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How Long Will This Recession Last?

The most important question for asset prices right now, from stocks to houses to Bitcoin, is whether we’re due for a recession. Last week we got confirmation…

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The most important question for asset prices right now, from stocks to houses to Bitcoin, is whether we’re due for a recession. Last week we got confirmation that according to the traditional definition of a recession – 2 quarters of negative growth – we are already in a recession.

The response from this administration has been denial and word games rather than actually trying to stop the slide. At which point the betting shifts to whether it’ll be a shallow 1991-style recession or a big, 2008-style one, perhaps with a financial crisis to spice things up.

Bigger-picture, what we’re seeing is a concentrated version of the world that paper money delivers: an endless series of booms, busts, and financial crises, all to sustain a permanent siphon of the peoples’ wealth towards subsidizing federal deficits and Wall Street-brokered leverage. Millions are waking up to what fiat money does, which could be bullish for Bitcoin in the long run.

The Numbers

First, the GDP numbers. Going by the Bureau of Economic Analysis (BEA), real GDP shrank at an annualized rate of 1.6% in Q1 and then dropped another annualized 0.9% in this most recent Q2. GDP is revised several times through the quarter, so that could change for better or worse. Meanwhile, of course, if they’re under-estimating inflation, as many believe, then the real decline could be much worse. Perhaps on the scale of a 3% annual drop in GDP.

To put that in perspective, in 2008 real GDP shrunk 1.6% in the first bad quarter (Q1 ’08), then rebounded to plus 2.3% in Q2 before falling to -2.1% in Q3. So, just reading the numbers, we’re in a substantially worse spot at the moment than 2008, even if we believe the inflation numbers.

By the way, about those definitions, the administration correctly claims that the private economics outfit NBER has the final say on what’s a recession. The problem is that over the past 75 years the NBER has never failed to call two down quarters a recession. Rather, they’ve only used their discretion to call a zig-zag a recession, as in 2008. So NBER only calls it worse, never better than the two-quarter standard. Why the chicken-little NBER is suddenly dismissing falling boulders is a very valid question, but then you probably already know why.

How Long will the Pain Last?

So where to next? Given the Fed is openly engineering a recession in order to slow inflation, the key question is whether inflation comes down on its own or will the Fed try to engineer harder.

Now, to be fair, inflation could come down to some degree. After all, if you shut down half the economy worldwide, there will be some hiccups along the way. Considering there’s little public appetite for new lockdowns and Ukraine is settling into a slog, barring a still-unlikely Chinese escalation over Taiwan things should continue ironing out.

Indeed, money printing is settling down to more normal rates: Over the past year, money supply in M2 has grown 5.6%, similar to the Obama and Trump eras. That’s down from 25% in the first year of the pandemic and 11% in the second year.

So the main driver of inflation — federal spending — is easing.

Of course, that doesn’t mean the pain is over; inflation famously lags money supply, typically around 18 months. And M2 growth has only recently calmed down. Meaning money could continue driving high inflation for, going by history, another 16-odd months.

At the same time, the slowing economy itself will probably start slowing inflation via “demand destruction” — fewer people buying less stuff. Indeed, that’s the Fed’s goal in driving higher rates, to choke off the private economy. But the question is will private demand come down a little or a lot? Literally, nobody knows — as so often in economics, we’ve never had precisely this sequence of economic shocks, so we can only guess from history.

By the way, a few weeks ago I did guess based on history, and the punchline is it gets ugly depending on the comparables, but nobody knows which will happen. Indeed at a recent conference in Europe, Chairman Powell himself remarked, “We now understand better how little we understand about inflation.” Invites the question of why he didn’t resign on the spot. But underlining that nobody knows how fast inflation will fall – if it falls at all -- and how much of the economy it takes down with it.

Of course, this “demand destruction” is up against the shrinking economy itself. That is, if the real economy is shrinking because of Biden’s War on Production or because new climate or race mandates are imposed on the economy, then inflation rises simply because there’s less stuff being produced.

Finally, I think the biggest unknown on inflation, hence on GDP’s future path, is what happens to the giant lump of fresh money that was pumped out during Covid — indeed, almost $5 trillion. Much of that new money isn’t showing up in inflation yet because it remains stashed in bank accounts. It’s stashed either because people didn’t need the free money and saved it, or because they saved up as a cushion during the scary times of Covid.

