Today, I want to clarify how recessions begin. You need to understand the fact that although unemployment is incredibly low right now, that a record number of Americans are employed, that the stock market is nearing all-time highs again, and that Trump’s approval ratings have touched a record 45%, we’re actually getting closer to a recession.
The important thing to understand is that all economic conditions are directions, not static situations.
In other words, a recession is not defined by “10% unemployment” or by “20% correction in stock prices.” Rather, the definition has to do with the trend of events.
When people go to a party, they get drunk and feel elated by the music, the atmosphere, and the entire occasion. But when the alcohol wears off and they get that “ordinary” feeling again, they vainly try to revive the rush of that alcohol in their bloodstream, since the chemical reaction is unique.
When the alcohol is finally out of your system, you are as healthy, content, and happy as you were before the party, only you don’t feel that way sometimes.
In the same way, the economy doesn’t need to go from 3.8% official unemployment to 5.3%, sacking millions of people, before we declare a recession. Historically, the rise of 0.3% from today’s 3.8% to 4.1% is enough to confirm the trend is in motion.
That’s enough to make it a recession, since firing even 0.3% of the working class creates a multiplier effect.
In fact, the tight jobs market is the enemy of expansion. When an economy employs every person who wants a job (7 million openings and 6 million officially unemployed and looking for work) as the U.S. does, productivity peaks.
It’s the moment when the alcohol has made a person feel high enough to enjoy it, but not too loaded to start vomiting.
If he continues, like President Trump is demanding by launching QE4 and cutting rates meaningfully, he is playing with his luck.
Courtesy: U.S. Global Investors
This chart shows how this century (the past 18 years) has been incredibly confusing for investors. Notice that had you diversified among various asset classes, you’d make a great return, even accounting for inflation, when not touching your positions at all.
Seriously, throw a dart and you’d beat inflation!
Yet, despite the incredible likelihood of becoming wealthier, as the world advanced and talented leadership teams innovated and created a larger pie of wealth, the average investor came in last place with a lousy 1.9% annual return.
The reason this happens is because most people trade in and out like it’s a game. I am a disciplined compounder of wealth and hold positions for years – even decades – unless a MATERIAL change in the underlying asset dictates a change in strategy, rather than a shift in short-term sentiment (which guides most people).
For instance, in theory, if I hold shares of Disney and Russia declares war on a religious group in its region, I do nothing, even if the stock goes down.
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The S&P is now up almost 25% since its Christmas Eve plunge.
These are all signs of alcohol in the system. Once it starts to wear down – and it will very, very soon – the change will be instant
Trump is attempting to prolong the fun, but it could backfire in a horrible way.
Smart Money truly understands that, politically and monetarily, neither Trump nor the FED will go down without a fight.
This is the reason that commodities have started 2019 on a tear, as the chart shows.
This will accelerate going forward, as powerful forces would rather see inflation going to 3%-5% than letting it slide into zero growth.
This is the riskiest period since the Great Financial Crisis – make sure that unlike most Americans, you are sufficiently capitalized for a less certain, more expensive world.
Research Partner, PortfolioWealthGlobal.com
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This work is based on SEC filings, current events, interviews, corporate press releases and what we’ve learned as financial journalists. It may contain errors and you shouldn’t make any investment decision based solely on what you read here. It’s your money and your responsibility. The information herein is not intended to be personal legal or investment advice and may not be appropriate or applicable for all readers. If personal advice is needed, the services of a qualified legal, investment or tax professional should be sought.
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