5 MINS AGO! Jim Rickards: "We're Seeing Something We've NEVER SEEN BEFORE"

Summary

The video discusses current economic indicators signaling an impending recession, emphasizing the contrast between the stock and bond markets. While stocks suggest a soft landing, bonds warn of a deeper crisis. The speaker outlines the delayed reactions of the Fed and stock markets to economic downturns, citing past events like the 2018 market crash. Key points include the Fed's likely missteps, rising unemployment, and layoffs across sectors like tech, alongside a shrinking labor force participation rate. The speaker stresses that real wages are falling and warns that the coming recession could be worse than expected.

Takeaways

• 😀 The global economy is showing signs of an impending recession, similar to 2007 before the 2008 financial crisis.
• 😀 The stock market is optimistic, suggesting a 'Goldilocks' soft landing, while the bond market is signaling that the situation is worsening.
• 😀 The inversion of the yield curve, which is a red flag for recession, is now approaching, potentially signaling a recession in less than a month.
• 😀 Interest rates are a lagging indicator, and the Federal Reserve (Fed) is usually the last to recognize a recession, with entrepreneurs and business owners often the first to see it.
• 😀 As recession fears grow, businesses often borrow more, driving up interest rates before the recession actually hits.
• 😀 The Fed is likely to pivot on interest rates and might cut them, but not because of a successful soft landing. They may do so because they overtightened and missed the warning signs.
• 😀 The stock market's 20% drop in late 2018 shows that the Fed doesn’t prioritize market levels, but rather disorderly market behavior, which can lead to a deeper crisis.
• 😀 The Federal Reserve cares about disorderly markets (such as drastic crashes) and will step in when markets show extreme volatility, not simply when they are trending down.
• 😀 The tech industry is already experiencing widespread layoffs, with companies like Google, Amazon, and Facebook letting go of tens of thousands of employees.
• 😀 Unemployment is a lagging indicator, and even though layoffs are happening, unemployment figures have not yet shown a significant increase due to businesses delaying layoffs until absolutely necessary.
• 😀 The labor force participation rate has been declining, with about 8 to 10 million people aged 25-54 out of the workforce, which could raise the true unemployment rate to depression-level figures if factored in.

Q & A

What is the primary indicator suggesting a recession according to the script?

The primary indicator suggesting a recession is the inversion of the yield curve, which has been observed globally. This inversion is similar to what happened in 2007, just before the 2008 financial crisis.

How do the stock market and bond market views differ regarding the recession?

The stock market is optimistic, believing in a 'Goldilocks' scenario with a soft landing and potential rate cuts. In contrast, the bond market signals a more pessimistic outlook, indicating that the recession is imminent and that it's too late for the Fed to prevent it.

Why do interest rates rise before a recession?

Interest rates rise before a recession because business owners, aware of an impending downturn, borrow as much as they can to secure funds before banks tighten their credit standards. This increased demand for funds pushes interest rates up.

What role does the Federal Reserve (Fed) play during a recession, according to the script?

The Fed often acts too late, tightening rates even as the economy shows signs of trouble. They typically realize the economy is in a recession only after it has begun, and they may eventually pivot to rate cuts, not because of a successful 'soft landing,' but because they over-tightened.

How does the script compare the current situation to the events of 2018?

The situation is compared to 2018, where the Fed continued tightening rates even as the stock market dropped significantly, culminating in a 20% drop. This event shows that the Fed does not prioritize the stock market but rather focuses on avoiding 'disorderly' markets.

What does 'disorderly' markets mean for the Fed, and when do they typically react?

'Disorderly' markets refer to drastic, rapid declines that could lead to a market collapse, as seen in the fall of 2008 or March 2020. The Fed reacts to such market turmoil, not just gradual declines.

What does the script suggest about the unemployment rate and its correlation with recessions?

The script notes that the unemployment rate, currently at a low of 3.5-3.6%, is a lagging indicator. Unemployment typically rises after businesses have already adjusted to economic conditions, such as layoffs, which often occur too late to prevent a downturn.

How does the Federal Reserve view the relationship between inflation and unemployment?

The Fed believes in the Phillips curve, which suggests an inverse relationship between unemployment and inflation. According to this theory, if unemployment is low, inflation will rise, and the Fed feels it must raise unemployment to curb inflation, even though this theory is considered flawed by many.

Why is the real wage growth not as positive as it seems?

Real wage growth has been negative because while nominal wages have increased by about 5%, inflation has outpaced that, leading to a decrease in real wages. The script emphasizes that while nominal wages are up, they aren't keeping pace with inflation, reducing workers' purchasing power.

What is the labor force participation rate, and why is it important in the context of the recession?

The labor force participation rate, which measures the proportion of working-age people employed, is currently around 60-61%. This rate has decreased over the years, and if the millions of people not in the workforce were counted as unemployed, the unemployment rate would be closer to 9%, indicating a much more severe economic situation.