(Kitco News) – Whether or not the US is in a recession has become a divisive topic. According to Commerce Department figures, the US economy has seen a two-quarter drop in gross domestic product, which fits in with the traditional definition of a recession.
However, Federal Reserve Chairman Jerome Powell said last week that the United States is not in a recession, a view shared by Treasury Secretary Janet Yellen and White House economist Brian Daisy. For example, Powell cited a strong labor market as a reason for the United States not entering a recession.
However, we are in a “technical stagnation,” said Alfonso Picatiello, author of macro compass Articles. Lyn Alden, founder of Lyn Alden Investment Strategy, agreed with Peccatiello.
“So far, there is a moderate recession,” Alden said. “I think the labor market is weaker than it looks…wages have gone up significantly in the last year, but they have gone up much less than inflation. So, the average worker has had a cut in their salary over the past year at a much deeper rate than is normal. It’s one of the worst years ever for inflation-adjusted wage growth.”
Alden and Peccatiello spoke with David Lin, Anchor and Producer at Kitco News.
Investing in Bonds in a Recession
With the economy slowing, Peccatiello and Alden had similar recommendations for investments.
With the Federal Reserve raising rates due to high inflation, Peccatiello suggested allocating more to cash, as well as to stocks that are “defensive” in nature, such as utilities, pharmaceuticals and consumer goods.
He also advised buying bonds.
“Returns 10 years north of 3 percent,” he said. “We’ve seen a huge rally in the last month as the economy weakens and the Fed is compounding the problem by being still too tight.”
The bonds are pricing in future growth and future inflation, he said, which could lead to higher yields.
Although Alden said bonds were “unattractive” at the start of 2022, due to inflation concerns, she said we are now seeing “non-inflationary pressures,” which could benefit bonds.
“I am fairly optimistic about the bond, on a risk-adjusted basis, as a six to twelve month trade,” she stated.
How bad is the recession?
Peccatiello predicted there would be “a long and engineered period of tighter financial conditions”. He explained that in 2020, central banks had intended to raise interest rates, but were unable to do so due to COVID shutdowns.
“Right now, you’re facing the exact opposite situation,” he explained. “We are facing policy makers from governments and central banks who are trying to fight inflation. They are trying to slow economic activity… they are trying to tighten financial conditions.”
With unemployment rising, he said, we should expect to reach an “unemployment rate of 6-7 percent.”
Alden agreed with Peccatiello’s assessment, adding that it expected a “stagflationary” environment with “slow or negative real GDP growth” and “inflationary pressures” from the supply side due to lack of energy.
“I think we’re stuck until we have plenty of energy,” she said. “For the general consumer, it will be about wages that have trouble keeping pace with inflation [The Fed] In an effort to reduce demand, you will see a weaker labor market, and we are already seeing early signs of that. So, higher initial jobless claims, job cuts… that’s basically what we should be looking forward to.”
For Peccatiello and Alden’s real estate predictions, as well as their views on central bank digital currencies, watch the video above.
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