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hey folks welcome back to the channel this is Jason host of fighting words financial and let's talk a little bit more about the economy now if you've been watching any of my live streams over the last couple of weeks I've been talking about how I think that the economy is already probably in recession we won't really know until all the data is in but then I've explored ideas that are sort of counter to that assumption as well talking about some of the data points that don't necessarily line up and saying that the data at this point looks a bit mixed it's really kind of hard to tell but I'm on the side that we're already in recession well based on the analysis here from Bill Ackman about the current situation I'm perfectly willing to admit that I'm probably wrong in this respect what we're going through right now is not going to fit the definition of at least academically the definition of a recession we are going to see some companies have declining earnings particularly the ones that don't have any pricing power but the bottom line is here is that we are doing something a little bit different because of inflation here and we may not actually be going into a recession so what I'm going to do is share a thread that Bill Ackman a famous investor put out over the weekend uh this was actually shared in my patreon group uh through our Discord chat and every once in a while I bring you guys things from that Discord this is also a great illustration as to why I never really think that Twitter is a great investment because I realize that most people consume Twitter in a second-hand manner I never would have seen this on my own I have a Twitter account well not really I haven't logged in in a couple of years I never look at it I'm never aware of any tweets unless somebody brings it to me like secondhand like in this case where someone actually sent me a link to Twitter the issue here is like usually when somebody sends me a link to a newspaper or article on Twitter or something like that that is monetizable but Twitter looks like a business to me that's relatively hard to monetize anyway that is beyond the point here I'm just thinking about uh Elon Musk walking away from the Twitter deal but let me give back to the economy in general here let me let's talk about what Bill Ackman has to say now he's stating that over the past two weeks rates have declined he's talking about interest rates on loans and bonds and that sort of thing have declined dramatically purportedly due to fears of recession Friday's move was particularly stunning for the scale of the move and for the degree of intraday volatility I put forth here a theory of what is going on uh so he's talking about the dramatic drop in rates and how volatile they were during the day two it just was kind of out of the ordinary so let's talk a little bit he goes on to say on the risk of a recession a recession is defined as two quarters of decline in real as opposed to nominal GDP uh real GDP meaning when inflation is factored in as opposed to nominal GDP which is just the strict dollar amount spending uh in a highly inflationary economy is more difficult for nominal spending spending and growth to exceed inflation in order uh therefore for today's economy to grow on a real basis nominal GDP growth must be greater than 8.6 percent which is a difficult hurdle to exceed it has been 40 years since we've experienced inflation at current levels and Market participants are used to a world with four to five percent nominal GDP growth and two percent inflation with inflation at two percent nominal GD GDP growth would only need to decline from four to five percent to less than two to three percent for two quarters in a row for real GDP to be negative and for the economy to be deemed in a recession two quarters of negative GDP growth uh does not seem however seem to be a reasonable definition during a period with high inflation particularly when inflation has spiked to nearly nine percent nominal spending growth of eight percent for the last two quarters would technically put us in a recession but this does not make sense fundamentally the economy is continuing to grow on a nominal basis consumers are spending substantially more this year than last there are about two times as many job openings that people looking for work the unemployment rate is at a 50-year low wages are rising substantially and it's hard to find workers Q2 revenues and earnings growth should be strong for most businesses with earnings misses and margin declines for some companies which have limited pricing power consumers have approximately 2.5 trillion dollars of excess savings well there's a mixed shift underway from Goods to services and that is something that at least anecdotally I've been observing myself as I've been traveling a little bit this summer um airports are packed people want to do things they want to experience things they're not necessarily wanted to buy Goods right now they want to go out and experience everything they haven't experienced in the last two years so Bill Ackerman goes on to say that overall demand is extremely strong we have a supply not a demand problem and this is the one thing that I have trouble hammering home to people is that this is all Supply shock uh this does not seem like a setup for a true economic recession regardless of the favored definition so why have rates declined so dramatically particularly short rates when the Federal Reserve has become increasingly strong Trident about the need for aggressive tightening to bring inflation back down to two percent I believe the answer is largely due to some misunderstanding about what a recession is but more importantly technical factors that are driving volatility and the downward move in rates Market participants speculating in the fixed income Market particularly hedge funds often using enormous amounts of Leverage because it is it is available and it allows one to make windfall profits if you get the trade right the bet that rates would increase became one of the more crowded trades in history going into June 15th at speculators covered their shorts on fed news rates began to decline causing substantial uh Mark to Market losses particularly for leveraged participants who were forced to close to cover or first to choose to cover with more data points emerging indicative of the slowing economy the recession narrative took hold causing a further decline in rates contributing to more losses Ensure door covering and going into the quarter when exposures are required to be disclosed in investor reports and financial uh statements meaning that at the beginning of the new quarter you have to publicly disclose the information about your trades and all that stuff that all of a sudden you kept secret last quarter so extremely limited liquidity going into the July 4th holiday compounded the move and the volatility and pain for leveraged Market participants as Traders look to and in many cases we're forced to exit or didn't wish to hold open positions over the long weekend so what happens from here Powell has committed to do whatever it takes to quell inflation even if doing so causes an increase in unemployment and a recession inflation is not coming down soon housing rental costs energy Ag and food supply are constrained and prices are unlikely to Abate for the foreseeable future wages are continuing to rise as immigration has been limited and many have exited the workforce or the balance of power has gone from companies to their labor forces companies are raising prices because they must do so in order to cover their costs because they can't uh the wage price spiral is underway while Demand is moderating due to sticker shock and inflation as well as rising rates overall demand remains strong inflation has become embedded and is a daily experience in in headline news and at dinner it's a dinner topic for all savings bonds pay 9 9.62 percent in order to stop the inflationary spiral the FED will need to rapidly raise rates to four to five percent by next year which hopefully will be enough to stuff inflation the mild transitory inflation being priced by markets as of Friday is a fiction rates are going up a lot and soon the sooner the FED quells inflation the better for long-term bonds and long-term Financial uh assets and equities don't be misled by short-term technically driven Market movements stocks of high quality businesses with long-term growth and pricing power look cheap don't forget that the stock market measures nominal business value inflation is hurting businesses and customer uh confidence and slowing growth killing off inflation will save the economy in the longer term at the expense of short-term pain let's hope the FED gets it right I welcome your input and rebuttals and yes we put our money where our mouth is I have often wondered why investors who share their views are often criticized for holding Investments on which they will profit if the views they share turn out to be correct we are 100 long high quality growth businesses with pricing power and own hedges hedges on which we will profit if rates rise our positioning as always matches our thinking and stated views so um I have a lot of respect for Bill Ackman he doesn't call everything correct but I have to be honest with you in this case um I was having a lot of these thoughts and was sort of unable to organize them into a coherent message over the over the weekend or so and he just sort of encapsulated perfectly pretty much everything that I was thinking that we're going into what's called a an earnings recession where the companies that don't have pricing power are the ones that look like they're going to suffer and uh it doesn't mean that demand in the overall economy is slowing it could be growing I don't want to say the word stagflation but I'm going to mention the word stagflation it's definitely too early for that we usually have that definition so sort of over a much longer time period but it's not necessarily all bad there are lots of opportunities out there but I think this is one of the best sort of roundups of all the information and theories about what's going on in the economy today let me know what you guys think in the comments below I'd be happy to hear from from you and uh I will see you next time thank you
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