via WSB:
I’m an old timer here — been a member of wsb through the last 12 recessions. In case it’s not clear how it will unfold, or anyone thinks there’s a chance we will have a soft landing, heres how it all happens — a tale as old as time. Also note how if you take the time to check, everything I say is strongly supported by decades of data.
STARTING STATE
- The economy starts out strong, real strong. This is indicated by:
- Very low unemployment – fred.stlouisfed.org/series/UNRATE
- Potential real gdp (Maximum capacity) divided by actual gdp (current operating capacity) is close to 1 (have to divide by real gdp yourself) –fred.stlouisfed.org/series/GDPPOT
- Credit conditions are loosey goosey and everyone is buying houses and cars ON CREDIT (see 2021) – fred.stlouisfed.org/series/DRTSCLCC
THE INFLECTION POINT
- Obviously, the fed is like wtf everyone is employed to the tits, but inflation is like 8%. We need to keep inflation anchored or else everyone gets fucked. Lets fuck the poor so they lose their jobs, demand collapses, and the rich/upper middle class stay happy. To do this, they raise the fed funds rate, making debt reaaaally expensive – fred.stlouisfed.org/series/FF
- The above changes credit conditions. The economy doesn’t run on cash. It runs on credit. By raising the fed funds rate, banks are forced to restrict access to credit, the yield curve inverts, and it makes much less sense to make any investments that would yield cash flows far into the future – see the tightening in action: fred.stlouisfed.org/series/DRTSCILM
And the yield curve which has never been wrong (set time period to max): fred.stlouisfed.org/series/T10Y2Y
THE PAIN (To be seen)
- When credit dries up, businesses start laying people off in anticipation of less access to the debt they’ve been using to pay salaries. Whats literally happening is future money becomes worth less and less desirable to pursue – so theres no need for all those workers chasing it. fred.stlouisfed.org/series/UNRATE
When unemployment upticks, people get scared and stop buying shit they don’t need. This change in retail behavior is also a clear sign of a recession. (use yoy percent change as your indicator – click EDIT GRAPH to change the scale) fred.stlouisfed.org/series/RRSFS
And the fed, if they are ballsy, will keep their foot on the neck of the poor until they have completely given up and demand from working people is crushed. Thus inflation returns back to 2%.
SUMMARY
That, my friends, is how the economy works. That is what is currently unfolding. 1. Start Strong -> 2. Fed Tightens 3. Credit Conditions tighten in the retail space -> 4. Mainstreet feels the pain. We are in the middle of stage 3, where conditions are tightening but it hasn’t been felt on main street yet. THIS IS IMPORTANT BECAUSE THE STOCK MARKET STILL THINKS THE ECONOMY WILL SURVIVE. This bear market so far has been all about adjusting discounting rates of discounted cash flow valuations while keeping projected earnings the same.
A recession will happen, and it will start getting priced-in in the next 6 months or so. The key indicators to watch are for a change in trend in unemployment (.3-.4% uptick NOT the nominal rate), and real retail sales yoy % change coming in at -1% or so. Those two things will indicate a recession roughly in the next 3 months. The above FRED links have recessions marked in gray. Check for yourself.
The economy operates in cycles of stages 1-4 over and over and over. No need to be surprised by it.