ISMS 3: Will the US Have a Recession or a Soft Landing?

27th January 2023 • My Worst Investment Ever Podcast • Andrew Stotz

Never has the US gov’t caused such a massive move in GDP. The question is, “which way is GDP going?” Will we see a recession or a soft landing?

Reasons for a recession

Extreme increases in interest rates are meant to slow down the economy
The fastest rate-hike cycle by the Fed since the 1980s
In the 2004 cycle, the target rate was hiked by 4.25% in total
Same as in the current cycle, but it has now been done much faster
The massive rise in mortgage rates is dramatically slowing the property market
This, in turn, leads to crashing prices, which will make people feel less wealthy and hold them back from spending
The yield curve has inverted, which has perfectly predicted prior recessions
All recessions in the US since 1968 were preceded by an inverted yield curve
The average time from inversion until the recession started was about 1 year (about mid-2023)
The surge in spending supported by gov’t handouts is working itself out of the system
Since 2Q21, households have demonstrated stronger than usual spending behavior
Strong wage growth has contributed to more savings in 4Q21 onward

High employment means the economy is robust and can withstand the rate hikes
Companies are highly profitable, which will allow them to bear a slowdown more easily
Companies are sitting on tons of cash
Individuals slowed their spending in anticipation of an economic slowdown
Democrat party leadership will pump things up (e.g., strategic petroleum reserve)
US banks are in a strong position, holding lots of cash and gov’t bonds
Reducing the risk of a financial sector crisis that would exacerbate an economic crisis
At the end of 2021, the banks had nearly 40% of their assets in cash and securities
Compared to 13% at the end of 2007
Gov’t spending is going to be crowded out by borrowing interest payments
And then politicians will pressure the Fed to cut rates