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The deflationary forces from the tech stocks breaking in 2021 probably too too big. The the power of interest rates rising and depressing the real estate market. Very negative, slowmoving influence. Renowned investor and co-founder of GMO, Jeremy Grantham has long been regarded as an influential voice in finance.
Grantham's current prediction goes beyond a mere recession and suggests the globe is on the precipice of an unprecedented crisis. Today's video will discuss Grantham's viewpoint on the factors contributing to his pessimistic outlook and explore the possible actions to safeguard yourself from the impending recession.
One, the market's attention deficit. Looking at America, the most outstanding national economy with the largest GDP in the world. Even though the summer showed signs of low inflation, stable job conditions, and increased consumer spending, there are concerns about a possible recession in the United States.
Sometimes the market gets overly optimistic and mistakes short-term rallies as a strong bull market indicator. Despite the risks, the market often remains confident, creating a false sense of stability. I I suspect that they will once again dominate and we will have a recession running perhaps deep into next year and and an accompanying decline in stock prices.
Though a government shutdown was temporarily avoided, the US economy faces several imminent risks of a recession. One of the most reliable ways to anticipate a recession is by looking at the yield curve, especially when it becomes inverted. Currently, according to the New York Federal Reserves model, there is a high probability of a recession within the next 12 months, which gives it an almost 70% chance of occurring.
This is significantly higher than what history has shown. But what does an inverted yield curve mean? An inverted yield curve occurs when short-term interest rates exceed long-term interest rates. In more simple terms, it means that the interest rates on loans or investments with shorter time frames are higher than those with longer time frames.
The inverted yield curve happens when long-term government bonds yield less than short-term bills. Currently, there is a more than 1.5% spread between the yields of 10-year and 3month bonds. This negative spread takes us back to the early 1980s, a period that experienced recessions in 1980, 1981, and 1982.
Drawing comparisons between the current inversion and past downturns raises concerns about the vulnerability of the US economy. two potential S&P 500 crash. Industry experts have highlighted Wall Street's growing complacency regarding the risk of an impending recession. I think the Fed's record on these things is is wonderful.
It's uh almost guaranteed to be wrong. They uh have never called a a recession and particularly not the ones following the great bubbles. They prided themselves in in stimulating the bubbles. They took credit for the beneficial effect of of higher asset prices on the economy. They have never claimed credit for the deflationary effect of asset prices breaking.
And they always do. Analysts now argue that the chance of a recession is higher than at any point in the last 2 years, demanding heightened attention and preparation. The collapse of the Silicon Valley Bank is an indicator of broader banking vulnerabilities. Looking at the stock market, the stock market has been compared to a drunkard trying to walk on a tightroppe, emphasizing its vulnerability to external shocks.
The market's upward momentum appears primarily driven by a handful of stocks, fostering a fragile liquidity environment. Analysts project that the S&P 500 could experience a plunge of more than 20%, surpassing its previous low in October. In a worstc case scenario, the index could potentially plummet by 45% or more, revisiting its pandemicinduced low below 2500 points.
These projections underscore the severity of the potential crash and highlight the formidable economic challenges ahead. One pivotal factor behind a possible S&P 500 crash is the unwinding of economic bubbles. You see, economic bubbles emerge when assets become overvalued and disconnected from their intrinsic worth, leading to an eventual correction.
Looking at the dot bubble in the late 1990s, the dot bubble shook the market as investors poured money into internet related companies, often disregarding profitability or realistic growth prospects. When the bubble inevitably burst, the S&P 500 suffered a significant decline of approximately 50% from peak to trough.
Again, the housing bubble. The mid2000s witnessed the housing bubble, fueled by a surge in subprime lending and inflated real estate prices. The inevitable burst of the bubble caused a cascading effect, triggering widespread financial instability. During this period, the S&P 500 experienced a downturn of 60% reaching its lowest point in 2009.
Well, the repetition of history remains uncertain and can only be determined with time. Another influential element contributing to a potential S&P 500 crash is a broader economic downturn or a drastic shift in market sentiment. Factors such as geopolitical tensions or sudden shifts in monetary policy can heavily impact investor confidence and incite market sell-offs.
