The Fed has been aggressively raising interest rates to fight inflation. They are doing so all while the stock market is in a bear market, housing prices are falling, commodity prices are falling. How will their actions impact the economy and you. Many people including Gary Vee, Cathie Wood and Jeremy Seigel all warn that the big issue the Fed is overlooking is Deflation which could lead to an economic slowdown and possible recession.
In this video we are going to talk about deflation. Where are we at in the cycle, What it is, how it impacts you and what you could do now to prepare for a deflationary environment. With warnings of a recession coming from CEOs like Jamie Dimon and David Solomon, make sure you learn the 5 things to do to make sure you are prepared if the economy goes into a recession.
Over the past year seems like all anybody could talk about was inflation. The impact that it would have on the individuals, businesses, and the overall economy. With the Fed aggressively trying fight inflation, the biggest concern is what comes next and what a lot of people are really worried about. It’s not just a recession, it’s deflation.
In this video we are going to talk about deflation. Where are we at in the cycle, What it is, how it impacts you and make sure to stick around to the end where I talk about what you could do now to prepare for a deflationary environment
Before I do, I’m Johnathan Rankin. For over 15 years my team and I have been helping clients plan and execute their retirement plans by focusing on 3 key areas in retirement, maximizing retirement income, optimizing investments and reducing taxes. If you are thinking about retiring or already retired, make sure you subscribe so you don’t miss any of our retirement videos or episodes of our retirement podcast called the retire once show. Now on to the Fed’s next big issue
As you know, the Fed has been aggressively raising interest rates to fight inflation. An issue they are partially responsible for creating by keeping an easy monetary policy at the wrong time. By June 2021 inflation has shot up to 5% and the Fed kept interest rates low and continued to expand their balance sheet. But the Fed didn’t think inflation would last.. they kept using the term “transitory” So they messed up when inflation was getting hot and now they are trying to make up for it by being over aggressive to fight it.
And that’s where we are today.. The Fed warns of pain almost like they want us to be punished for their policy errors.
Now, it seems like the only people worried about inflation is the Fed as the have been tightening aggressively into a bear market in equities, a slow down in real estate, a huge drop in commodity prices, and a very strong dollar which sets up a perfect storm of what everyone else is starting to sound the alarm of the next issue… Deflation
First let’s talk about what deflation is – Deflation is when consumer and asset prices decrease over time. Sounds great right? Things getting cheaper? I mean who doesn’t love a sale.
Prices have been so high, it’s nice when things go on sale and get cheaper. this is actually a lot more devastating than inflation. As prices drop, consumers actually reduce spending because they believe things will keep getting cheaper. This is where falling prices can turn into an economic downward spiral.
Because people delay purchases in the hopes that they can buy things for less at a later date that mean lower spending which leads to less income for producers, which can lead to unemployment and even lower demand because you have higher unemployment and the cycle continues. Which is why deflation is typically associated with economic recessions.
A Recession refers to a decline in economic activity measured by GDP. Whereas, deflation refers to a situation where consumer prices and assets fall over time and is measured by a decrease in the Consumer Price Index. Both, however, result in low investments, low incomes, high levels of unemployment and lower outputs. That’s why a deflationary cycle is typically associated with economic recessions
Here’s a perfect example of this happening right now. Target and Walmart come out and say that they are having to reduce prices due overstock of inventory. And then just the other day, you have Gary Vee posting this video to his audience of over 10 million people.
So many people, underestimating how scary it may get. Having a person with such a large following like Gary Vee, tell his audience to hunker down and hold off on spending, what kind of impact does that message send about future demand. You also have Cathie Wood, the CEO of Ark Invest posted an open letter to the Fed saying the Fed is making a policy error that will lead to deflation. She goes on to talk about how the Fed seems to be basing its decisions on two lagging indicators: employment and headline inflation from official reports such as the Consumer Price Index. Her letter had the support of Elon Musk as well as bond guru Jeff Gundlach.
Then comes wharton School economist Jeremy Siegel who also warned that a hawkish Federal Reserve risks pushing the economy into a depression if it waits for core inflation to return to 2%. The finance professor also believes its an issue the Fed id using a lagging indicator like CPI and cited signs that real prices, including home and commodity prices and freight rates are coming down. He also said that the money supply, a big part to the inflation story experienced over the past two years, recently has experienced the most protracted decline since World War II.
The Fed exploded the money supply in 2020, but inflation didn’t show up until 2021. Interest rates going up take time to work their way through the system.
So you have Cathie Wood, Elon Musk, Jeremy Siegel, Jeff Gundlach and the list goes on and on of highly respected people banging the drum on deflation, but what are the numbers showing?
Used car prices are down over 10% year over year
Commodity prices outside of food and energy have fallen off a cliff
Look at this chart of the most-watched supply chain metrics, they have been falling and close to pre-pandemic levels
Refinancing index has fallen to lowest level since 2000
Home builders sentiment about future sales at its worst level since 2012.
With deflation being a big concern, and the numbers are showing it’s starting to show up, the next common thought is the fear of an economic slowdown or recession
We are already seeing warnings of recession all over the place. From JPMs CEO Jamie Dimon who believes we could see a recession in 6-9 months. To Goldman’s CEO David Soloman warning of a recession next year. To now Bloomberg Economics model is forecasting 100% odds of recession in the coming twelve months, up from 65% in the last update.
100%! So certain, they are leaving themselves no wiggle room to be wrong
They say that the only thing certain was death and taxes, well not according to Bloomberg.
So with all of this, what can you do?
If you are retired, keep cash on hand. Don’t get caught up on the thought that purchasing power is eroded and you’re not earning anything on cash be patient with large purchases.
What if you’re not retired yet?
Keeping cash on hand and being patient on large purchases. But there are other issues you have to think about.
When we headed into a recession or in a recession we start seeing layoffs. Which despite the strong employment data, we are already seeing signs from major corporations like Goldman, Intel and Microsoft that have already announced layoffs of thousands of emplyees. In fact, there is a website that tracks layoffs in the tech sector. YTD, there are 690 startups with over 91000 employees laid off this year.
Now some of that you can’t control, but just to be prepared there are 5 things you can do to prepare yourself for a recession, 1 you can use this time to payoff debt, 2. build up an emergency fund, 3 keep an updated resume, that leads to number 4, leverage LinkedIn. This is your digital resume and rolodex in one spot. Connect with current and former colleagues, build your network, just in case something happens you have an easy way to reach out to people and see who might be hiring. Lastly, update your financial plan. With asset prices down, and potential income lost, you want to see what your financial life looks like under all possible scenarios.
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