You Say You Want a Recession

Lee Arnold

CEO

YOU SAY YOU WANT A RECESSION, WELL YOU KNOW... WE ALL WANT TO CHANGE THE WORLD…

It is unlikely that the Beatles would have envisioned the British Pound sinking to historic low levels against the U.S. dollar, but that is exactly what happened this past week.

It is entirely possible that the genesis of this may be from overzealous, anti-inflationary?measures taken by Federal Reserve Chair, Jerome Powell, who warned that a “soft landing” was highly unlikely for the United States economy.

The actions taken by the Federal Reserve to raise interest rates by .75 basis points—it’s third such activity in the last six months—will cause additional pain for both consumers and corporations.

While the goal is tempering the red-hot real estate market, the ancillary effects will be felt by mortgage lenders, builders, suppliers, and everyone else involved in the real estate markets.

Under Chair Powell’s guidance, the goal is to slow the economy, which seems counterintuitive. While inflation may be tamed, the stock market will continue to take a beating.

The monetary gains in the market were not relegated purely to the “top 1%” either.

College funds, retirement plans, pension plans, all benefited from the wealth effect of a positive trending market.

While the goal is tempering the red-hot real estate market, the ancillary effects will be felt by mortgage lenders, builders, suppliers, and everyone else involved in the real estate markets.

Without getting into the notion of a “trickle-down economy,” the positive wealth effects ranging from buying or refinishing an existing home, to dining out more frequently, travel—all benefitted from a stimulated economy.

Now the specter of the dreaded “R Word”—Recession—is bandied about by every talking head and market pundit with the panache of the latest offering from the Venice Film Festival.

Market players such as hedge funds and institutional investors were used to an accommodating Fed and relatively easy money. Those days look to be long gone as the market tumbles into bear territory.

Unfortunately, the pain felt by “professional” investors is nothing compared to what could be in store for the average worker.

Layoffs have been announced almost daily by companies traditionally thought to have been safe havens, like Apple, Google, and J.P. Morgan.

Many companies, still reeling from the fallout in corporate real estate due to the work at home movement, are going to continue to reduce headcount. Once-flush employees who were the engine that drove the real estate market, will now find themselves struggling to pay higher interest rates, and in many cases foregoing home purchases.

ALL WE ARE SAYING… IS GIVE POWELL A CHANCE…

According to the Fed, inflation was transitory.

The jury remains out as to whether these maneuvers have been overly aggressive or will have significant effects including a severe recession.

Wharton School of Business Professor Jeremy Siegel has been incredibly frustrated with the Fed Chair’s moves and lambasted him on CNBC stating, “Powell owes the American people an apology for mishandling inflation.”

It did make for “Must See TV” in the finance world, but there are others who have echoed Professor Siegel’s comments, with most opining that the Fed clearly hasn’t learned anything from most boom/bust cycles in the past.

The flooding of the economy during the pandemic, coupled with supply chain issues were the perfect storm for prices to rise. This should have been readily evident to the Fed who had the opportunity to tighten monetary policy early on, potentially tapering any inflationary effects before they truly affected the average citizen.

As is often the case, the working/middle-class will be the ones who most likely bear the brunt of the Fed policy adjustments.

A long-lived recession will see the record low rate of unemployment flipped on its head very quickly.

ALL YOU NEED IS LOVE… (AND A SOFT LANDING)

It is possible that the Fed’s action may have the intended consequences to staving off inflation.

It may not be the soft landing originally envisioned, but there is room for a middle ground.

Recessions may come and go; the Fed?DOES?have at its disposal the opportunity to cut rates when the dust settles, and the effects of the previous monetary manipulations have had a chance to run their course.

As in any other economic period of uncertainty, there will be?investment opportunities?as well as time to reevaluate overall holdings and allocations.

Panic and knee jerk decisions work about as well as market timing—which is to say—not at all.

Like the Beatles said, “And in the end, the love you take, is equal to the love you make.”

They were singing about knowing when to invest and when to take profits.