The collapse of Lehman Brothers and the subsequent failures of major financial institutions sent shock waves throughout the market. The onset of the CO 19 pandemic in early 2020 further underscored the S&P 500's vulnerability to external shocks. The trend line being slightly generous is 2500 and most of the great bubbles, the super bubbles go below trend and stay there for quite a while.
Uh in the Greenspan era that tendency stopped in 2000. Yes, the NASDAQ came down 82%. Which was fairly brutal. Amazon came down 92. But the Federal Reserve raced to the rescue so loudly and strongly that they stopped the decline in the S&P at trend line. It only declined 50%. 50% is a hell of a big decline, but it was only enough to get it back then to trend.
This time trend is at most 2500. Widespread fear of a global economic recession and uncertainty surrounding the pandemic prompted panic selling leading to a swift decline of around 34% within a few weeks. Four, skepticism of Bitcoin. On the other side of cryptocurrencies, 2022 was challenging for cryptocurrencies like Bitcoin and Ethereum as well as for crypto enthusiasts.
Bitcoin, the largest cryptocurrency, saw a significant decline of about 65% in its market value throughout the year. This decline was unexpected and was caused by various unpredictable events, including crashes in Teruna and FTX and macroeconomic conditions. However, the start of 2023 brought some hope for the crypto market as signs of recovery began to appear.
In July, Bitcoin even experienced a modest increase of 0.39% and reached a price of around $31,000. As of last month, Bitcoin showed signs of a bearish trend, trading below the $30,000 level after briefly surpassing it. The cryptocurrency had been on a path to recovery with a monthly increase of almost 15%.
However, according to the latest charts from Coin Market Cap, Bitcoin is trading at a weekly loss of over 2% at $26,861.19. As from October 10th, the number of bitcoins BTC sold by miners exceeded $20,000, marking a significant record since April 2023. The current situation in the cryptocurrency market is not entirely favorable.
In addition to this, Ethereum ETH Wales have also been selling their holdings. Starting in February, addresses holding a balance of $10,000 to $100,000 ETH, have been selling or redistributing their cryptocurrency. Over this period, more than 5 million ETH, equivalent to around $8.5 billion, were withdrawn from these large wallets.
Bitcoin faces pressure due to inflation concerns, particularly in emerging economies like the United States and the UK. Critics argue that Bitcoin's recent rally may be a bull trap rather than a sustained upward trend. Cryptocurrency experts suggest it could bounce back if Bitcoin maintains its level around $30,000.
However, it's important to acknowledge that Bitcoin is still down by approximately 50% from its all-time high. Looking at the housing market, the US housing market encountered various challenges, but only the Great Depression 2008 resulted in a significant decrease in home values. The housing shortage in the US has created intense demand with more people trying to purchase or rent homes than available properties.
As mortgage rates have risen and housing affordability has declined, year-over-year home price growth has decelerated since 2022. The implication of this trend could be that the housing market is experiencing a deceleration or slowdown. I only specialize in what I call the really great bubbles. If you go back to 1929 to 2000 to Japan and and the housing the housing part of the housing bubble and you ask how did conditions look?
Profit margins look great. The forecast was great. there was no chance of a of a recession. A few months ago, smart people were saying there was a 20% chance of a recession in three years. I mean, it is quite amazing. And what happens after the bubbles break is there's always a recession pretty quickly and um people never get it, people never forecast it.
And and along with the recession comes a drop in profit margins. Five, volatility of commodities. Now on to commodity. The recent decline in commodity prices, including food and energy, has raised concerns about the possibility of a global recession. This comes after a period of inflationary fears dominating the economic landscape, further adding to the confusion about the state of the global economy.
Before Russia invaded Ukraine, global food commodity prices had risen by almost 40% over 2 years. In May 2022, just 2 months after the attack, these prices reached a record high. However, the situation has now reversed with commodity prices expected to decline by 21% in 2023 compared to the previous year.
