Two huge news stories happened this week. Jerome Powell announced a new rate hike in the Fed Funds rate, and we received a positive US jobs report. We are going to discuss what both of these mean, this week on Wolves and Finance.
Let us start with a quick disclaimer: This video is educational purposes and is not investing advice. Investing is risky. Please talk with a professional investment advisor before putting your money at risk.
In this video, I am going to explain what I think is happening in the economy right now.
Most people who follow business news fall into one of two groups: the Bulls and the Bears. The bulls think the stock market is going to go up, and the bears think the stock market is going to go down. This is one of the central questions about the stock market today.
I want to focus on two different people in this conflict: Jim Cramer and Michael Burry. Jim Cramer is a CNBC TV personality. He has said that he thinks we are in a bull market. This is a news headline published on Jan 31 from CNBC. “Jim Cramer says we’re in a bull market, so buy on the dip.”
Michael Burry takes the opposite perspective. He is a hedge-fund manager at Scion Asset Management. He is well known for correctly forecasting the 2008 financial crisis. In 2008, he shorted the market by holding credit default swaps. He made his investors $700M and a personal profit of $100M. He believes we are in a bear market as shown in this tweet from Jan 31: “Sell.” Unfortunately, the stock market went up dramatically in the days following his tweet, and Michael Burry received a lot of hate on Twitter and, shortly after, deleted his entire Twitter account. But we know that he strongly believed in his position. As a portfolio manager, Michael is required to report his stock holdings to the SEC. So we know, from his 13F-HR filing that he sold all but one of his stocks last August, representing millions of dollars.
I want to dive into what makes the bears and the bulls different on what they see in the markets. Everyone agrees that there are weird things going on in the economy. The general consensus is that we over-reacted during the COVID lockdowns. We used more stimulus than we needed, the Fed reacted too slowly, and now we face high inflation. Where the bears and the bulls disagree is on what happens next.
Let us go back to Jim Cramer. Jim Cramer represents the majority opinion on Wall Street right now. Jim is friends with many people on Wall Street in investment banks. When he is reporting on CNBC, he is just repeating what all his friends are telling him: That everything is looking up in the market. There are a couple of reasons for this. Jerome Powell, chair of the Federal Reserve just raised rates by 25 basis points, instead of the 50 basis points they did last quarter. The speed of rate increases is slowing. The market takes this as a sign that inflation is slowing, and that is good for the market. Also, we just saw an incredible jobs report with very low unemployment. Recessions generally happen during high unemployment, not low unemployment. The bulls think that we have conquered inflation, and the market is going to increase. I would say the majority of people on Wall Street believe some version of this story.
I will tell you that I disagree. I am on the side of the bears, and Michael Burry. I think inflation is not over and we are heading into a recession. Let me lay out the reasons why. The jobs report is misleading. A lot of jobs were created in January, but the total amount of jobs in the US is not much higher than before the pandemic. When Trump was president, the US had 152M jobs. Now we have 155M. That is not much of an increase. You also have to look at all the workers being laid off. If you lost a cushy job at Twitter, and have to take a new job working at Starbucks as a barista, it is true that you still have a job, but you are not happy.
Next, inflation is likely to continue. Inflation was the result of us putting too much money into the system. You can see this by looking at a chart of the M2 money supply. You can see the rapid increase after the pandemic. This has only decreased slightly. This must decrease a lot more before inflation stops. I think we are doing all the right things. I just think it will take longer to correct. The bulls think inflation will be over in six months. I think inflation will likely take several years to correct.
Finally, there is an increasing risk of global conflict. Every month it seems like the threat of war all over the world increases. Imagine that China sends a spy balloon floating over the US. And let’s imagine that balloon holds an EMP bomb that detonates and the entire country loses electric power. That would cause a recession.
So let us look at the assumptions side-by-side.
- Jobs – bull – low unemployment / bear – misleading metric
- Inflation – bull – over in six months / bear – over in two years
- Global conflict – bull – none will happen / bear – likely to happen
When you look at these assumptions, my opinion is that the assumptions on the bear side are more likely than the bull side. And you have to remember that Jim Cramer and all of his Wall Street friends are the same people who did not see the 2008 crash coming. They are the same people! So they do not exactly have the best track record.
There is one other thing that convinces me a recession is coming. We have never addressed the real problem in the US which I have talked about many times. There is just too much debt. The Fed Funds rate was at zero for years after the 2008 recession. That created too much easy debt. Companies took out massive loans and invested them in questionable business ventures. Now that the Fed Funds rate is much higher, all those companies cannot refinance those loans without paying higher interest which they do not have. All the bad loans are going to default, and if there are too many defaults at the same time the banks will not be able to handle it. I think the Federal Reserve will maintain higher rates for longer than anyone expects, which will cause defaults and recession.
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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.
Sources:
https://www.cnbc.com/2023/01/31/jim-cramer-says-were-in-a-bull-market-so-buy-on-the-dip.html