House of Cards

House of Cards

Despite what the Biden Administration and Federal Reserve would have us believe the U.S. is in a recession. The Atlanta Fed estimates Q2 Real GDP at -1.2% and we will get the official Real GDP figure Thursday July 28th at 8:30am ET. The official figure will be revised in the weeks to come (probably downward). Q1 Real GDP was -1.6%. Two consecutive down quarters is a recession despite the political spin from those in office (both elected and unelected officials).

We see the U.S. economy playing out in one of two ways:

  • The first scenario would be marked by a deep recession (worse than the Great Recession of 2008), followed by a period of Real GDP growth as the economy slowly recovered. Inflation would likely find its way down to 3-4% by 2024. Debt-to-GDP would remain elevated above 100%.
    • If there was to be a fiscal response subsidized by the Fed plus a strong QE response we would see:
      • 1.) Rapid Nominal GDP growth;
      • 2.) High inflation (higher than today’s level) and;
      • 3.) Elevated Debt-to-GDP – all three measures more pronounced than the post-COVID recovery period of 2H 2020 and 2021.
  • The second scenario would be marked by muted Real GDP growth alternating with mild Real GDP contractions:
    • Real GDP between -1% and 1%;
    • Persistently high inflation (we would not see a 2% CPI this decade);
    • Elevated Debt-to-GDP levels;
    • Interest Rates would eventually have to rise substantially to reduce inflation, in which case we would have a multi-year scenario that played out like the inflation-plagued 1970s.

It is too early to know which of the two scenarios will play out. However, we do know that:

  • The Fed has lost its battle against inflation (too little too late);
  • The U.S. is in a recession;
  • Investors appear to be happy with muted growth from companies so long as those companies are reporting figures within the guidance range (valuations be damned);
  • Companies are executing hiring freezes and job cuts yet this news is ignored as investors prefer the rosy, backward-looking, Government reported jobs figures.
  • There are few positive economic catalysts.
  • Fed Chair Jerome Powell is a political animal and a shill.