Next Prediction – The Economy

“You got to know when to hold ‘em.
Know when to fold ‘em
Know when to walk away.
Know when to run.
You never count your money, when you’re sitting at the table
There’ll be time enough for counting, when the dealing’s done.”

The Gambler – Kenny Rogers

…..

There will be a recession. The business cycle has not been repealed. The question is whether that will occur this year or next year or five years from now. I don’t know when this will occur. The technical definition of a “recession” is two consecutive quarters of negative GDP growth. The financial press is obsessed with this definition.

But the reality on the ground for people can be quite different. There are a lot of bad things happening economically right now. Inflation caused largely by too much money printing. Increasing interest rates to deal with said inflation. A war that is causing shortages of many things. The residue from the virus response lockdowns that are causing shortages of more things. The “green” agenda causing even more shortages and increasing the price of the one thing that almost everything else requires which is energy. Demographic changes leading to less robust economic growth. Productivity declines. And bubblish prices of everything from stocks to bonds to real estate to crypto with values exceeding anything ever seen before.

It's an ugly picture. A few of these things may correct themselves without a major decline. But most won’t.

That said, the effects of these problems often take a while to develop. We all know about the stock market crash in October of 1929. But the Dow 30 did not hit bottom until the middle of 1932, 2 ½ years later. The stock market did not return to its 1929 high until 1954. In the last big inflationary period, the stock market declined 45% in 1973 and ’74 but it took 21 months to do that. The “Dot.com” bubble peaked in December 2000 but did not hit bottom until later in 2002. The housing market peaked in December of 2005 but did not “crash” until September of 2008.

In each of these cases, it took 21 to 33 months from the first decline after a peak until all the excesses in the economy were washed out. These things take time. As they say, history rhymes and I think there are some similarities with each of these four other notable economic declines in the last 100 years. I have used the stock market as a measure in most of these cases, but each was accompanied by a classical recession (or depression in the case of 1929) meeting the standard definition. The economic decline in each case, however, was longer in duration than the classical recession.

Some might say that these comparisons are invalid because things move quicker today with all the information and technology at our fingertips. Maybe. But human nature has not changed. These things take time to unwind because the masses of people do not change their behaviors quickly. Maybe things take only 17 months instead of 21 months, but it will still take time. Declines like the shutdown caused 2020 or the 1987 crash were brief because the causes were singular and the road to recovery was quicker. 

So, where is my prediction? I think we are in for one of these 2-3 year patches of unwinding of the excesses of the prior 10 years. I don’t know when a recession will be declared or how long it will last. There is still a lot of cash out there that has not yet evaporated, and that cash is still being spent and invested. It doesn’t “feel” like there is a recession to me right now. But our economy peaked in the 4th quarter of last year. Throughout 2022, 2023 and maybe in to 2024 there will be someplace where values are dropping, or incomes are dropping, or costs are exceeding incomes, and some people will experience economic distress. It may be steady over the period or happen all at once or stairstep its way down. Yes, what the Federal Reserve does matters. But they have few good options at this point. They can try and keep the economy from faltering and let inflation run uncomfortably high. Or, they can tamp inflation but bring on a decline in economic activity. The odds of a so-called “soft landing” with low inflation and a growing economy are unfortunately low. There are just too many things going wrong in the economy now and too many things that looked good but were unsustainable in the last year or so. Unwinding will take time but it will have to happen. You can only sustain an economy with manufactured money for so long.

Over the last decade and until recently, the price of assets (like real estate, the stock market, and businesses) has been going up while the price of goods (things you buy, eat and use) have been quite stable. It is probably time that that trend reverses and the price of goods increases while the price of assets remains flat or down. If you made me do a more specific prediction, it would be that inflation stays at 5-7% or so for the next two years at least. The level of interest rates stays below the rate of inflation, which is part of what keeps inflation from coming lower but also keeps asset prices from collapsing.

But hell, nobody really knows, least of all me.

As such, I think it is a time to be extra cautious and fiscally conservative on a personal level. I don’t know how this will all play out. But I believe that the water will be rough out there for a year or two. Batten down the hatches.

I remain respectfully,
Congressman John Campbell
Drive Fast and Live Free 

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Predictions: In the Year 2024