We’re probably going to have a quarter or two contractions. It’s probably going to happen sort of at the late end of this year – the beginning of next year. Just the real question is how high are the rates between now and then? The setup isn’t very good which is that the investors in the stock market are playing chicken with the fed. Chamath Palihapatia, whether you’re a fan of him or not, has been very accurate in his predictions for what is going to play out in stock markets, crypto markets and capital markets.
Over the past few years, this accuracy has led to huge success for Chamath and a lot of the time he is actually going against the consensus of the market or other investors which is generally the best time to generate wealth. In his latest interview, Chamath explains why he now believes that we actually haven’t seen the worst of it because of raising interest rates. We’re going to see a recessionary contraction ,play out in markets up until the end of the year.
There was a big CPI print, obviously, but there was a report. Probably not many people read it, but it was about home equity and the takeaway was. Since 2020 Americans have taken to 430 and the exact number was 427 billion dollars of equity out of their homes, effectively spent. What it started to make me think about if you look at all of that home equity plus the Stemi checks, plus the unemployment insurance checks? That starts to explain. I think why the labor markets are so tight and why people haven’t gone back to work? There is no motivation because there’s just so much money sloshing around for them to, basically not have to be forced to do any of this stuff that they don’t want to do anymore.
The thing to keep in mind is what’s gone into the stock market? It’s also what’s driven up the price of used cars, new cars all of this stuff. I just think that kind of starts to paint a picture of CPI. What’s really important is it’s probably a little bit more transitory than we may actually think because when you exhaust all of that extra money – that’s a dry powder. There’s not as much inflation to be had. I think most people are now forecasting that inflation is really going to taper off and the big warning sign is that everybody is sort of marching towards it.
As you know, too many excessive rate hikes between now and the end of the year could actually push us into a real recession. We were talking about that before, but the probability is now sort of one and three. We were talking about it so I just wanted to put that out there as something I learned this week that I thought was really important – was the labor participation rate peaked at 67-68 %. But half a trillion dollars (half a trillion dollars of actual spending in the economy) that’s a ton of money to be absorbed!
If people have a couple of hundred grand in their bank account who own homes or whatever – there’s no need to go back to a job. If you don’t feel safe because you still have some coveted fears, you don’t want to commute or you’re just out of the rhythm for two years and you’re enjoying skiing or whatever you’re doing whatever your jam is – maybe there’s no rush to get back! You’ll wait until you exhaust all of that. We’re probably going to have a quarter or two contractions. They’re just at the beginning of a rate cycle and they haven’t been able to impact any real forms of liquidity in the equity market. So, they’re going to attack that. The only blunt force instrument they have is rates.
You could see rates at three and a half percent and that’s going to impact a lot of stuff! The problem is that you know it’s going to be after the economy has slowed down because it’s going to be after a lot of these fake savings. If you will have been depleted when the fed gets involved though they get involved in a brute force way.
Prediction! If we’re definitely headed into an economic slowdown. It`s unknown if it will meet the technical definition of recession but very high negative quarters of growth. So, it is very high chance.I think of recession like Jamal said towards the end of the year if this war is still going on and we get in a recession look out below, this president will be in jimmy carter territory. He began the year at 38 which was in reasonably good conditions of peacetime. If we get recession at war that’s what it’s looking like right now, so this is things are looking pretty dire which is why I keep saying it – the policy this administration should be to try and find a settlement to the situation in Ukraine to this war. We didn’t start it – Putin started it. Let’s be clear, but if there’s an off-ramp, we should be seizing it because we got real problems back home in America and the administration should be focused on our economy and our problems. Europe is going to be the canary in the coal mine on all of this because they feel this pretty severely. There’s a lot of exhaustion amongst European governments and leaders when you start to listen to this rhetoric to kind of find a way to end.
What’s going on over there they’re gonna see a pretty meaningful recession. So, there’s Shamath Palihapatiya and why he thinks a recession is coming in the later half of the year. All the events unfolding this week do seem to back him up, not only is Elon trying to take Twitter private. But from the 10 year to the 30 year it seems like each area of the yield curve looks worse than the next.
This as Chamath has pointed out. It has historically been a sign of a coming recession. In fact, typical portfolios consisting of only stocks and bonds are expecting returns of below 5% for the next decade. But even if the yield curve normalizes, we’re not out of the woods yet. As the Consumer Price Index is skyrocketing as smooth pointed out. It’s already up to 8.5 % but that’s all old news, and if you’ve been keeping up, you also know one of the best ways to counter both of those factors – because I’ve been talking about the amazing qualities of art investing for a while now and judging by the numbers. They have art by the biggest contemporary artists in history Picasso, Banksy, and Basquiat to name a few. What’s incredible about contemporary art, they offer is that it has potential solutions to both of our problems. The yield curve inverted is no biggie. This is an alternative asset with a low correlation to stocks and bonds. Great for diversifying inflation is high-perfect contemporary art, actually, has 36 average price appreciation. When inflation is over 3, so it’s no wonder why you guys flock over there in droves. This art has some amazing investment qualities and I think the idea is genius fractionalized securitized art investing in a price structure tailored to you.
Now Chamath believes that a recession is coming but what does this mean for another one of my favorite asset classes cryptocurrency – analyst Lex Maskovsky. We have some data that would suggest Bitcoin and the crypto markets may not fare as badly as Chamath makes out. As you can see, the Bitcoin exchange reserve on all exchanges has just hit another low. Despite the interest and demand being gone from the market, we are still seeing strong accumulation from high conviction long-term holders. Although, Chamath is correct in that we will see a contractionary period in equity markets because of data like this. Bitcoin and the wider cryptocurrency space will fare quite well.
This article is a transcription of a video made by Jamie Tree
Original video: https://youtu.be/5BtBu17xE6g