People are making comparisons to 1979 when they look at today’s economy. Back then, we had high inflation, low growth, and a high level of unemployment. Well, as you know, I think today’s environment is worse. We don’t have a high level of unemployment – because we have more than 38% of able-bodied Americans not even taking part in the workforce. The workforce participation rate is under 62%… and will keep falling.
With deflationary technologies continuing to displace workers and reduce the cost of unessential goods, the Fed keeps papering over losses and making us all feel poorer. Inflation is largely manmade, a consequence of ongoing interference in the natural order.
The Fed has largely driven this because it has allowed interest rates to remain low for too long on top of trillions in helicopter stimulus. They can blame supply chains all they want, but it doesn’t completely explain the dysfunction of our energy markets due to ESG mandates, RINs, and government interference.
I also find it hysterical that when asked how many barrels of crude oil Americans use each day, the Secretary of the Department of Energy – former Mich. Governor Jennifer Granholm – didn’t know the answer. She’s also in charge of the nuclear arsenal if you aren’t on your fourth whiskey of the day…
Recession Protection with Safe-Haven Assets
Inflation looks like it will be here to stay into 2023. Low economic growth is likely due to a stagnating economy and weak labor force. Technology is accelerating to replace jobs and drive down prices (which creates lower nominal prices, which affect nominal GDP growth). And every economist is looking to the 1930s and 1970s for solutions – even though this time – this economy – is lightyears different than the ones in the past.
Now, I could get into all of the solutions I have, but how does that make you money? Instead, we have to look at the safe-haven assets that are supposed to provide us a way to make money and protect wealth moving forward.
1. Gold – This might be a historical inflation hedge, but it’s been stuck in neutral since 2011. Gold prices fell sharply during multiple economic contractions. When the markets tanked in 2008 and 2020, gold prices fell with them. It’s important to allocate 5% of your capital to these types of investments. But this remains a lackluster play.
2. Silver – This is a more transactional base metal, and it has real industrial use. However, that industrial use-value declines in times of recessions. So, while it might offer a hedge on inflation, its industrial value takes a hit in the short term.
3. Bitcoin – There isn’t enough data to suggest this is an inflation hedge. We’ll find out in the coming years. But if the market tanks and there is a flight to safety, we could see a lot of deleveraging from the crypto space. I own a little bit of crypto, but I wouldn’t put a lot of hope and wealth into Bitcoin (CCC:BTC-USD) in this environment.
4. Tech Stocks – Deflationary stocks are my solution to fighting inflation, but the challenge remains when the Fed must raise rates. If we find ourselves in a steep downturn, we have to get serious about raising rates while fighting inflation. That puts us in 1980s territory, and it will require a lot of pain. Tech companies could take a serious hit.
5. Energy Stocks – Energy stocks do benefit from rising commodity prices. But these commodity prices struggle in the event of a recession. Oof…
6. Banks – Who is taking out loans? Who would pay higher lending fees during a recession? We’ve killed small businesses already during the pandemic. The banks are not going to endure that sort of environment.
So, what on earth will do well in terms of recession protection during times of inflation… and times of economic contraction? I ask – what do people always need and will pay for regardless of economic conditions? I’ll answer that tomorrow. But you likely know the answer if you have an On-Off switch.