• New York Community Bancorp shares plummeted due to devalued assets and tighter regulations
• The sinking regional bank sparked fears of a sector wide banking crisis
• A Gold IRA can insulate portfolios from the impact of a collapsing banking system

Banking Crisis Blowing Back Up

It has been one year since the banking crisis resulted in the second and third largest bank collapses in US history. And now a new troubled regional lender, New York Community Bancorp (NYCB) is stoking fears that the simmering banking crisis is about to reignite.

New York Community Bancorp stock plummeted after releasing a terrible earnings report. The report showed massive, unexpected losses on commercial real estate loans. The bank revealed a fourth quarter loss of $252 million instead of a third quarter gain of $207 million. In response, the bank slashed its dividend by 70% and was forced to stash a half billion in cash away to protect against future losses, plus $185 million in net charge-offs. Their shares have lost almost half their value in a week, dropping 44.6%.¹

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Even worse, this came as a shock because the bank had not prepared markets for the bad news. Moody’s has since put its ratings of NYCB under review. The bank shares can now be downgraded into “junk” territory.

The fall of NYBC ties directly back to the earlier stage in the banking crisis. NYBC ballooned in size last year after taking over the assets of the fallen Signature Valley Bank. Not only did NYCB trap themselves with the flailing SVB assets, but the acquisition also pushed them above the $100 billion asset mark. That forced them into tighter government standards that were imposed to prevent another round of regional bank collapses. NYBC had to devote more funds to make sure they could stay liquid in case of a crisis.

Fear of the Crisis Spreading

Fears of contagion amongst regional banks grew. Regional banks are overleveraged with loans to a desperately struggling commercial real estate sector. The average regional bank stock has lost 10% over the past week.

Other banks are drawing scrutiny. M&T bank has similar size and assets as NYBC. Big banks have been bracing against real estate losses by setting money aside for months. Overseas banks are not insulated from the panic. Azora Bank of Japan saw shares drop 20% due to its portfolio of US office loans. It could have fallen further if there wasn’t a maximum drop allowed on the Japanese market. Deutsche Bank had to increase its loss provisions for its US commercial loans nearly fivefold.

Fed Chair Jerome Powell described the situation as a “sizable problem.” The rapid increase in interest rates is what doomed Signature Valley Bank. High rates combined with low valuations to put commercial real estate holdings underwater. But there was a secondary effect. Banks had to raise interest rates to compete with the government for depositors. This eroded their net interest income – the difference between what lenders earn on loans and pay on deposits.³

The Federal Reserve put a lid on the earlier phase of the banking crisis by printing money and throwing it at the banks. Their “Bank Term Funding Program” with $25 billion in new money paused the crisis without solving the underlying problems.

Bank Runs

Last year’s banking crisis was made worse as fears of a bank run grew. Customers withdrew $42 billion in a single day from Silicon Valley Bank. It was left with $1 billion in negative cash balance. The staggering withdrawals unfolded at a speed enabled by digital banking and were likely fueled in part by viral panic spreading on social media platforms and, reportedly, in private chat groups.⁴

Regulators say a run is unlikely. But it is not impossible. Like they say, a flood always begins with a single drop of rain. With banks required to only keep a small fraction of customer deposits on hand, another run could be disastrous.

And with $1.5 trillion of commercial real estate loans hovering near default, there is reason to believe a nationwide banking crisis could flare up to epic proportions. A new report from the National Bureau of Economic Research indicates that nearly half of all banks now risk default. Even a 10% default rate would cost commercial banks $80 billion.⁵

The floodwaters could break as soon as March 11. On that date, the Fed’s emergency bank funding program will shut down for good. Without a government bailout waiting in the wings, the country may be stricken by a full-blown banking crisis that affects every sector of the economy and sinks the stock market.

The government recognizes the danger even if they aren’t prepared to handle it. The Financial Stability Oversight Council, of which Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and US Securities and Exchange Commission Chair Gary Gensler are members, released a report last December that cited commercial real estate as a major potential financial risk.

“As losses from a [commercial real estate] loan portfolio accumulate, they can spill over into the broader financial system,” they wrote. “Sales of financially distressed properties can reduce market values of nearby properties, lead to a broader downward CRE valuation spiral, and even reduce municipalities’ property tax revenues.”⁶

Conclusion

The only people profiting from the failing banks are the short sellers who made over $685 million in paper profits. And that is on top of hedge funds clearing unrealized profits of $7.25 billion after the March 2023 bank failures.⁷ If you aren’t in that elite club of investors, then you need to take precautions to protect the value of your portfolio. With no counterparty risk, a Gold IRA from American Hartford Gold can insulate your portfolio from a collapsing banking system. Contact us today at 800-462-0071 to learn more.