Effectively, all that money has been buried in the backyard in terms of inflation – it’s not for sale. But once those bank accounts start to empty, which should happen both as Covid fears recede and as the economy slows, all those frozen trillions are released into the wild to go chase a now dwindling pile of goods, giving inflation a second wind. You can see in the chart below it’s just starting to trickle out, with much more to go.

So, in sum, the main drivers of inflation these past two and a half years are fading, but most of that fresh money is still locked up. So we could still have a long period of elevated inflation. And, if we do, the Fed could continue panic-hiking into a serious recession or even a financial crash.

One interesting Zerohedge chart this week noted that bouts of high inflation tend to last two and a half years before coming down. Which would put us at another year or so of pain. Of course, that two and a half year cycle doesn’t drop from the sky; it’s driven by the central bank itself reacting to bad numbers and jacking rates, noting that lag between M2 and inflation.

Having said, the orgy of money printing these past two years has been substantially higher even than the “Great Inflation” of the 1970’s – it turns out it took a lot of trillions to tranquilize the population into accepting lockdowns. So the magnitudes are likely to be larger, or the timelines longer, than what we’ve seen since the 1950’s.

Recession: How Long and How Deep

The shape of recession will be a question of how those four inflation factors (slowing M2, fading Covid, falling production, draining savings) impact Fed rate decisions, which in turn either crash harder or soften the blow.

If inflation does come down a lot due to those four factors (“on its own” is how the news will frame it), then the Fed will pause or reverse hikes, and we’ll probably limp along like the Obama years. That is, government will continue to excrete new economy-hobbling regulations and taxes, but the economy will be able to handle it, cleaning up the messes as quickly as government makes them.

Indeed, that’s the going bet on Wall Street, with current projections for positive but fading GDP growth the rest of this year and 2023, ending next year at 1.3% real growth – pathetic, but not a 1970’s-style catastrophe.

So that’s the best case: we coast like a car that’s run out of gas, slowing gradually until either a new administration reverses course or until enough economic deadwood has been cleared that the economy turns back to growth.

And if inflation doesn’t come down “on its own?” Then the Fed, after its habitual several quarters of denial, gets back to economy-crushing hikes. Ushering in a potentially severe recession.

Of course, there is an out-of-box solution, which is to end inflation by dramatically lowering federal spending. Simply getting back to pre-Covid could drop federal spending by some $1.5 trillion per year, while getting back to a Bill Clinton-scale government drops more like $4 trillion every year. We’d have the debt paid off in a decade.

Trimming a couple trillion off federal spending would indeed tame inflation for decades to come. But then you’d have to be pretty naïve to think this administration and Fed will go that path.

So that leaves the most likely stubborn-inflation scenario: Fed pretends it’s not there for a while, then crashes the economy so We the People get to, once again, tighten our belts.

So, bottom line, it’s a recession at the moment; whether it gets worse depends on inflation, and policymakers goofing around whistling past graveyards should give anyone pause.

A version of this article was originally published at CryptoEconomy. Subscribe to Dr. St. Onge's substack here.

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Economics

Playing the infinite game: patient investing

In his 2019 book The Infinite Game, author Simon Sinek describes how taking a long-term view — what he calls adopting an infinite mindset — is critical…

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In his 2019 book The Infinite Game, author Simon Sinek describes how taking a long-term view — what he calls adopting an infinite mindset — is critical for success. Although discussed in the context of leadership, the same principle applies to investing, which has historically favored those who take a long-term view rather than react impulsively to the inevitable ups and downs that occur on the path to creating wealth. Of course, while countless investors have demonstrated that the market rewards those who stay the course, the reality is that doing so isn’t always easy. On the contrary, it takes discipline, self-restraint, and patience.

Investors can quickly lose sight of this reality, particularly in the current environment. Faced with record inflation, rising interest rates, and geopolitical unrest, it’s only natural for investors to want to take action. Shifting strategies or pulling out of the market are among the ways that some investors try to insulate themselves from volatility. Yet the reality is that taking these or other similar steps rarely yields the desired outcome over the long term. Patience isn’t just a virtue. We believe it’s an essential ingredient in any successful financial strategy. 

Why we believe patience pays off

As a society, we’re constantly bombarded with information that can either scare us or make us feel like we’re missing out. As a result, it’s easy to feel compelled to take steps we believe will safeguard our assets or to try to time the market or cash in on the latest trend. That’s one reason so many investors have shifted from a buy-and-hold mentality in recent years to one that favors trading securities much more frequently. While the desire to buy low and sell high is understandable, it’s virtually impossible to do so regularly without a crystal ball.

