I believe we are already in a “recession,” but for reasons not seen during any other recession in my lifetime (nor my parents’ or even my grandparents’ lifetimes). I know hundreds of business owners. They reside both in our country and abroad. They all tell me the same story. Their business is experiencing record profits, and the only things holding them back from being even more profitable are the inability to obtain more inventory and a lack of employees. Meanwhile, the laborers themselves are on average earning record pay. Target is starting new employees at $24 per hour (that works out to $50,000 per year). In addition to my job as the owner of a Registered Investment Advisory firm with clients in nine countries, I also serve as Commissioner of the Virginia Beach Parks and Recreation Department. We currently have over 100 job openings for a myriad of skill levels. We just raised the pay for lifeguards to $16 per hour from $12 and our pay scale for people working at our after-school care programs begins at $16 per hour. And yet we have significant job openings. Clients tell me they hire new employees at the highest pay they’ve ever offered, only to watch them quit mid-day a week or two later for an even higher paying job.
All this is to say this is the craziest recession any of us have ever seen. Every recession that you and I have experienced has been where businesses are losing money, and laying off employees, and workers are having to accept lower pay at their new job than they were previously earning. This recession is one where employers and employees are making more money than ever. And according to the Fed, cash in their bank accounts is at an all-time high, with debt levels at the lowest level since the 1950s.
So, the question is, what gives?
Well firstly, I do not believe we are going into a depression. In my opinion we are not even going to see a deep recession like we saw in 2008. Both individuals and corporations are in the strongest financial position they have been in for at least well over 100 years. Two years ago I publicly stated that contrary to what was being said by “financial experts” on TV and in the print media, we would not have a recession in 2021. On the contrary, I said 2021 would be a “banner-year” for the economy. That surging economy would lead to more demand than there would be things available for us to buy (thanks to nothing being built during the COVID shut-down). This would cause inflation to surge in the first half of 2022 as we competed against each other for houses, cars, appliances, and everything else we wanted to buy. The resulting increase in inflation would cause the Federal Reserve to rapidly raise interest rates (and though I foresaw those interest rate hikes, I never imagined the Federal Reserve raising them as rapidly as they have. . .this being the fastest increase in interest rates since the Federal Reserve was created over 100 years ago).
I went on to say that the supply problems would begin to ease after the summer of 2022, thus causing inflation to start waning in the fall and winter of 2022. That would then cause the Federal Reserve to do an about face and start lowering interest rates in 2023. While we don’t yet have the data on the accuracy of my forecast for the rest of 2022 and for 2023, so far my “against the mainstream” forecast has been correct and on time.
As for stock and bond prices, I will need to use an analogy to best explain my thinking. Let’s say I have a used car that I am selling to you. We both agree that $10,000 is a fair price. Just prior to you writing the check to me you stop and say, “Hold on Joe. Look at those tires.” I say, “What about them?” You say, “I am going to have to replace those tires, and four tires for that car will cost $1,000. I am not buying this car from you when right away I will have to buy new tires.” I reply, “I disagree with you. Those tires will last you another two years. They are fine.” You say, “I am the one writing the check, and I think they will need to be replaced so I’m not giving you the full $10,000.” If I offer to knock $1,000 off from the price and sell you the car for $9,000, then even if you are right about the tires, we have factored that eventuality into the price.
According to MCM research, depending which indices you use, the stock market has declined in value between 25% to 35% in only nine months. That is an enormous decline at which we value American businesses. This is especially true when one considers that they are simultaneously announcing record earnings. A sharp decrease in the market value of a business combined with a significant increase in the business’ earnings tells me that we have not only factored in the new tires that may or may not be needed, but we have also priced in new brakes, shock absorbers, a tune up and an oil change. In other words, I believe the recession will be a shallow recession. Even if the recession is deeper than I forecast (i.e. we actually do need new tires), in my opinion we have already priced in the consequences and so the stock market shouldn’t go down much further.
Even though my forecast has occurred on the anticipated timeline, it remains difficult to forecast the exact timing of when the stock market will conclude its decline and resume its uptrend. I believe that we either have already hit bottom or are very close, both in consideration of time and price but as I previously said, that is something I cannot guarantee.
Historically the stock market has an upward bias. We have experienced recessions, wars, political changes, scandals, shortages, inflation, and even “The Real Housewives of New Jersey,” But overall the stock market has kept climbing. Think of it like this: In the short term the price of a loaf of bread or a new house may fluctuate up and down, but over time their cost, like nearly everything else, has gone up. Likewise, the companies that make those things over time charge more money and subsequently make more money. And companies that make more money tend to be worth more money. With no guarantees, I believe that if we haven’t hit the bottom of this year’s decline in financial assets, then we are within 10% of the bottom, and even in a worst case scenario no more than 15% from the bottom. Of course, that is just my worst-case scenario; I do believe we are much closer to the bottom than that. My current forecast is that at current prices for American corporations, the buying opportunity is so attractive that market returns over the next ten years should result in an increase of between three and five times the current market valuation.
I know I have said a whole lot in this commentary, so if you would like to talk about it and/or have me show you on Federal Reserve websites where I see some of the numbers I have quoted, let me know and I would be more than happy to schedule a time. Always remember, I work for you. You don’t work for me.
Information contained in this report does not purport to be a complete description of the developments referred to in this material. This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Opinions expressed are those of Joseph A. Monaco, PhD. They are based on findings from sources he believes reliable but upon whose accuracy he cannot guarantee. There is no assurance that any of the trends mentioned will continue and does not constitute a recommendation. The S&P 500 is an unmanaged index of widely held stocks that is generally considered representative of the U.S. stock market. U.S. government bonds and treasury bills are guaranteed by the U.S. government and if held to maturity offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Additional information, including man-agement fees and expenses, is provided on Monaco Capital Management, LLC’s ADV Part 2 available on request or on the SEC’s Investment Advisor Public Disclosure site. Past performance is not a guarantee of future results.
