Are we in a recession? Even in 2023, the possibility of a global financial crisis looms large, and some experts believe that we may be on the brink of another economic downturn.
However, I believe that this time around, the situation may be even more dire than what we saw in 2008-2009. In this article, I will explain why in three simple steps.
First, let's consider the most powerful economic indicator, as per the Federal Reserve.
In March 2022, Federal Reserve Chair Jerome Powell weighed in on a major topic of debate in the bond market.
Some investors had been calling attention to a rapidly shrinking spread between two-year and ten-year treasury yields, sounding the alarm – something we've been doing for the last year.
But Powell said that there was good research by staff and the Federal Reserve system that really said to look at the first 18 months of the yield curve, which is what has 100% of the explanatory power of the yield curve.
This makes sense because if the curve is inverted, it means the Fed is going to cut, which indicates that the economy is weak. These were Jerome Powell's words, not mine.
Powerful Recession Indicator: The Near-Term Forward Spread
So what secret indicator that the Fed uses and Powell himself says is so powerful? It's the near-term forward spread.
This chart, which shows a 90-day moving average going back to 2005, indicates that market participants are betting their own money that the Fed will drop rates even faster than they did during the GFC and even faster than they did prior to the cervesa sickness.
The problem is that today, in 2023, the near-term forward spread is even more inverted than it was prior to the GFC.
According to the Fed's own website, the near-term forward spread predicts monetary policy recessions, negative GDP, and stock market crashes.
And right now, the Fed's most powerful economic indicator is saying that things are worse today than they were in 2008, leading up to the global financial crisis.
While some may believe that we will experience another global financial crisis this year, I believe that the situation may be even more severe by the time we reach the end of 2023.
Near-Term Forward Spread Predicts 2023 Hard Landing
The Fed's powerful economic indicator, the near-term forward spread, indicates that market participants are betting on a quick drop in rates, which is not a sign of a soft landing recession but rather a financial or economic crisis.
As investors, it's important that we pay close attention to this indicator and take appropriate action to protect our portfolios.
As the global economy continues to face uncertainty and instability, the average American feels more impact than ever.
Despite some positive nominal wage growth, working Americans' real wages have decreased, leaving them struggling to make ends meet. And unfortunately, this situation is only set to get worse.
And right now, the near-term forward spread shows that the current economic situation is worse than in 2008, leading up to the global financial crisis.
While the economy may seem to be booming on the surface, with packed restaurants and entertainment venues, the reality is that these are mainly younger people who still live at home and have fewer financial responsibilities.
Most Americans are struggling to pay for the basic necessities of life, such as food, shelter, and energy, with their purchasing power decreasing dramatically despite nominal wage growth.
Shocking: Millions of Americans Forced to Borrow Money Just to Put Food on the Table
And if that wasn't bad enough, a recent chart has shown that an alarming number of Americans are having to borrow money just to buy groceries.
A survey by Lending Tree revealed that 21% of respondents needed a buy now, pay later loan just to put food on the table. And with 44% of Americans expecting to apply for this type of loan in the next six months, it's clear that the situation is only set to get worse.
The unemployment rate may currently be at 3.5%, but what happens if it increases to 7%, 8%, or even 10%?
How many more Americans will be forced to borrow money just to feed themselves and their families?
The situation is truly sobering, and it's clear that we need to take action to support those who are struggling the most.
As we continue to face economic uncertainty, it's more important than ever to keep a close eye on the indicators and work towards a more equitable and stable economy for all.
In the year 2023, concerns over the state of the economy have become more pressing. As we enter the third step of this economic analysis, it is becoming increasingly apparent that real Americans are struggling to make ends meet.
In step one, we discussed the esoteric curves and yield curve inversions near-term forward spreads, all of which play a role in the deterioration of the economy.
In step two, we examined the real-life impact of this declining economy on the average Joe and Jane.
In step three, we delve deeper into the banking system and its impact on the overall health of the economy.
2023 Banking System Crisis: The Next Economic Tsunami!
It is alarming to note that the size of bank failures in 2023 has already exceeded what we saw during the global financial crisis of 2008.
If we were to compare inflation-adjusted numbers, the size of the assets on the balance sheet of failed banks today has reached an unprecedented $600 billion, whereas it was only $500 billion in 2008. This calls into question the argument that these failures are contained and pose no systemic risk, as we saw in 2008.
In addition, the state of the housing market, stock market, and commercial real estate further exacerbates concerns over the economy's well-being.
Housing prices compared to incomes have surpassed the 2008 bubble, and the Buffett indicator shows that the stock market is even worse.
The commercial real estate bubble, worth $20 trillion, is already beginning to pop, with nominal prices plummeting.
The unemployment rate of 3.5% may provide a buffer for the economy, but it is not an accurate reflection of the economy's overall health.
It is important to note that the younger generation, or “moody millennials,” do not represent the average Joe and Jane, who significantly impact the economy's well-being.
The fact that 44% of Americans are expected to apply for a buy now pay later loan in the next six months, with 21% of them using it to buy groceries at a staggering 28% interest rate, is a cause for concern.
While some may argue that the unemployment rate is too low for the economy to go into a recession, history tells a different story. Every recession since the 1940s started with a low unemployment rate, just like today.
When the yield curve uninverts, which is expected to happen in the coming months, we will see the full impact of the economic tsunami that is headed our way.
Once the two-year Treasury yield goes back below the 10-year Treasury yield, we can expect to see a rise in the unemployment rate and further deterioration of the economy.
In conclusion, the state of the economy in 2023 is alarming, with real Americans struggling to make ends meet. The banking system's failure, combined with the housing and stock market bubbles, poses a significant risk to the economy's well-being.
The younger generation cannot provide a buffer for the economy, and the low unemployment rate is not an accurate reflection of the economy's overall health. It is crucial to prepare for the coming economic storm and take action to mitigate its impact on the average Joe and Jane.