The Policy Recession

Policy Recession

Market momentum is Green. Welcome to the 2022 recession. 

I know that several politicians and advisers are trying to spin the NEGATIVE 0.9% economic growth number from Q2, but let me make this simple. The technical definition of a recession relies on two consecutive quarters of negative GDP growth. We had -1.6% in Q1. We had -0.9% in Q2. 

Their argument goes that a recession isn’t really a recession because (insert excuse). The common figure is that the labor market is strong. We just hit an eight-month high on unemployment benefits TODAY. The labor market is starting to unwind.

Also… if that inflation definition is NOT correct, I will be the plaintiff against the Economics departments of Purdue, Indiana University, Johns Hopkins, Harvard, and Northwestern. I spent a lot of money at those schools… and if they didn’t tell me the truth here, I’m in quite a pickle. 

The Numbers Were Terrible

Fed Chair Jerome Powell said that they expected a bad number. This one was worse. Dig under the hood, and you see some VERY ugly numbers. U.S. business investment fell by 13.5%…

Personal income increased over the last year, but REAL income – accounting for inflation – declined. The same goes for disposable income. Disposable income jumped 6.6% during the quarter… but real disposable fell 0.5%. The personal saving rate also declined compared to the first quarter.

We’ve seen a big decline in inventory levels. Big declines in real estate. Declines in spending on real goods like cars and furniture. And a surprising decline in government spending.

Oddly, there was an uptick in exports. However, according to the Wall Street Journal, if we didn’t have that positive figure on the export front, the real GDP figure would have been -2.3%.

The Recession Culprits

One of the big problems here has been public policy. First, we had trillions of dollars dropped from the sky by the Fed in 2020 that helped turbocharge spending. Then, we had trillions in stimulus from Congress, despite the warnings around inflation. 

Even worse, we have bad energy and transportation policies that drive up the price of oil and gasoline (year-over-year), which acts as an artificial tax on businesses and consumers. There is chatter that we’re at peak inflation. 

But I don’t think inflation is over. We’re likely facing periods of high inflation and low inflation in offsetting months, which will create policy problems for the Federal Reserve. 

We aren’t doing enough on the supply side to bring more products to the market. Yes, Congress is trying to subsidize select businesses in semiconductors, solar panels, and other “Clean energy,” but they’re also planning on raising corporate taxes and running a $1.5 trillion deficit next year.

This spending is inflationary… So it’s insulting that they are calling their new spending bill The Inflation Reduction Act of 2022.

The Situation Isn’t Improving

At the heart of this is energy prices. And I think it’s time to prepare for higher gasoline prices again. Yesterday, during our live roundtable, I explained that I was bullish on oil prices despite economic concerns and rising interest rates. There are a few reasons…

First, the global energy economy is $500 BILLION short in the amount of money it needs to produce enough crude to meet demand by 2025… and how much will be spent. There is an ample capital supply crunch aided largely by a lack of support among banks and government officials. OPEC and multiple Wall Street banks have sounded the alarm.

Second, China will eventually come off its COVID lockdowns. On the global front, China is the key demand figure for oil, and the nation’s central bank is about to unleash a significant amount of stimulus to aid its weak real estate market and to invigorate its economy.

U.S. Strategic Petroleum Reserve

Then, there are current supplies. These numbers should shock you. The United States owns a Strategic Petroleum Reserve. This reserve was built in the 1970s in response to the OPEC Embargo. It’s designed for serious emergencies like war… economic problems… and general supply problems.

The Biden Administration has largely treated it as a political tool in 2022. It has released about a million barrels per day to help reduce the cost of gasoline at the pump and to alleviate inflation pressures. 

There’s just one problem. At some point, you must stop doing this or risk an actual security crisis. The numbers right now in the U.S. on the supply side are very bad.

Since July 2020, U.S. inventory levels, according to the EIA, are down 438 million barrels of crude oil. This isn’t just the SPR. Overall we had about a 9 million barrel decline in total U.S. storage, and about six million came from the SPR. 

Our petroleum inventory levels have declined in 80 of the last 108 weeks in the United States. We now have the lowest seasonal levels of crude inventories since 2008.

I can’t find any real plan to increase inventories here. Higher prices have companies pumping crude and selling it. So, yes… I’m long Devon Energy (DVN), Crescent (CRGY), and ConocoPhillips (COP).

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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