Recession ahead – right after this new bull market

Wall Street is looking forward more than 6 months later, and you love what you see. The proof lies in the behavior of the stock market: building a volatile and upward foundation.

Why choppy? Because we are in the middle of negative news that produced a huge drop in the stock market for 5 months. It’s this news that keeps investors nervous and the market is volatile. However, the rise in stock prices deflected concerns.

Baron I just described the procedure in the “Review and Preview” email on June 2nd:

“A different market. It might be a temporary bounce, or a bear market rally, but investor sentiment has made a huge turnaround in the past two weeks. Since the Nasdaq Composite bottomed out on May 24, it is now up 9%. Apparently the bad news hasn’t The longer the stocks go down. In fact, in some cases, the stocks are going up though.”

This bull market is neither a temporary bounce nor a rally in a bear market. Volatility is a key feature of the stock market climbing a wall of anxiety.

As for the bear market rally, it actually happened in March. It was a quick and exciting jump that seemed to signal, but wrongly, the end of a months-long decline. (See my March 31 article, “Stock market bulls try to revive ailing 2021 favorites – don’t get trapped“)

More from ForbesStock market bulls try to revive ailing 2021 favorites – don’t get trapped

So, what should an investor do?

Private Equity – But…

…this bull market is going to be different. So, don’t forget bull market opinions, ideas and strategies for 2021. The new environment has made the Fed slowly resume its traditional (AKA, “neutral”) position (i.e. sitting on the sidelines as a lender of last resort). This will result in a healthy market-driven return of interest rate determination and the allocation of capital resources.

After more than 13 years of Fed control, the benefits of this change will be dramatic and new to many investors and even Wall Street.

Important – The Federal Reserve (in fact, the 12-member Federal Open Market Committee or the Federal Open Market Committee) is not a Solomon-like entity. It is simply a government agency made up of a few politically appointed individuals, most of whom are economists. They are unable to wisely bypass the capital markets (i.e. the system of pricing and superior allocation of capital resources), and are misled by relying on econometric models built on past data. Their attempts to help have been the cause of many problems for the economy and capital markets in the past. Inflation today is the latest failure.

But, what about that inflation and the Fed’s rising interest rates – and possibly a recession?

These three issues are real, but they are viewed and interpreted incorrectly.

First, swell today

It has two factors: demand/supply mismatch and excess money (the Fed does). Higher demand and a mismatch in supply will cause prices to rise in specific areas (eg cars), but they will eventually correct themselves. Prices will fall when supply and demand are in line again. Therefore, there will be no permanent hypertrophy damage. (These double-digit inflationary areas likely account for about half of the roughly 8% CPI inflation rate.)

However, the Fed’s creation of excess money (AKA, printing money or discount currency) is a serious problem. He simply threw trillions of dollars in cash into the system. The result is called fiat inflation (“fiat” means an unbacked currency with something as valuable as gold).

The main, absolute and proven problem is this: once forced inflation begins to increase, it infects all aspects of the economy and the financial system, thus inducing a pay-and-lei-pull cycle of price, cost, wages, productivity, demand and supply shifts. This non-productive activity seeks to benefit from or seek protection from a currency’s loss of purchasing power.

This is what happened in the inflationary period 1966-1982. the case? It was launched and reinforced by the Federal Reserve and the Federal Government believing the John Maynard Keynes theory: Increasing the money supply and deficit government spending could produce, in a multiplier size, private sector growth and employment.

looks familiar? you are right. The knowledge gained from that period has faded away, and here we are again.

Instead, prices have gone up all over the place, undermining any supposed real growth effects. Even worse, rather than admitting that it was a failed experiment, the Federal Reserve began a series of flawed attempts to control inflation by curbing economic activity by tightening money. Instead, the Fed produced a series of recessions, yet inflation continued to rise to new highs. This chart shows what happened before the Big Monkey Key – the oil embargo imposed by the Organization of the Petroleum Exporting Countries (OPEC) in October 1973. The loss of oil supply caused a huge mismatch between supply and demand as well as the ever-worsening fiat money inflation that eventually led to Maximum stagflation and double-digit inflation.

Second, higher interest rates

The Fed’s actions today represent a general approach. Before 1965, the Federal Reserve was silent. The discount rate will be determined, but all deliberations and money supply procedures have been kept confidential. As a result, capital markets set interest rates on observable terms. For example, tightening will begin to affect capital supply, so rates will begin to rise. Ultimately, these measures will affect economic activity.

Today’s rise rates are not similar to the rates of the past. Previously, the Fed tightened money, thus raising capital market rates. Today, everything is decided by the Federal Reserve. Moreover, the rates are much lower than what the capital markets might set. Therefore, we need to discuss the effect (and not effect) of the current interest rate situation on the economy, and therefore, the chance of a recession.

Third, a recession coming because of those high prices?

Certainly, this is a possibility. Most likely, though, growth will slow, not reverse, because the Fed’s rate hike is unlike anything in the past. The main difference today is that interest rates are still abnormally low. Until prices reach the level set by the capital market (i.e. without Fed intervention), The Fed is still running a loose fiscal period.

How do you know when normal life returns? When the main short-term rate (of a 3-month US Treasury bond) is higher than the inflation rate of paper money. Normal is defined by investors claiming and having positive “real” (inflation-adjusted) interest income. Today, that is likely above 4%, well above the Fed’s “new high” of 1.2%. This trivial rate is a negative real return of about -2.8%, Worse than Negative -2% in long years for the Fed near 0% nominal rate.

Therefore, the Fed still has a long way to go before it allows this rate to reach anywhere near normal, and much less to produce a tight financial environment. Therefore, it is likely that the real recession anxiety will not occur until the price reaches 5% or more.

Compare this graph to the one above…

Bottom line: focus on the new and emerging bull market and ignore everything else

Analysis of past economic data and assessment of the market today’s arrears is irrelevant. The Fed’s fiat inflation is here to stay, and the bull market drivers of 2021 are over. However, good times are coming – they will be very different than they were before.

How does it differ? We can’t know yet. It will be evolutionary. Therefore, “hiring” Wall Street experts now is a good strategy. We see “A completely different bull market is at hand – how to adjustFor an example of actions to be taken.

More from ForbesA completely different bull market is at hand – how to adjust