What Does the Beginning of a Recession Look Like?

As much as I wanted to make this brief, I need to lay a little bit of foundation for folks to fully understand the gravity of the situation. Bear with me.

The US economy is a very large and complex machine and, with all the media noise, it can be difficult to follow and interpret it in each and every aspect. Many investors depend on "Indicators" which are metrics used to perform technical analysis in order to make a decision to buy or sell a security. In short, they are a way to keep a "pulse" on the market. Each sector of the economy has it's own indicators, but there are several that have a direct impact on the economy as a whole. Since every sector in the US economy transact and pay taxes in US dollars it is important to know that a changing supply of dollars chasing the same quantity of physical goods can have a dramatic effect on the price of food, energy, etc.. through inflation.

Additionally, a growing percentage of our nation's GDP is coming from government spending. I feel it is a misnomer to include government spending in the official GDP calculation (as it is) because the government obtains it's money through printing and taxes. The very words Gross Domestic Product imply production, not confiscation and printing. Even John Maynard Keynes (father of Keynesian Economics) himself acknowledged that relative to private enterprise, a disproportionately large percentage of public spending is bad for economic growth in the long run.

In lieu of raising taxes, Inflation is a more politically acceptable way to confiscate wealth from people because raising taxes to pay for wars and social programs can be political suicide. To combat having to operate on sound monetary policy, politicians and bankers created an alliance (of the unholy type) called the Federal Reserve. Next to disparity of financial education, this is the number 2 reason for the disappearing middle class and the growing divide between the poor and the super rich. The media will tell you otherwise, but if you get your information from the media, you are probably not reading this article.

The introduction of the Fed created a banking monopoly allowing the government to borrow and spend money in perpetuity and run enormous deficits without having to raise taxes. In order to prevent a liquidity crisis (not enough reserve funds) caused by the complete collapse of the derivatives market in 2008 (it was a derivatives crisis that caused a housing crisis), the Federal Reserve put the digital printing presses into overdrive through a process called Quantitative Easing. It started buying hundreds of billions of dollars of bank debt, treasury securities, and mortgage-backed securities with money created out of thin air.

When all was said and done in late Oct 2014, the Fed used its magic wand to purchase $4.5 Trillion in assets dramatically increasing the money supply (indicated in blue in the image). The red line in the image represents an aggregate of the top 5000 companies stock prices in the US (called the Wilshire 5000) and is an aggregate indicator of the performance of US stocks.

In addition to open market operations (buying Treasury Securities and the like) the Fed can also manipulate the economy by changing bank reserve requirements and the interest rates at which they lend to other banks. Indicated in green in the image, you can see where they dropped the rates to zero when the economy collapsed in 2008 in an attempt to encourage lending and stimulate spending. Artificially low interest rates encourages speculation and asset bubbles which you can be seen quite clearly in the stock market and a growing number of real estate submarkets around the US.

There is a strong correlation between the printing of money and the propping up of asset values. Seeing as the Fed has already fired two out of three cannons ( wide scale open market purchases, and interest rates), it is unclear to me how they will try to pull the US out of the next recession as implementing more of the same policy will likely make matters worse. I foresee a new currency coming into play in some form of IMF Buck (Special Drawing Rights) and the US dollar fading from the world scene.

Good things to have during severe depressions:

Combination of cash and Precious Metals in reserve.
A 6-12 Month stockpile of household consumables.
Entrepreneurial Spirit
Understanding how to properly organize and manage resources.
Understanding how to value bankrupt businesses and distressed assets.
Understanding how to communicate ideas to investors.
Understanding how to market effectively.

I do not share this information to scare you, only to warn you that the light at the end of a tunnel is a train and you should probably step out of the way. Will the US fade from existence with its currency? Not likely. We will simply switch to transacting with something else but that switch can create a bumpy ride. Just remember that wealth is like energy, it can be neither created nor destroyed, only transferred. The direction in which it transfers depends on the information and paradigms on which you operate.

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