Notes:
1. https://www.cnn.com/2024/02/06/investing/premarket-stocks-trading/index.html
2.. https://www.nytimes.com/2024/02/06/business/banks-real-estate-fears.html
3. https://www.nytimes.com/2024/02/06/business/banks-real-estate-fears.html
4. https://www.cnn.com/2023/03/14/tech/viral-bank-run/index.html
5. https://moneyandmarkets.com/2024-phantom-bank-crisis/
6. https://www.cnn.com/2024/02/06/investing/premarket-stocks-trading/index.html
7. https://www.cnbc.com/2024/02/01/us-regional-banking-shares-tumble-for-second-straight-day.html

• The AI fueled stock boom bears an eerie resemblance to the dot-com bubble of the 90s
• Analysts see the highly concentrated, overinflated tech stocks experiencing a similar bust
• Physical precious metals in a Gold IRA can protect the long-term value of your portfolio from an inevitable crash

The AI Stock Bubble is Set to Burst

AI has sparked a stock market boom that may soon go bust. The ‘Magnificent 7’ tech stocks are lifting the market to new heights. But experts are advising caution as conditions take on an eerie resemblance to the dot-com boom of the 1990s. The “irrational exuberance” overinflating today’s stock prices could be squashed by a sudden crash, massive losses, and a lingering recession.

The stock market has been rising since it bottomed out last October. Tech stocks are leading way, specifically, a group known as the Magnificent 7. This group includes Amazon, Apple, Meta, Alphabet, Tesla, Nvidia and Microsoft. Bank of America has called the AI boom a ‘baby bubble’ with returns on trades rising 200%. The 7 almost singlehandedly lifted the S&P 500 to a 24% gain in 2023. This concentration in the market is nearing its highest level since the dot-com days. There is less diversity of companies leading the market in 2024 than at the peak of the dotcom bubble.¹

²

Parallels to the 1990s

Ed Yardeni is a longtime investment strategist and president of Yardeni Research. He said, “Instead of a repeat of the inflationary 1970s or a replay of the productivity-led boom of the 1920s, the current decade has the potential to play out like the tech-led stock market party of the 1990s.”³

The rapid rise of AI chip maker Nvidia looks like the parabolic ascent of Cisco, the maker of equipment for the internet. Cisco’s share price increased 8-fold from 1997 to March 2000. Meanwhile, Nvidia is up 252% with the AI explosion ignited by ChatGPT.⁴

The Fed may inadvertently swell the bubble if they begin cutting interest rates this year. Lower rates could fuel the same “irrational exuberance” that powered the doomed internet bubble. Newly accessible cash would overinflate asset prices. And when valuations ultimately crash back to normal, a recession would most likely ensue.

Jon Wolfenberger is the founder of BullAndBearProfits.com and former investment banker at JP Morgan and Merrill Lynch. He also compares today’s market to the dot-com bubble of the 90s.

“For those of you younger than us who did not live through the Tech Bubble of the late 1990s, you are now living through Tech Bubble 2.0. As a reminder, the NASDAQ fell about 80% when that bubble burst in the mild recession of the early 2000s,” Wolfenbarger said. “Given the fact that stock market valuations are even higher now than they were at the Tech Bubble peak of 2000, we would not be surprised by a similar decline in the coming recession.”⁵

Evidence of a Bubble

There is evidence supporting the idea that there is a bubble. The Shiller price-to-earnings ratio gauges whether the market is overvalued. It is currently at one of its most elevated levels in history. It isn’t as high as it was during the dot-com bubble, but it is higher than it was in 1929.

The concentration of stocks also points to a bubble. The top five stocks make up a higher percentage of the S&P 500 than they did during the dot-com bubble. This concentration drastically increases the vulnerability of the market to a crash if anything happens to those leaders.

Wolfenberger identified several factors pointing to the impending bubble-bursting recession. He pointed to the continuing sharp decline in the number of full-time employees. The drop is quickly resembling the unemployment rate before the recessions of 2001 and 2008. Wolfenberger also cited declining manufacturing data, which also fuels unemployment, and the inverted Treasury yield curve.

