Late 2021 Economic Warning

Since the previous Economic Update, it appears we have now entered into a period of a sustained economic slowdown in the fourth quarter. This has occurred as a result of the diminishing effects of stimulus spending (governmental cash to consumers during the pandemic), and persistent supply chain issues. Additionally, supply issues have started to become significant, with the majority of ports now experiencing bottlenecks. Many important materials needed for our manufacturing segments (e.g., steel, computer chips, and plastics) are in very short supply1.

Growth in the U.S. economy is coming off a very strong pace that ended in the 3rd quarter of this year. Due mostly to the tapering off from a burst of consumer spending after pandemic-stricken businesses reopened. Additionally, there has been less spending on durable goods, including Autos1. We now are seeing broad-based declines in economic activity; as higher inflation and a rise in “Coronavirus Delta Variant” cases are increasing and weighing on consumer sentiment. Housing starts (new home sales) are also down this quarter because of shipping and supply problems.

I am of a very firm belief that our economy is closer than ever to another deep recession. We are still experiencing stock market records and continuing the almost unprecedented 12-year bull market (Since 2010). This pending potential ‘Depression’ is normally triggered by some type of major domestic event such as a mortgage loan fraud, Conflict in the Middle East, sharp Inflation, or a war effort. I personally believe the “Supply Chain Issue” may eventually trigger a quasi-disaster in the global equity markets. Even more likely is potential US government debt default.

I say all this because economic growth cycles (“Bull Stock Markets”) almost always follow a pattern of 7-9 years before they drop because of a Recession Trigger. Last June was the anniversary of the beginning of the Real Estate and Stock Market bubble, which has now finished 11-full-years. Bubbles must pop eventually, and the longer this growth cycle continues, the more massive the recession – depression will be.

Although the unemployment rate was over 6% after the 1st half of 2021, today it’s about 5.2 percent2. I personally expect a slower drift down for the unemployment rate by the end of this year to about 5.1%. The unemployment rate however, won’t reach Pre-Pandemic levels (3.6%) until about the end of 2023. Expect retail sales of large ticket items and “discretionary spending – luxury purchases” to drastically drop off when we hit the anticipated Recession. When an Economist looks at Economic indicators, they not only look at Jobless claims, but also Interest Rates – Lending Rates. The Prime Rate is the interest rate that banks use as a basis to set rates for different types of loans and lines of credit, with the exception of mortgage rates. It currently is 3.25%2. One year ago, the Rate was exactly the same. This is historically low, but sadly might continue to expand the economy and push everything to be highly overvalued (further giving fuel to the next recession). Fortunately, many economic forecasters are factoring in two interest rate hikes by the Fed next year.

Commodities as of early October (2021): Gold bullion has begun to drift lower in per ounce price; this month hitting only $1,770 per ounce3. Down roughly $110 per ounce from last quarter. Silver bullion has also started to drift lower in bullion price; this month $4 per ounce lower (compared to last quarter) at almost $23 per ounce4. After a fantastic drop in price last March 2020 to roughly $12-13/barrel, “West Texas Intermediate” Crude oil has increased over the past 2 years to an annual high of $77.70 per barrel, up over 15% from $66/barrel last June5. The Crude Oil price outlook mirrors the economic growth outlook, therefore there is little hope that this price trend will continue after the end of 2021. Oil is up over 460% in price since 3/2020. This is a warning if you are heavily invested in Oil or Gas stocks. You may want to contact me and consider a rebalance and realization of past profits.

Notes: 1) 2), 2), 3-4), 5)