Recession Soon?? What It Means For You & Your Portfolio!!

Summary

This video delves into the concept of recessions, explaining their technical definition as two consecutive quarters of negative GDP growth. It explores indicators such as yield curve inversion and the Duncan leading index to predict recessions, and the Su rule to confirm them. The script discusses potential triggers for a severe economic downturn and how government spending and debt levels can influence the severity and duration of a recession. It also examines the varied impacts on jobs and investment portfolios, suggesting that while some industries may suffer, others could benefit from government infrastructure spending. The video concludes by highlighting the importance of active investment strategies in a potential stagflationary environment.

Takeaways

• 🌐 The global economy has been strained by high inflation and interest rates, leading to concerns about a potential recession.
• 📉 A recession is characterized by a slowdown in the economy, often resulting in job losses and significant market downturns.
• 👥 Unemployment and market crashes are practical effects of recessions, with the last major one occurring in 2007.
• 📊 Technically, a recession is defined as two consecutive quarters of negative GDP growth, which measures a country's economic output.
• 🤔 The National Bureau of Economic Research (NBER), a group of eight economists, unofficially determines recessions without clear criteria.
• 📈 The US economy technically experienced a recession in 2022 due to negative GDP growth, but it was not officially declared.
• 🔢 Predicting a recession involves assessing indicators such as the yield curve inversion and the Duncan leading index.
• 📈 The yield curve inversion occurs when short-term interest rates exceed long-term rates, signaling economic weakening.
• 🛑 The Su rule recession indicator suggests that recessions occur when unemployment rises rapidly compared to the previous four quarters.
• 📊 Real-time indicators like state unemployment rates and earnings reports from major companies can provide insights into the economy's health.
• 💼 The impact of a recession on jobs is typically felt most by industries closely related to consumption, such as retail, hospitality, travel, and manufacturing.
• 💰 The effects of a recession on portfolios depend on the assets held, with manufacturing companies potentially performing well due to infrastructure spending.
• 🏦 The severity of a recession could be influenced by factors in the financial system, such as commercial real estate and banking crises.
• 💵 High inflation combined with economic weakness could lead to stagflation, complicating the response to a recession and affecting asset performance.

Q & A

What is the current strain on the global economy?

The global economy is currently under significant strain due to high inflation and high interest rates, which have led to concerns about an impending economic downturn or recession.

What is the practical effect of a recession?

The practical effect of a recession is widespread job losses and massive losses in the markets, leading to economic hardship for many individuals and businesses.

What is the technical definition of a recession?

The technical definition of a recession is two consecutive quarters of negative GDP growth, which translates to a 6-month period of economic decline.

What does GDP stand for and what does it measure?

GDP stands for Gross Domestic Product, and it measures the economic output of a country, including consumer spending, investment, net exports, and government spending.

Why was there debate about the recession in 2022?

There was debate about the recession in 2022 because although the US economy experienced a technical recession with GDP declining in the first two quarters, an official recession was never declared.

Who decides when the economy is in a recession in the United States?

In the United States, the National Bureau of Economic Research (NBER), a nonprofit organization consisting of eight economists, decides when the economy is in a recession.

Why is the NBER's method of determining recessions controversial?

The NBER's method is controversial because the criteria they use to determine a recession are unknown, and they have a history of announcing recessions long after they have started, which can be unhelpful for economic planning.

How can the yield curve inversion be used as a recession indicator?

An inversion of the yield curve, where short-term interest rates are higher than long-term rates, is a popular recession indicator. It suggests that investors expect the economy to weaken in the future, which can lead to reduced lending, borrowing, and economic growth, eventually causing a recession.

What is the Duncan Leading Index and how does it predict recessions?

The Duncan Leading Index is an economic indicator that looks at specific measures within the GDP figure, particularly those related to personal consumption and private investment. It compares these measures to broader GDP growth to predict economic conditions, and a falling ratio suggests that a recession may be on the horizon.

What is the Su Rule recession indicator and how does it work?

The Su Rule recession indicator, named after economist Claudia Sahm, suggests that recessions tend to occur when unemployment in one quarter is rising faster compared to the last four quarters. It emphasizes the rate of change in unemployment as a key factor in predicting recessions.

How might the current fiscal spending in the US affect the prediction of a recession?

The current fiscal spending in the US, which has been abnormally high due to various factors including upcoming elections, can distort economic indicators and make it more challenging to accurately predict a recession.

What are some real-time indicators that can be used to assess whether the US is in a recession?

Some real-time indicators include unemployment by state, which is published monthly, and earnings reports from major retail outlets and fast food companies, which can provide insights into consumer spending habits and economic health.

What are the potential catalysts for a severe recession in the US?

Potential catalysts for a severe recession in the US include issues in commercial real estate and banking, as well as fiscal problems caused by excessive government spending.

How might a recession affect different industries and job sectors?

A recession typically affects industries closely related to consumption, such as retail, hospitality, travel, and manufacturing. However, the impact can vary, and some sectors, like infrastructure-related manufacturing, may continue to perform well due to government spending.

What could be the impact of a recession on an individual's investment portfolio?

The impact on an individual's investment portfolio during a recession depends on the assets they hold. Stocks in industries most affected by the recession may suffer, while assets like bonds could rally as investors seek safety. However, if inflation is high, other inflation hedges like gold might be more suitable.

What is stagflation and why is it difficult to manage?

Stagflation is a situation where the economy experiences both stagnation and high inflation at the same time. It is difficult to manage because measures to stimulate growth can exacerbate inflation, while measures to control inflation can lead to more economic weakness.

How might a recession affect the financial system and the value of bonds?

A recession could lead to a decrease in the value of bonds if there is a need for higher yields to compensate for inflation. If bonds, which are a primary form of collateral in the financial system, lose value too quickly, it could potentially lead to a crisis in the global financial system.

What are some of the potential strategies governments and central banks might use to address a recession?

Governments and central banks might use a combination of strategies such as reducing spending, restructuring debts, redistributing wealth, and printing money to address a recession. The challenge is to balance these tools effectively to deleverage the economy without causing further issues.