Other expert voices are sounding the alarm. Jeremy Grantham, who called the 2000 and 2008 crashes, has said that stocks are in a ‘super bubble.’ Adam Karr is the President of Orbis Investment Management. He issued this warning, “Historically, similar periods have ended badly. Expensive stocks lost 40% of their value following the Japan bubble in the late 1980s and 50% of their value following the dot-com implosion. Investors can look foolish for not owning the winners in the short term—and ‘FOMO’ can be overwhelming. But paying too much for an asset with high expectations can be a recipe for disaster.”⁶

JP Morgan is also advising caution. A team of analysts found that the rising concentration in the stock market has become an important risk that investors should be aware of in 2024. The JP Morgan strategists said the Magnificent 7 are overdue for a period where it lags behind the broader market. They warn clients to expect a drop in the market as a result.

Conclusion

The AI boom driving the market higher is taking on an uncanny resemblance to the dot-com bubble of the 1990s. By the time that bubble finished bursting, stocks had lost $5 trillion in market capitalization since the peak. At its trough on October 9, 2002, the NASDAQ-100 had dropped to 1,114, down 78% from its peak.⁷

It is easy to get caught up in the excitement of quick profits. But the bigger that bubble grows, the harder those stocks will fall. People with a long-term outlook should investigate assets that will weather the inevitable market drop and protect their portfolios from losses. Physical precious metals in a Gold IRA can preserve the value of retirement funds as stocks crash. Contact us today to learn more at 800-462-0071.

Notes:
1. https://www.businessinsider.com/stock-market-crash-tech-bubble-valuations-sp500-nasdaq-recession-wolfenbarger-2024-1
2.https://www.advisorperspectives.com/images/content_image/data/b0/b08eabf2c6dd39ca0601334df3fac807.png
3. https://markets.businessinsider.com/news/stocks/stock-market-outlook-90s-dotcom-crash-tech-bubble-nvidia-yardeni-2024-1
4. https://markets.businessinsider.com/news/stocks/stock-market-outlook-90s-dotcom-crash-tech-bubble-nvidia-yardeni-2024-1
5. https://www.businessinsider.com/stock-market-crash-tech-bubble-valuations-sp500-nasdaq-recession-wolfenbarger-2024-1
6. https://www.businessinsider.com/stock-market-crash-tech-bubble-valuations-sp500-nasdaq-recession-wolfenbarger-2024-1
7. https://en.wikipedia.org/wiki/Dot-com_bubble#:~:text=By%20the%20end%20of%20the,down%2078%25%20from%20its%20peak.

• Americans may be exposed to higher taxes due to last year’s record Social Security cost of living increase
• Millions of new remote workers are vulnerable to being taxed twice on the same income
• A Gold IRA can shield savings from this administration’s aggressive tax policies

Higher Taxes in 2024

Older Americans grappling with the severe consequences of stubborn inflation may soon find themselves facing another harsh reality – higher taxes. 2023’s record high Social Security benefits increase could result in a new, heavier tax burden. And the army of new remote workers may also be caught in a tax trap. Fortunately, there are means to escape the impact of this administration’s heavy tax policy.

Taxes on Social Security Benefits

Social security recipients receive a cost-of living (COLA) increase indexed to inflation. The current inflation crisis resulted in an 8.7% COLA increase last year. That is the biggest increase since 1981. The Social Security Administration said more than 66 million people received higher benefits last year. The average monthly payment jumped up around $140. The boost could push more seniors into higher tax brackets.¹

²

The problem is that the amount of benefits exempted from taxes hasn’t changed since 1984. Recipients owe taxes on benefits if their adjusted gross income is more than $25,000 if they are single and $32,000 if they are a married couple. Individuals earning more than $34,000 and couples earning more than $44,000 can be taxed up to an astonishing 85% of their benefits.³

Surveys show this jump in taxes could come as a surprise to many seniors who have never owed taxes on their benefits before. “We really expect a huge bump in the number of people who will be paying taxes on their social security benefits this year, sadly,” said Shannon Benton, executive director of the Senior Citizens League. ⁴

A recent study showed 23% of retirees had to pay taxes on benefits for the first-time last year. That number is projected to rise significantly in 2024 as there will be another COLA increase of 3.2% this year.
Economists recognize the tax trap the government is laying out. “It’s kind of a Catch-22,” Benton said. “It’s like, ‘OK, give me a raise, but then take more of it away.’ So, they’re getting this increase every year that they desperately need, but the [tax] thresholds have never been increased.”⁵ Higher monthly income can also reduce senior eligibility for income-sensitive government programs such as Medicare. ⁶

Surprise Remote Work Tax

The pandemic redefined work. There are now 35 million people working remotely. While remote work may bring several perks, it can also come with a nasty tax surprise. Depending on where you live and where your employer is based, remote workers may be subject to the income tax rules of two – or more – states. Individuals can be taxed based on both where they live, and where they earn income.