In our view, making a conscious decision to be patient is critical, even though it’s challenging. People are often hardwired to seek instant gratification. We want results, and we want them now. As such, we have a strong bias toward taking action to reach a resolution sooner rather than later, even when waiting can be the more prudent thing to do.

Practically speaking, that means that many investors are willing to sell their assets in a down market in the hopes of avoiding deeper losses. Our experience suggests that, in many cases, had they just remained invested, their outcome could have been markedly different. On the opposite end of the spectrum, those same investors are also prone to selling assets that have increased in value far too soon. While there’s nothing wrong with locking in gains, doing so can come at a high cost if it means missing out on a substantial upside.

With investing, taking action for action’s sake can lead to poor outcomes. Exhibit 1 shows the impact of missing the one, five, and ten days in the market with the highest total return for the Russell 1000 Growth and the Russell 2000 Growth over the past 20 years.1 Notably, some of these “best days” can occur during highly uncertain times, such as the challenging market downdraft at the end of 2008, and the tumultuous early phase of the COVID-19 pandemic in 2020. To us, this underscores the difficulty of attempting to time the market and the wisdom of staying invested for the long term.

Exhibit 1: Impact of Missing the Best Days in the Stock Market, August 31, 2002 to August 31, 2022

Source: Bloomberg, as of August 31, 2022

Patience takes determination, resilience, and the confidence to stand by investments backed by careful, fundamental research. To be clear, being patient isn’t the same as being passive. It’s not about taking your eye off the ball and letting come what may. Nor is it about being too stubborn or inflexible to adjust one’s strategy when merited. Instead, the goal is to see past any noise in the market today and to hold steady in pursuit of greater rewards.

For the patient investor, those rewards are possible thanks to the power of long-term compounding. Our research indicates that successful companies plow profits back into their business to promote further growth, which can lead to greater value and higher stock prices over time. Investors who trade in and out of the market, whether driven by fear or to chase returns from the latest meme stock, frequently miss out on that compounding effect and sacrifice substantial long-term growth.

Taking the patient approach

At Polen, we believe that patient investing starts with adopting an owner’s mindset rather than that of a trader. For us, that means taking the time to identify and invest in what we see as the highest-quality companies and having the discipline to maintain those positions over the long term. We carefully study each company we invest in, engaging with their management teams and examining multiple aspects of their business before allocating capital. We take a bottom-up approach focused on understanding the business, its potential for profitability and growth, and any risk factors that could stand in the way.

Notably, the companies we invest in aren’t new, untested, or at the forefront of the latest fad or trend. They are proven, established businesses with robust balance sheets and the financial flexibility to keep investing in and growing their business in any environment, including periods of high volatility and recession. Once we’ve invested in a company, we continuously monitor its progress and note any factors that could prompt a change in our outlook (Exhibit 2). We believe that this measured, unemotional approach is critical not only for capital preservation but also to position ourselves to reap the full benefits of long-term compounding.

Exhibit 2: Select Factors That May Prompt a Polen Capital Decision to Sell an Equity Security

Source: Polen Capital

While no business is immune to macroeconomic conditions like the ones currently affecting the market, we believe short-term fluctuations shouldn’t be cause for concern. We believe that investors with a diversified portfolio of companies with outstanding fundamentals should reflect that while the path to wealth creation may be bumpy, the patience to play the infinite game can improve one’s chances of succeeding.

1 The Russell 1000® Growth Index is a market capitalization weighted index that measures the performance of the large-cap growth segment of the U.S. equity universe. It includes Russell 1000® Index companies with higher price-to-book ratios and higher forecasted growth values. The index is maintained by the FTSE Russell, a subsidiary of the London Stock Exchange Group. The Russell 2000® Growth Index is a market capitalization weighted index that measures the performance of the small-cap growth segment of the U.S. equity universe. It includes Russell 2000® Index companies with higher price/book ratios and higher forecasted growth values. The index is maintained by the FTSE Russell, a subsidiary of the London Stock Exchange Group. The volatility and other material characteristics of the indices referenced may be materially different from the performance achieved. In addition, the composite’s holdings may be materially different from those within the index. Indices are unmanaged and one cannot invest directly in an index.

