How Vicious Will The Recession Be?

The Recession Will Be Deeper Than You Expect

The average American and politicians seem to think the economy is fine. Fed Chairman Powell talks about how strong the labor market is to support his contention that the economy is strong.

But cracks are appearing in this façade.

• We just technically went into a recession with two consecutive quarters of negative GDP.
• Consumer expectations are plunging
• The housing market is starting to crack

But how deep will it be? Will it be 2008 all over again? Or milder or a depression?

I’ll give you my opinion another day. But today, I want to focus on what the bond market thinks.

I could give the case that the bond market is the smartest market there is. I don’t know if I would win that argument but I could make a good case for it.

The chart shows the difference between 3 month treasury bill yields and the ten year yield. This is the 3 mo/10 year yield curve.

There have been 18 recessions since World War II. This yield curve has predicted each and every one of them. As you can see, we are there now.

But notice the absolute collapse in the curve. The curve just fell off the edge of the table. No controlled drop. Nope, A collapse.

Why?

And how do we make money from it?

The collapse occurred because the two ends of the curve went in opposite directions! Rare!

The Fed is raising the yield on 3 month bills but the 10 year yield dropped sharply.

But why are long yield collapsing?

The only possible answer is that they believe:

1. The Fed policy will cause a recession
2. The recession will be deep and vicious
3. The recession will cause inflation to collapse from the current 9.1% to less than 2%

I need you to think about how deep and hard the recession would have to be to cause inflation to drop so much in such a short period of time.

I think the bond traders are looking for a recession worse than the Great Recession of 2008! I’m not ready to say they are looking for a depression but something worse than 2008 will be at least approaching a recession.

Right now, the stock market is in the middle of a tepid seasonal rally, But that rally ends soon and we get a seasonal drop into fall.

The way to make money will be to:

• Sell stocks in August like QQQ
• Buy bonds now like TLT
• Sell housing stocks like XHB

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