2022 Recession Incoming?
Many analysts are predicting an incoming recession, is it true?
As the first quarter of 2022 comes to an end, news of an incoming recession have been sprouting all over the news. Even without giving too much attention to news, I believe we have all felt the effects of rising inflation as well. The US have reported a whopping 8.5% inflation rate in the month of March, the highest since December of 1981.
Back in Singapore, the annual inflation rate climbed to 5.4% in March 2022, above market estimates of 4.7%. A cup of iced coffee from Koufu costs $1.90 now. Daylight robbery.
This begs the question, is a recession really incoming? I am going to illustrate what are the odds of a recession, and what we can do about it.
Interest rates have been extremely low since start of COVID as they dropped it to near 0%, which is why the recession in 2020 only lasted 2 months, but interest rates cannot be kept at 0% due to inflation. As mentioned, inflation rates are at skyhigh levels. The central bank is planning to increasing interest rates at 0.25% every few months, but many feel that inflation is too high to be increasing rates at such a slow rate.
Yield on 10Y Treasury Bonds (Yield Curve)
The 10-year Treasury yield is the yield that the government pays investors that purchase the specific security. Purchasing the 10-Y note is essentially loaning to the U.S. government.
This curve has reliably predicted 10/11 recessions since 1955. A forward-looking indicator.
Every time we see it drop BELOW the 0% line; a recession happens after. Recession is indicated by the grey shaded area.
When investors get scared, they buy the 10-Y Treasury Bond to preserve value of their money. When enough investors do that, it drives the prices higher and its yield lowers. It does look like it’s going to hit the 0% line soon, but the feds have said that they will be offloading mortgage-backed securities and treasury bonds, in hopes of increasing the yield, and hopefully decreasing the odds of it going to 0%. However, given how unstable the world is right now (Russia-Ukraine War), this still poses a significant risk.
Real Wage Growth
From data, the average person got a boost of 4.7% on their annual pay, which translates to an increase in $1.46 per hour. This may sound positive. However, if we were to compare with inflation (which is 7-8%), the REAL wage growth is actually -2.3%. These drastically increases odds of recession. This is because when you notice your income going up, yet you are still spending more money than you used to, this means you will cut back on spending so much and hence, contributing to slow growth of economy. This inevitably leads to a recession. The root cause is because inflation is so high that it outpaces wage growth.
Back in Singapore, petrol prices have gone up drastically due to the increase in commodity prices.
History shows that anytime price of a commodity (oil) goes above average, the higher the likelihood of a recession. Specifically, the price of Brent Crude Oil. Anytime the price of Brent Crude Oil goes above $104, there has been a recession.
Why is this so? When oil prices increase, people use less oil and spend less. However, one other more significant reason is because when business to business (B2B) transportation costs also go up, small businesses are more heavily affected. When their profit margins decrease, the odds of recession increase. However, I'd like to point out that this may not be a very good indicator of a recession because the labour market is going quite strong, household net worth has increased and there is a strong consumer demand and spending, as well as decent corporate profits. But this is still a risk worth taking note of.
What can we do?
So, it does sound like the future is bleak, and a recession is incoming. Let us assume the worst and that a recession is indeed approaching. What are some of the actions we can take?
To give the most simple and blunt answer, nothing. Yep, do absolutely nothing. "You must be crazy, you want me to lose my money?" Well umm.. yes(?) and no. As someone in their 20s, I believe that we have an abundance of time to tide through this recession. As a matter of fact, a recession can be viewed as a good buying opportunity to accumulate more assets (good fundamentally sound ones that is). Also, knowing that a recession is incoming, one should stop initiating leveraged positions, but continue to dollar cost average (DCA). Read here to find out why.
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