This information is provided for illustrative purposes only. Opinions and views expressed constitute the judgment of Polen Capital as of September 2022 and may involve a number of assumptions and estimates which are not guaranteed, and are subject to change without notice or update. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness, or accuracy. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients. This document does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction. Past performance does not guarantee future results and profitable results cannot be guaranteed.

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Bonds

Druckenmiller: “We Are In Deep Trouble… I Don’t Rule Out Something Really Bad”

Druckenmiller: "We Are In Deep Trouble… I Don’t Rule Out Something Really Bad"

For once, billionaire investor Stanley Druckenmiller did…

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Druckenmiller: "We Are In Deep Trouble... I Don't Rule Out Something Really Bad"

For once, billionaire investor Stanley Druckenmiller did not say anything even remotely controversial when he echoed what we (and Morgan Stanley) have been warning for a long time, and said the Fed's attempt to quickly unwind the excesses it itself built up over the past 13 years with its ultra easy monetary policy will end in tears for the U.S. economy.

“Our central case is a hard landing by the end of ’23,” Druckenmiller said at CNBC’s Delivering Alpha Investor Summit in New York City Wednesday. “I would be stunned if we don’t have recession in ’23. I don’t know the timing but certainly by the end of ’23. I will not be surprised if it’s not larger than the so called average garden variety.”

And the legendary investor, who has never had a down year in the markets, fears it could be something even worse. “I don’t rule out something really bad,” he said effectively repeating what we said in April that "Every Fed Hiking Cycle Ends With Default And Bankruptcy Of Governments, Banks And Investors" "

He pointed to massive global quantitative easing that reached $30 trillion as what’s driving the looming recession: “Our central case is a hard landing by the end of next year", he said, adding that we have also had a bunch of myopic policies such as the Treasury running down the savings account, and Biden's irresponsible oil SPR drain.

Repeating something else even the rather slow "transitory bros" and "team MMT" know by now, Druckenmiller said he believes the extraordinary quantitative easing and zero interest rates over the past decade created an asset bubble.

“All those factors that cause a bull market, they’re not only stopping, they’re reversing every one of them,” Druckenmiller said. “We are in deep trouble.”

The Fed is now in the middle of its most aggressive pace of tightening since the 1980s. The central bank last week raised rates by three-quarters of a percentage point for a third straight time and pledged more hikes to beat inflation, triggering a big sell-off in risk assets. The S&P 500 has taken out its June low and reached a new bear market low Tuesday following a six-day losing streak.

Druckenmiller said the Fed made a policy error - as did we... repeatedly... last summer - when it came up with a “ridiculous theory of transitory,” thinking inflation was driven by supply chain and demand factors largely associated with the pandemic.

“When you make a mistake, you got to admit you’re wrong and move on that nine or 10 months, that they just sat there and bought $120 billion in bonds,” Druckenmiller said. “I think the repercussions of that are going to be with us for a long, long time.”

“You don’t even need to talk about Black Swans to be worried here. To me, the risk reward of owning assets doesn’t make a lot of sense,” Druckenmiller said.

Commenting on recent events, Druck was more upbeat, saying “I like everything I’m hearing out of the Fed and I hope they finish the job,” he said. Now, the tightening has to go all the way. “You have to slay the dragon.” The problem is that, as the BOE demonstrated with its QT to QE pivot today, it's impossible to slay the dragon and sooner or later every central banks fails.

What happens then? According to Druck, once people lose trust in central banks - which at this rate could happen in a few weeks or tomorrow - he expects a cryptocurrency renaissance, something which may already be starting...

... and not just there, but in the original crypto - gold - as well...

Excerpts from his interview below:

Tyler Durden Wed, 09/28/2022 - 12:26

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Economics

6 Best Stocks to Buy Right Now

The best stocks to buy right now are well below their highs. When the market rebounds, these stocks should move higher.
The post 6 Best Stocks to Buy Right…

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With stocks dropping, it hurts to look at my portfolio. But on the other hand, I also get excited about the better buying opportunities. I can invest more money into great companies trading at lower valuations. That’s why I’m sharing some of the best stocks to buy right now.