Several states tax people based on where their office is located, whether they physically work in the state or not. If an employee’s home state doesn’t offer a tax credit, or if they don’t live in an income tax free state, they can be stuck paying taxes twice on the same income.

Jared Walczak is the vice president of state projects at the Tax Foundation. He said, “some [people] are unfortunate enough to work for companies based out of states that have what’s called a convenience rule, which can result in two states taxing the same income without any adjustment.”⁷

Conclusion

Increasing taxes are becoming a staple of this administration and Americans can expect more if the administration doesn’t change in November. There are strategies to try and limit the impact of these taxes. If you are already retired, it may be possible to avoid having Social Security benefits taxed by limiting withdrawals from a traditional retirement plan.

However, that could result in not having enough money to pay your bills. Especially as inflation continues to erode purchasing power. As it is, nearly 3 in 5 seniors report struggling financially to cover the costs of necessities like food, rent, and medical care. Prices are up a shocking 17.23% when compared to January 2021.⁸

For those not yet retired, the Motley Fool suggests saving for retirement in a Roth account instead of a traditional savings plan. Roth IRA and 401(k) withdrawals aren’t taxed, and they’re not factored into combined or provisional income. To gain additional protection from inflation, people can investigate a Roth Gold IRA. It combines tax advantages with the wealth protection offered by physical precious metals. To learn more about how you can secure your financial future, contact American Hartford Gold today at 800-462-0071.

Notes:
1. https://www.foxbusiness.com/money/social-security-recipients-could-get-hit-surprise-tax-bill-year
2. https://www.foxbusiness.com/economy/small-social-security-cola-could-leave-retirees-struggling-get-next-year
3. https://www.foxbusiness.com/economy/small-social-security-cola-could-leave-retirees-struggling-get-next-year
4. https://www.foxbusiness.com/economy/small-social-security-cola-could-leave-retirees-struggling-get-next-year
5. https://www.foxbusiness.com/economy/small-social-security-cola-could-leave-retirees-struggling-get-next-year
6. https://www.schwab.com/learn/story/how-higher-income-can-affect-medicare-premiums
7. https://www.foxbusiness.com/money/remote-workers-face-double-taxation-threat-irs
8. https://www.foxbusiness.com/economy/small-social-security-cola-could-leave-retirees-struggling-get-next-year

• Credit card debt and delinquencies are at record levels
• Rapidly ballooning consumer debt can have disastrous impact on individuals and the economy
• Physical precious metals can safeguard retirement funds from the effects of runaway debt

The Danger of Exploding Credit Card Debt

More and more Americans are buckling under the weight of mounting credit card debt. Inflation and strong consumer spending has sent credit card balances ballooning. Outstanding credit card balances now top an astounding $1.3 trillion. “Over the past two years, Americans’ credit card balances have skyrocketed 40%,” said Ted Rossman, senior industry analyst at Bankrate. The explosion of credit card could hold severe consequences for the economy as a whole.¹

Data points to credit card debt that is snowballing out of control. Credit card balances spiked 18% this past November alone. The share of people carrying balances month to month has leapt up to 49%. Only one third of account balances are paid in full, the lowest amount in 4 years. Meanwhile, 56 million Americans have been in credit card debt for at least a year.²

³

In addition, all stages of credit card delinquency (30, 60, and 90 days past due) jumped higher during the third quarter of last year. They surpassed pre-pandemic levels and are close to setting a record high since data started being collected in 2012.

Delinquencies are occurring as debt is getting drastically more expensive. Carrying a balance is worsened by sky high annual percentage rates, making the debt a deeper and deeper hole to climb out of. The average credit card rate is now more than 20%. “Most cardholders’ rates have risen five-and-a-quarter percentage points during that span as a result of the Fed’s rate hikes meant to combat inflation,” Rossman said. “It’s no wonder, then, that we’re seeing more people carrying more debt for longer periods of time.”⁴

Paying just the minimum on a card with a 20+% rate is “brutal.” Borrowers making the minimum payment on an average credit card balance of $6,000 at the average rate of 20.74% would be in debt for more than 17 years and end up paying more than $9,000 in interest.

