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Recession Is Coming: Should You Be Concerned?

By Sunshine Profits (Arkadiusz Sieron)CommoditiesJun 24, 2022 11:21AM ET
www.investing.com/analysis/recession-is-coming-should-you-be-concerned-200626261
Recession Is Coming: Should You Be Concerned?
By Sunshine Profits (Arkadiusz Sieron)   |  Jun 24, 2022 11:21AM ET
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It’s certain that the recession will come eventually. The questions are: When? How will it impact the market? And, are there any reasons to be afraid?

Is a recession coming? Yes, it is! Recession is a normal part of a business cycle, so, yes, the current phase of economic boom will eventually turn into recession. That’s for sure.

The more tricky question is about timing: Is a recession just around the corner, as more and more economists and analysts worry? Well, there are some disturbing economic signals worth looking at. First, in the first quarter of 2022, the real U.S. GDP decreased 0.4% compared to the Q4 of 2021 (see the chart below), or 1.4% at an annualized rate, according to the advance estimates by the Bureau of Economic Analysis. The decline in GDP is always scary, but this time it shouldn’t be, as it resulted mainly from an increase in the trade deficit, i.e., the widening difference between exports and imports.

Real GDP Chart.
Real GDP Chart.

What happened is that supply chains improved, so imports of goods surged, causing the GDP to drop, as exports are added to the GDP while imports are subtracted from it. However, this is likely to reverse, as businesses won’t build inventories all the time. Moreover, consumers are switching their spending from goods to services, while China’s new lockdowns will cause fresh distortions in the supply chains, which will also reduce imports. Thus, the recent decline in GDP doesn’t signal a recession.

Second, the yield curve has inverted. As the chart below shows, the spread between 10-year and 2-year Treasuries turned briefly negative at the turn of March and April. The inversion of the yield curve is probably the strongest recessionary indicator, so it should be taken seriously.

U.S. Treasury Spread (10- And 2-Year).
U.S. Treasury Spread (10- And 2-Year).

However, the spread between 10-year and 3-month Treasuries didn’t invert (neither the difference between 10-year yields and the federal fund rate). Actually, this spread became steeper in April, and is well above the negative territory, as the chart below.

U.S. Treasury Spread (10-Year And 3-Month).
U.S. Treasury Spread (10-Year And 3-Month).

This is very important as this maturity combination is believed to be the most accurate recessionary indicator, better than the use of 10-year and 2-year yields. In 2019, both curves inverted, which provided a much stronger recessionary signal. Hence, I wouldn’t use the recent brief inversion as a justification for strong recessionary calls, at least not yet, and I would wait for other confirming signals.

Third, there is a big correction in the U.S. stock market. As the chart below shows, the S&P 500 Index plunged 18.7% from its all-time high in January, while Dow Jones sank 15%. Many people define a bear market as a situation when prices fall 20% or more from their recent highs. So, although we haven’t reached the bear market, we are very close to it.

S&P 500, Dow Jones Long-Term Combined Chart.
S&P 500, Dow Jones Long-Term Combined Chart.

However, even if there is a technical bear market in stocks, it doesn’t have to imply an imminent recession. As the old joke goes, “the stock market has predicted nine of the past five recessions.” Bear markets are a normal part of the stock market’s functioning, and they don’t have to indicate economy-wide recessions.

Last but not definitely least, high inflation reduces real wages for most workers, negatively affecting spending and market sentiment. To combat such a high inflation, the Fed would have to hike the interest rates to a level that risks triggering a recession.

What does it all mean for the precious metals market? Well, gold generally shines during periods of economic crisis, so the upcoming recession would be great news for the yellow metal. But I don’t see it in the data yet, so, we will have to wait a little longer for the next rally in the gold market.

However, gold bulls shouldn’t feel disappointed. The economic outlook is generally gloomy. Economic growth has slowed down – the IMF cut its forecast for global growth this year to 3.6% from 4.4% expected in January and from 6.1% in 2021 – while inflation is still above 8%. There is a war in Europe and the Fed is tightening its monetary policy and financial conditions. Such a mixture won’t end well, and – given how high is inflation already – I don’t believe that the Fed will engineer a soft landing.

Actually, I would say that a recession is almost certain within a few years – what is unsure is its reason. There are two options. The first is that the Fed will bring inflation under control. However, to do this now – when inflation is already high – it would have to raise interest rates and tighten monetary conditions in an aggressive manner that would likely cause a recession. The second scenario is that inflation remains unchecked and would produce sufficient economic distortions to lead to the recession on its own. One way or another, an economic downturn is coming!

Hence, my bet is that the next year – when the Fed’s tightening cycle will be much more advanced or even already ending, and we will be closer to recession – will be better for gold than 2022.

Recession Is Coming: Should You Be Concerned?
 

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Recession Is Coming: Should You Be Concerned?

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Comments (8)
khoun Mengheng
khoun Mengheng Jun 26, 2022 7:33AM ET
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so what is the gold ways for this week eventually boss
Dave DoggyDogg
Dave DoggyDogg Jun 25, 2022 11:15PM ET
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author said "In 2019, both curves inverted, which provided a much stronger recessionary signal. Hence, I wouldn’t use the recent brief inversion as a justification for strong recessionary calls, at least not yet, and I would wait for other confirming signals" not sure what he was trying to imply but they inverted and indeed there was a flash recession in 2020 that was minimal due to fed QE which because if that QE its actually now going to make the next upcoming recession even worse. The bigger the bubble gets the bigger the mess when it pops.
Samer Diab
Samer Diab Jun 25, 2022 4:46PM ET
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great article. finally someone who mentions the 10 year 3 months. I believe we bottomed already. let's see
Edward Chong
Edward Chong Jun 25, 2022 4:46PM ET
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far from it.
Samer Diab
Samer Diab Jun 25, 2022 4:46PM ET
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more proof we r at the bottom when everyone is bearish :)
louis muller
louis muller Jun 25, 2022 11:03AM ET
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Biden, the all knowing, says we wont have a recession. I believe him……………..
jack frost
jack frost Jun 25, 2022 7:11AM ET
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More like 2008 were now just going to turn off the stimulus.
JJ JJ
JJ JJ Jun 25, 2022 5:42AM ET
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Recession already started two years ago.
Larry DeAngelis
Larry DeAngelis Jun 24, 2022 2:45PM ET
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He seems to know more about it than Mr. Transitory , All Powell had to do was go to the grocery store to see inflation was rampant.
Dave DoggyDogg
Dave DoggyDogg Jun 24, 2022 2:45PM ET
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"shrinkflation" in the grocery stores... theres a whole interesting subreddit dedicated to "shrinkflation"
jason xx
jason xx Jun 24, 2022 1:26PM ET
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Oh yeah your the authority on whether or not we will have a recession. The smartest economists in the world don't know but thank God you do and you're not just guessing.
Zman Trading
ZmanTrading Jun 24, 2022 1:26PM ET
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He is making qualified «guesses» based on his insight. You don’t have any insight so you might actually learn something…
Peter ONeill
Peter ONeill Jun 24, 2022 1:26PM ET
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Are these all the same 'smartest' economists who constantly get it wrong and every year have to readjust their previous estimates - including for over 2 years about Inflation and how long it would last??? ;). As the saying goes - asking 1,000 economists a question and they will probably come back with 1,000 different answers.
louis muller
louis muller Jun 24, 2022 1:26PM ET
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The smartest economist in the works said inflation was transitory, you still believe them? And that russia is to fully blame? Just tryibg to see how smart you are
 
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