Darius sat down with Julia La Roche last week to discuss inflation, the Fed, and the likelihood of a recession.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. A Recession Has A High Probability Of Commencing Over The Next 6-9 Months
Our team has conducted extensive backtests on recession timing after the inversion of the 10-year/3-month treasury yield curve.
We found the 13 – 18 month forward interval has the highest probability of GDP contraction and a rise in the unemployment rate.
The 10-year/3-month yield curve inverted in October 2022, indicating the period between Nov-23 and Apr-24 has the highest probability of the start of a recession.
2. Inflation Will Likely Bottom At A Level Inconsistent With The Fed’s 2% Mandate
Our research suggests Core PCE will likely trend 50% – 100% higher throughout this decade.
In the last decade, the underlying trend of Core PCE YoY was 1.6%. We project that trend will increase to somewhere between 2.5% to 3.1% over the next decade, and prolonged conflict in the Middle East may cause a spike in commodity inflation and push it even higher.
We believe the Fed will need to revise its inflation target upwardly to between 2.5% and 3% to account for the upcoming higher trend.
3. Sticky Inflation Will Force The Fed To Sit On Its Hands
Wall Street survey data shows an increasing number of investors believe the probability of avoiding a recession is high.
We challenge that view. We believe a recession is likely to begin with inflation measures tracking at levels uncomfortably higher than the Fed’s 2% inflation target. That means the Fed will likely be forced to sit on its hands and maintain higher rates until inflation declines.
If that happens, the recession will likely be worse, and asset markets will likely decline further than most investors now expect – after having been dead wrong the US business cycles and asset markets all year.
That’s a wrap!
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