Private equity billionaire David Rubinstein founded his firm in 1987. Before getting into leveraged buyouts, he actually worked at the White House under Reagan in the early 1980s and told a funny story about how politicians treat a recession as a suicidal word to utter publicly.
He recalled when a financial advisor to the president told Reagan that the economy was definitely slowing down into a recession, to which the president replied that he didn’t want to hear the “r” word.
He told this advisor to say “banana” instead, so when the topic of recession came up, they all said the U.S. was headed into a banana.
This story illustrates how hard it is for the leader of the free world to admit a recession is here under their watch.
Courtesy: Morgan Stanley, Zerohedge.com
The reason that 2022 has been so bizarre is because we’ve reached the limit of what zero-percent interest rate policies can do for our economy. In hindsight, they probably should have ended a long time ago before the mental build-up of the consensus that there’s a FED put in place and that governments will always come to the rescue.
This is not a classical recession; you can see how the unemployment numbers remain low even as the stock market suffers its worst year in a long time and bonds are undergoing their worst year since 1920.
The reason is that what central banks are essentially doing is saying, “Guys, our fault or not (and IT IS theirs), there’s too much credit out there and the free markets can’t find good uses for them, so everyone’s spending like it’s nobody’s business, so we need to stop this party before we all drop dead.”
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The reason the markets are plummeting is because there’s now a realization that many businesses worked and thrived only when there were zero-percent rates in place, while other stocks are plummeting because investors were playing around with funds that they actually needed for something else but thought they’d invest in the meantime… again, this was a euphoric thought process.
Finally, we’re starting to see that this process of raising rates and shrinking the available credit is sinking in and the average person is now convinced that much of this spending euphoria and excesses are behind us:
The issue is that not all people change at the same time. While some of us have already come to grips with the fact that the goldilocks days are gone and that we may have been too careless with our financials because we too got sucked into this thinking that markets only go up, others are still at it and spending every dime they have and not considering that life isn’t that simple.
The FED wants to bring to an end the excessive feeling of the wealth effect, the comfort level that many have been operating with, and wants corporations and households to be more selective with their expenses to curtail the inflation they were late to react to and stop.
The markets are now completely persuaded that the FED is going through with its plan:
Courtesy: Zerohedge.com, Bloomberg
The bottom in the markets will be formed either by plummeting inflation without actually seeing massive layoffs or, if Europe and China can’t fix their own problems, we’ll see a terrible recession here in America.
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