The overwhelming effect of debt is feeding into the negative outlook Americans have on the economy. This is despite being told how well the country is doing. People are being forced to rack up debt for practical purchases such as food, fuel, and day-to-day expenses. They are not buying indulgences that can be delayed or ignored. Bills are becoming harder to pay in the face of stubborn inflation, burned up stimulus savings, and renewed student loan payments.

Banks are making it harder to get credit in response to delinquencies. They are granting fewer credit line increases and reducing credit lines more frequently. And even if the Fed does start cutting interest rates this year, credit card APRs aren’t likely to improve much.

The Bigger Picture

For the overall economy, more credit card debt can be ok when things are going well. Consumer spending accounts for about 70% of the US economy. But the short-term boost can become a drag in the long term. If the current pace of defaults and delinquencies continues, the consequences to individuals, financial institutions, and the broader economy would be profound.

As individuals falter in repaying their credit card debts, creditors, including banks and credit card companies, would bear the brunt. The surge in defaults would translate into significant financial losses for creditors. This could lead to a decline in their profitability, potentially threatening the stability of financial institutions. As a response, these institutions might tighten their lending practices, creating a ripple effect that restricts access to credit for consumers.

Consumer spending, a linchpin of economic growth, would contract as individuals curtail discretionary spending. Businesses, especially those reliant on consumer spending, would experience a decline in revenue. The potential consequence is layoffs and a rise in unemployment rates, compounding the economic slowdown. This negative feedback loop could lead to a prolonged recession.

Investors holding securities backed by consumer debt would not be immune to the fallout. Asset-backed securities, including those comprised of credit card debt, form a significant portion of investment portfolios. A surge in defaults would translate into losses for investors, affecting investment portfolios and retirement savings.

Conclusion

The potential for massive credit card defaults presents a clear financial danger. Ballooning consumer debt could set up the economy for a crash. With overwhelmed Americans left with nothing to spend, businesses would decline, and financial institutions could be left holding trillions in bad debt. Any government intervention can make the problem worse – stricter lending requirements could suffocate growth, cutting rates could reignite inflation, while raising them could put the final nail in indebted American’s coffin. That’s why experts suggest looking to physical precious metals to hedge against the consequences of runaway debt. With intrinsic value and no counterparty risk, physical precious metals, especially when in a Gold IRA, can protect the value of your retirement funds. Contact us today at 800-462-0071 to learn more.

Notes:

1. https://www.cnbc.com/2024/01/08/56-million-americans-have-been-in-credit-card-debt-for-at-least-a-year.html
2. https://qz.com/us-credit-card-balances-hit-a-new-record-as-delinquenci-1851151742
3. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/credit-turnaround-expected-in-2024-even-as-card-delinquencies-jump-in-q3-79808520
4. https://www.cnbc.com/2024/01/08/56-million-americans-have-been-in-credit-card-debt-for-at-least-a-year.html

• The UN, IMF, and World Bank predict a decade of dismal growth
• The global economy is being dragged down by war, inflation, high interest rates, and debt
• Physical precious metals can preserve portfolio value against global recession

Global Economy Facing ‘Wasted Decade’

Global financial institutions are painting a sobering picture for the years ahead. The IMF, UN, and World Bank all foresee a challenging path for the world economy, with a bleak period of economic growth that could result in a “wasted” decade.

World Bank Outlook

The World Bank said the global economy is on course to record its worse half decade of growth in 30 years. The global growth forecast has slowed for the third year in a row. And it is the slowest rate for a five-year period since 1990-1994. It is slowed down by high interest rates, sluggish trade, and geopolitical tensions. World Bank called it a ‘wretched milestone’.

“Without a major course correction, the 2020s will go down as a decade of wasted opportunity,” Indermit Gill, the World Bank Group’s chief economist and senior vice president, said.¹

²

The World Bank pointed to the rise in geopolitical conflict as one of the primary drags on the global economy.

“You have a war in Eastern Europe, the Russian invasion of Ukraine. You have a serious conflict in the Middle East. Escalation of these conflicts could have significant implications for energy prices that could have impacts on inflation as well as on economic growth,” said Ayhan Kose, the World Bank’s deputy chief economist.³

While growth is set to weaken in the West, developing countries are going to face the biggest decline. They are trapped by paralyzing levels of debt that is only growing more expensive as interest rates soar. By the end of 2024, 1 out of every 4 developing countries will be poorer than they were before the pandemic began. Investment in developing countries will drop to about half the average of the previous 20 years. Inflation has declined in the past year, but in about a quarter of all developing countries, annual inflation is projected to exceed 10%.⁴

United Nations Forecast

The United Nations issued a pessimistic forecast for the global economy due to escalating conflicts, sluggish global trade, high interest rates and increasing climate disasters.

