and the Biden Administration is trying to persuade people semantically that we're not. 

I received the following from my investment banker and he sees us in a recession:

Gross Domestic Product was reported this morning at an annual rate of -0.9%.  Weakness was more broadly based than the first quarter this year, with housing declining due to the substantial increase in mortgage rates.  As I’ve written in these messages for months now, nominal activity remains rather robust and employment is rather strong, but the burst in inflation is gobbling up all the nominal gains.  We are now living with the consequences of the policy response to the COVID shutdowns: federal authorities flooded the economy with massive quantities of new money in 2020 and congress doled out direct stimulus checks to a majority of the population.  The Federal government’s 2020 policy actions remind me of the Dire Straits song Money for Nothin’: Money for nothin’ and your chicks for free.  Once again, we are reminded of the ‘Austrian School’ economists’ assertion that there’s no such thing as a free lunch.

Most economists and investment professionals are calling this a ‘technical’ recession.  We now have two quarters of economic activity in 2022 behind us and both were declines in real (inflation adjusted) terms.  The definition that’s most frequently used as a recession is two consecutive quarters of real economic decline.  The administration is engaging in semantics with the NBER definition of recession trying to assert that we are not in a real recession.

What does this all mean for your portfolio?  We are seeing US equity markets rise strongly in July just at the times otherwise negative economic data is fresh news.  In fact, the US equity market has been up on news of both a substantial Fed Funds rate increase with at least another to come, and now the first estimate of GDP showing Q2 decline.  Treasuries are rallying, consistent with a slowing or declining economy.  My best estimate is that 1) growth stocks as a group have returned to favor for the summer months, and in an environment that favors growth stocks, valuations matter little, so equities are probably going to be fine for a short while ahead, and 2) that environment may be somewhat short-lived.

 Remember what President Bill Clinton once acknowledged:

"A recession is two quarters in a row of negative growth."

-- President Clinton, Dec. 19, 2000

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