In terms of food prices, the Food and Agriculture Organization's price index indicates a 22% decrease over the past year. The most significant drop in vegetable oil prices has fallen by 48% due to lower palm, soy, rape seed, and sunflower oil prices. Cereal prices such as wheat and maze have also lost a quarter from their record high levels a year ago.
Six, the impact of artificial intelligence on technology. Implementing AI and machine learning technology has dramatically enhanced productivity and efficiency in various applications. This increase in productivity can result in reduced production costs which can benefit businesses. However, there is a possibility of encountering supply side constraints due to this improved efficiency.
This means that if the demand for goods or services surpasses the available supply, it can lead to inflation. Seven, recessions and their impact. The ongoing recession has raised concerns among economists and investors alike as its effects are expected to extend well into the following year. One critical aspect Grantham highlights is the presence of companies within the Russell 2000 that exhibit no collective earnings and high debt levels.
Such companies face significant challenges during recessions as they struggle to generate profits and meet their financial obligations. This combination of financial weakness and economic uncertainty places them at a higher risk of defaulting on their debts or even bankruptcy. Moreover, the prolonged recession raises concerns about continually low returns or a future bare market.
In simple terms, a bare market is a period in the financial market when prices of securities such as stocks are generally falling or experiencing a decline. A bare market occurs when stock prices decline by at least 20% from their recent highs and are accompanied by pessimism and a lack of investor confidence.
logic about fundamentals takes you to a certain point if you're trying to pick stocks for a three to six month period. But if you take a broader view, we've obviously seen two major bare markets already this century uh where the S&P fell 50% and then 56%. And I believe the signs are there again uh that we're in the second or third inning of another one of those multi-quarter bare markets.
We got very very complacent over the last two years. Um essentially record complacency and record household ownership of stocks. Uh we've already seen some of the longerterm metrics reversing. So I believe that uh we are already uh pretty firmly in a big bare market. Rantham emphasizes the significance of a 50% decline from the peak in real terms.
This decline often triggers a further downward spiral, amplifying the negative impacts on the economy. The danger of simultaneous housing and stock market bubbles is another factor that warrants attention. When both markets experience excessive growth fueled by speculation and high demand, the risk of a significant decline increases.
A burst in either of these bubbles could trigger a domino effect leading to a substantial decrease in asset values and overall market instability. Looking at China, one of the top traders in the world's economy, the slowdown in China's economy is expected to hurt global oil prices. Additionally, deflation within China has led to decreased costs of goods being transported worldwide.
Any further disruptions or economic setbacks within China can reverberate worldwide, affecting trade, supply chains, and overall financial performance. Eight, proactive steps to prepare for a recession. In times of economic uncertainty, taking proactive steps to prepare for a recession is crucial. Grantham recommends investing in quality assets or as he calls them free lunch as a proactive strategy to prepare for a recession.
Quality assets refer to companies with strong fundamentals, solid balance sheets, and sustainable competitive advantages. History has demonstrated that companies with high profitability, stable cash flows, and consistent earnings growth often exhibit better resilience during economic downturns. Job security is another critical aspect to address when preparing for a recession.
Stay updated with industry trends and acquire new skills that are in demand. For instance, taking online courses, attending workshops, or pursuing certifications in your field can demonstrate a commitment to personal and professional growth. Thirdly, focus on the long term. This means looking beyond immediate financial gains and considering investments and strategies to withstand economic downturns.
Make decisions that align with your long-term goals and are less vulnerable to market fluctuations. Four, stay informed and flexible. Follow reputable financial news sources and consult with financial advisors to gain insights into market conditions. By staying informed, you can identify potential risks and opportunities, making informed decisions that protect your interests.
It is often said that history repeats itself, and this holds for economic cycles as well. One famous example is Sir Isaac Newton, who made substantial losses during the South Sea bubble in the early 18th century. Even though he possessed great intelligence, he suffered a significant financial loss. This serves as a reminder that anyone can experience losses if they do not take their finances seriously.
So, do you take your finances seriously? What adjustments have you made in your financial building? Could you share them in the comments section? Give this video a like, share, and subscribe to this channel to elevate your knowledge. If you're genuinely committed to evolving into a new version of yourself, watch the next video.
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