Bill Bonner: “A Very Slight Recession”

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 4-year spell in the White House. Now, finally, we can stop worrying.

by Bill Bonner:

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?”

Yesterday, 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 earlier in the 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 Bellywash

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 bellywash.  

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 is 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.

If you are buying a business or stocks, for example, you might think of something such as residential rentals… with a building that was recently built and won’t require much maintenance. Rents will rise with inflation; your costs should remain low. Another example might be a company in the energy sector (people are still going to need it). A pipeline company, for example, should have low maintenance and operating expenses. As the price of oil or gas goes up, its revenues go up too… while its costs rise very little.  

These, of course, are the kind of companies Tom is looking for.

But for now… as long as the Fed sticks to its guns… cash is king….

Maximum Safety Mode

That’s cash and real assets (including a healthy stash of physical gold and silver.) 

So far this year, it’s been the right call. Take a look at this nifty (if depressing) graph, showing the dismal return of the US stock and bond markets going back almost a century… 

As you see, the year-to-date returns put 2022 in pretty miserable company, with only two other years (1969 and 1931) notching net negative results across both markets. And with “transitory” inflation proving itself rather stubborn, it doesn’t appear the Fed is likely to change tack anytime soon. 

Wednesday’s report from the Bureau of Labor Statistics showed the Consumer Price Index at 8.2%, while the Core Index, which strips out food and energy, came in at 6.6%, the highest rate since 1982. In other words, were it not for the reduction in energy costs (-2.7% for fuel oil and -4.9% for gasoline for the month), prices would be rising much faster than they already are… even as the Fed ratchets up rates. 

At some point, somewhere along the line, something’s gonna give. Here’s Bill, ruminating on the matter in yesterday’s Fatal Conceits Podcast…

“As the Fed stays the course and raises rates to try to get ahead of inflation, we’re going to see something like what we just saw in England. That is, certain institutions… could be Goldman Sachs, it could be JP Morgan, it could be a state pension fund like CalPERS in California… 

“…somebody’s going to get in big trouble and suddenly there’s going to be a meltdown crisis on Wall Street in which Powell and his fellow bankers, in order to save themselves and their clients and their members and Wall Street itself, they’re going to say, ‘Well, okay, we need to get control of inflation… but not right now. Now we have to save the system because otherwise it’ll go totally bad.’ 

“I would say again, this is a high probability hunch that’s going to happen and we’re going to see a pivot from the central bank because they just owe too much.”

Remember: First cash… then gold.

Bill Bonner writes the Bonner Private Research substack and is an NYT bestselling author who wrote the book Hormegeddon: How Too Much Of A Good Thing Leads To Disaster.