With many investors heading for the hills, it’s not easy to stay the course and keep buying. But going against the crowd is the only way to beat average returns. So, let’s dig into these companies and why they’re towards the top of my buy list…

Best Stocks to Buy Right Now

  1. Intel (Nasdaq: INTC)
  2. British American Tobacco (NYSE: BTI)
  3. V.F. Corp (NYSE: VFC)
  4. Stanley Black & Decker (NYSE: SWK)
  5. FedEx (NYSE: FDX)
  6. 3M (NYSE: MMM)

Intel

As one of the best stocks to buy right now, Intel is in the midst of a huge turnaround. It’s one of the best semiconductor companies. Over the past few years, it’s lost some ground to competitors such as Advanced Micro Devices (Nasdaq: AMD). Although, Intel is in a stronger financial position to innovate.

Intel’s largest segment is its Client Computing Group. The pandemic helped push forward a lot of demand for these products. But recently, demand has slowed down. And Intel’s other segments have helped pick up some of the slack. Its next two largest segments are Datacenter and AI, and Network and Edge.

On top of that, Intel has talked about a Mobileye IPO. By taking this autonomous driving tech company public, it can free up cash for Intel’s big expansion. The company is under new management with CEO Pat Gelsinger. And he’s pushing to build new fab capacity.

Pat Gelsinger is also personally buying shares. He recently invested close to $500,000 and it’s a good sign when a CEO further aligns interest with investors.

British American Tobacco

This investment might not be for everyone. Many investors consider it a sin stock due to the products it sells. However, it also has a reliable consumer base that leads to consistent cashflows.

There’s increased regulatory risk, but investors are rewarded with higher dividend yields. And another benefit for a tobacco company is that its revenue remains fairly stable during economic downturns. This is great for income investors and the company provides some diversification…

British American Tobacco is based in London, England and for foreign investments, there can be taxes withheld from dividend income. However, the U.K. doesn’t withhold dividend taxes for U.S. investors.

V.F. Corp

V.F. Corp is one of the smaller stocks to buy right now when looking at market cap. However, it owns some huge brands such as The North Face, Vans and Timberland.

Its diverse portfolio has helped the company produce stable cashflows. As a result, the board of directors keeps paying investors bigger dividends. V.F. Corp is a dividend aristocrat and that means it’s paid a larger dividend each year for the past 25 years in a row.

Similar to the others on this list, VF stock is down a lot over the past year. Investors are worried sales will drop as consumer spending drops. However, it’s during these downturns when some of the best buying opportunities come along. V.F. Corp should be able to weather a downturn and continue rewarding long-term investors.

Stanley Black & Decker

Stanley Black & Decker is around the same size as V.F. Corp. Although, it’s in a very different industry. Stanley Black & Decker builds industrial tools and household hardware. It also provides security products.

This company also has a long history of rewarding investors with larger dividends. It’s a dividend aristocrat and the dividend looks pretty safe. Its recent payout ratio comes in below 60%.

As one of the best stocks to buy right now, Stanley Black & Decker is also trading at a lower price. Its valuation metrics have come down and the company should easily survive through a recession.

FedEx

FedEx is a leading transportation, e-commerce and business services company. It’s focused on long-term growth and building economies of scale. FedEx delivers to more than 220 countries and territories.

Thanks to growing cashflows, FedEx has also been rewarding investors with bigger dividends each year. On top of that, the recent dividend payout ratio is low with it coming in well below 50%. This provides good wiggle room as the economy takes a hit…

The CEO of FedEx recently said that he expects the economy to enter a worldwide recession. This will put downward pressure on FedEx’s sales and profitability. Although, investors have beaten down the share price and the company should be able to continue rewarding long-term investors.

3M

3M is last on this list of the best stocks to buy right now. Investors have pushed down its share price due to litigation risk from some of its past products. And the company has roughly 60,000 different products, so it’s not new to legal troubles.

Although, fear is high for investors due to recent actions. As a result, 3M shares are likely oversold and the risk-to-reward is looking solid.

Similar to the other companies on this list, 3M has a long track record of rewarding investors. It’s also a dividend aristocrat and for long-term investors, right now might be one of the better buying opportunities.

More Investing Opportunities

There are thousands of different investments to choose from. However, I believe this list provides some of the best stocks to buy right now. All of these companies come with a different set of risks and the markets might continue to drop. So, always do your own homework, and consider both your ability and willingness to invest.

If you’re looking for more investing insight, check out these best investment newsletters. They’re packed with tips and tricks from investing experts. Here at Investment U, we strive to deliver the best investment research and ideas…

The post 6 Best Stocks to Buy Right Now appeared first on Investment U.

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