Ugly Bank Earnings, Recession Risks Rise + a Pretty Safe High-Yield Bond
The risk of recession is rising. Granted, we have to read tea leaves until the official 2Q 2022 announcement on July 28, 2022. However, there certainly are a lot of messages floating to the surface. The silhouette is taking shape, and the phantom is concerning. As Jerome Powell admitted in his interview with Kai Ryssdal on May 12, 2022, “The process of getting inflation down to 2% will include some pain.”
GDPNow is Forecasting a Recession
GDP Now is anticipating a contraction of -1.2% in the second quarter of 2022. Since the 1st quarter was a contraction of -1.6%, that would mean that the U.S. is in a recession. If the data comes in flat or above the line, then the U.S. will have averted a recession for now.
How Accurate is GDPNow?
GDPNow typically comes in higher than the results. The week before the 1Q 2022 GDP growth results were released, GDPNow projected growth of 1.3%. We discovered on April 28, 2022 that the economy had actually declined.
Powell Speak, Yet Another Recession Indicator
So what are some of the other tea leaves out there? Lawrence Summers has gone on record saying that a recession is almost inevitable. Jerome Powell has stopped defining a soft landing as avoiding a recession. Instead he said his team will try to keep the labor market strong. That’s a pretty big red flag, even though Powell also drops caveats that no one is very good at predicting recessions. (History shows us that fast rate hikes = recessions). When Powell speaks, every word is a sign, as is every word that’s omitted. Inflation was repeated incessantly throughout the most recent FOMC minutes, while the word recession was avoided.
What About Other Forecasts?
The Conference Board went on record yesterday writing that they believe the economy is not in a recession. However, their projections are for flat growth of just 0.8%. As long as the data is above zero, the U.S. will technically avert a recession for now. However, as we saw in the Great Recession, that doesn’t mean that we’re out of the woods. (Keep reading…)
2Q GDP Growth Advance Report on July 28, 2022
We will know definitively where we stand on July 28 at 8:30 AM ET, when the advance report of the 2nd quarter GDP growth is released by the Bureau of Economic Analysis, (bea.gov).
It’s a good idea to make sure that we have at least a percentage equal to our age safe now, before the report is released. When we wait for the headlines, it’s like trying to catch a falling knife. It can be too late to protect ourselves. In our sample pie charts, we are overweighting an additional 20% safe, based on the heightened risk of a recession. If you’re 50, consider having 70% safe. If you’re 30, consider having at least half of your wealth safe. As you will read below, it is also important to know what’s safe in today’s Debt World.
Bank Earnings Could Be Nasty Starting Tomorrow
Mortgage banks are suffering. Rapidly rising interest rates have slowed housing sales by 8.6% year over year. Many mortgage banks have seen their revenues fall by more than 40%. Email info@NataliePace.com if you'd like to receive a Bank Stock Report Card.
The decline in mortgage originations will also affect large banks, at a time when they are also experiencing fewer M&As, bond and IPO transactions. Last month, JP Morgan’s CEO and amateur meteorologist Jamie Dimon warned that there is a hurricane on the horizon. It could strike land as early as tomorrow with JP Morgan’s earnings report at 8:30 am ET. Citigroup and Wells Fargo report on Friday. Citigroup also has a Russian exposure problem, with up to $10 billion in exposure. (Click to read my blog on banks from June 5, 2022.) Investors are already anticipating a rotten report from Citigroup. Citi’s shares are down almost 40% from their 52-week highs.
Inverted Yield Curve
As you can see from the graph below, an inverted yield curve is 100% correlated with recessions. (The grey lines indicate recessions.) Short-term (2-year) bonds are offering a higher yield than 30-year bonds. This has a lot to do with the rapid increase in the Fed Fund rate, and the disinclination of investors to take on the risk of long-term, negative-yielding fixed-income investments. Bonds are losing money, annuities are not FDIC-insured, and money market funds have redemption gates and liquidity fees, which is why it’s essential to know what is safe in a highly-leveraged world. (We spend one full day on this topic at our Investor Educational Retreats.)
A Pretty Safe Bond That’s Earning 9.62%
The Treasury has a pretty safe Inflation-linked bond that is currently pegged at 9.62% (for six months). The rate resets Nov. 1, 2022 and is tied to inflation, which just came in hotter than expected today, at 9.1%. This bond requires a minimum of a one-year commitment. There are other terms and conditions, including an annual investment cap of $10,000/person. Click on the blue-highlighted words to access the TreasuryDirect web page with additional information.
What’s at Stake? Up to Half of Your Wealth
Between October 2007 and March 2009, the Dow Jones Industrial Average dropped 55%. It took six years to crawl back to even. It took even longer to recover from the Dot Com Recession, when the NASDAQ Composite Index sank up to 78% and took 15 years to recover. This time assets are even more overvalued than they were in the Dot Com Recession, according to Warren Buffett’s favorite valuation tool – the value of all stocks compared to GDP. If equities are as expensive as these and other charts indicate, protecting our wealth now is of the utmost importance.
Don’t try market timing. It rarely works. The pie charts with regular rebalancing is a time-proven, 21st Century plan.
Buy & Hope Doesn’t Work in the 21st Century
Buy & Hope plans have ridden a Wall Street rollercoaster in the 21st Century. Getting your pie chart set up (keeping the right amount safe and diversifying properly) and rebalancing regularly (1-3 times a year) means that you protect your wealth in recessions and outperform the bull markets in between, instead of using the majority of the bull market hoping and praying to make up losses. This plan is easy as a pie chart, which is why we call it the life math that we all should have learned in high school.
Email info@nataliePace.com or call 310-430-2397 to receive a 2nd opinion, including a pie chart of what you currently own, compared to a sample pie chart of our time-proven, 21st Century plan. You can also learn this strategy at our retreat or in my book The ABCs of Money.
As we get closer to retirement, we have less time to make up those losses. Since our credit score tanks with our losses, it’s important to get the plan set up now, even if we’re a young HENRY (High Earner, Not Rich Yet). It’s never a good time to lose half of your wealth. A time-proven plan is always the best strategy.
What Happened in the Early Days of the Great Recession?
In the 4th quarter of 2007 and the 1st quarter of 2008, growth was flat, at 0.6% and 0.9%, respectively, despite the collapse of Bear Stearns in March of 2008. The 2nd quarter of 2008 even registered economic growth of 3.3%, despite continuing bankruptcies in a number of mortgage banks and the forced marriage of Countrywide to Bank of America. Americans didn’t know the economy was in a recession until the 3rd quarter GDP was reported at the end of October – when the White House team raced to Congress for a bailout to prevent a global financial meltdown. When we wait for the headlines or for politicians to admit what’s really going on, it’s too late.
This time around, we haven’t seen a lot of bankruptcies, largely due to the amount of cash that flooded companies and individuals during the pandemic. In fact, bankruptcies are near a historic low. However, as money tightens up, that could change rapidly. Industrials and consumer discretionary continue to be the most vulnerable industries, followed by healthcare. However, mortgage banks were the first to show distress in the Great Recession, and this time, they are again experiencing a lot of pain.
If you're interested in learning stock and 21st Century time-proven investing strategies for protecting your wealth and managing the bear market from a No. 1 stock picker, join us for our Oct. 8-10, 2022 Financial Freedom Retreat. Email info@NataliePace.com or call 310-430-2397 to learn more and to register. Click on the banner ad below to discover the 18+ strategies you'll learn and master. Get the best price and a free 4-part Protect Your Wealth Now webinar that will get you started immediately when you register before July 15, 2022.
Natalie Wynne Pace is an Advocate for Sustainability, FinancialLiteracy & Women's Empowerment. Natalie is the bestselling author of The Power of 8 Billion: It's Up to Us and is the co-creator of the Earth Gratitude Project. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). Her book The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 5th edition of The ABCs of Money was released on September 17, 2021.
Natalie Pace's easy as a pie chart nest egg strategies earned gains in the last two recessions and have outperformed the bull markets in between. That is why her Investor Educational Retreats, books and private coaching are enthusiastically recommended by Nobel Prize winning economist Gary S. Becker, TD AMERITRADE chairman Joe Moglia, Kay Koplovitz and many Main Street investors who have transformed their lives using her Thrive Budget and investing strategies. Click to view a video testimonial from Nilo Bolden.
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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.