A UN report, the World Economic Situation and Prospects 2024, projected global economic growth would slow this year. It will be below the 3% growth rate before the COVID 19 pandemic. Their forecast is lower than those of the IMF and the Organization for Economic Cooperation and Development.

The UN report warned tighter credit conditions and higher borrowing costs could present “strong headwinds” for a world economy saddled with debt. Especially for developing countries in need of investment to recover.

They caution that global inflation could lurch upwards again. All it would take would be another supply chain shock or problem in fuel availability to boost inflation. This, in turn, could prompt another interest rate hike to bring inflation down – further slowing global growth.

Meanwhile, the UN Economic Analysis and Policy division said long term high interest rates and potential price shocks means ” we are not yet out of the woods” when it comes to a global recession.⁵

The UN signaled that the United States isn’t immune to a downturn. “Amid falling household savings, high interest rates, and a gradually softening labor market, consumer spending is expected to weaken in 2024 and investment is projected to remain sluggish,” the UN said. They continued, “the United States economy will face significant downside risks from deteriorating labor, housing and financial markets.” Growth in the US is expected to slow to 1.6 percent this year from 2.5 percent.⁶

The World Bank attributes the coming US slowdown to the highest interest rates in 22 years. They see businesses becoming wary of investing due to economic and political uncertainty, especially around the 2024 election.

Conclusion

In today’s world, no country is an economic island. The fortunes of the entire globe are bound together. So just as a rising tide raises all ships, the opposite holds true. The largest international finance organizations are all warning of a dismal decade ahead. The US economy may be able to stagger through the downturn. But it will also need to resist the downward pull of the sinking economies of developing nations. As global recession sets in, the value of markets, and retirement funds built on them, will naturally decline. Those looking to protect the value of their portfolios before the slide accelerates should investigate the benefits of a Gold IRA from American Hartford Gold. To learn how physical precious metals can safeguard your financial future, contact us today at 800-462-0071.

Notes:

1. https://www.bloomberg.com/news/articles/2024-01-09/world-bank-sees-wretched-run-for-post-pandemic-global-growth
2. https://www.bloomberg.com/news/articles/2024-01-09/world-bank-sees-wretched-run-for-post-pandemic-global-growth
3. https://www.cnbc.com/2024/01/09/global-economy-set-for-its-worst-half-decade-of-growth-in-30-years-world-bank.html
4. https://www.whio.com/news/un-economic-forecast/AJ7F6U37A3CIQ6O2Q4IO7SCBRY/
5. https://www.whio.com/news/un-economic-forecast/AJ7F6U37A3CIQ6O2Q4IO7SCBRY/
6. https://www.whio.com/news/un-economic-forecast/AJ7F6U37A3CIQ6O2Q4IO7SCBRY/

• The US is in a ‘rolling recession’ with some industries sinking as the overall economy treads water
• Conditions are creating a unique ‘richcession’ where white collar workers are being laid off en masse
• A Gold IRA can protect the value of assets from the effects of the impending recession

A ‘Rolling Recession’ Plagues the Economy

A surging stock market, declining inflation, and solid job market have analysts putting the idea of recession behind us. This view is strengthened by signals from the Fed of potential interest rate cuts. However, this perspective isn’t seeing the whole picture. Hopes for a ‘soft landing’ are blinding some observers to the current ‘rolling recession’ and the advent of a ‘richcession’.

Rolling Recession

‘Rolling recession’ was coined to describe the current situation where only some industries are shrinking while the overall economy manages to stay above water. The economic weakness is across various segments but primarily focused on manufacturing and housing. An overall recession has been avoided by offsetting that weakness with the relative strength in consumer services such as travel, restaurants, etc.

Excessive government spending shielded sectors like education, government work, and healthcare from surging interest rate hikes. Private industry was not so lucky. The housing sector was the first to suffer from aggressive rate hikes. Mortgage rates nearly doubled, and home sales plunged. They are 19% lower than they were a year ago.

Manufacturing quickly followed. It’s been dubbed the “global cardboard box recession” because demand dropped for things that go in a cardboard box. Factory output dropped dramatically in 2023. The Global Manufacturing Purchasing Managers Index (PMI) marked the 15th straight month below 50, the level that divides growth from contraction. That is the longest stretch in history. A shrinking number of new orders indicate that production weakness will continue well into 2024, furthering the record duration. ¹

²

The Richcession

Current economic conditions are giving rise to a phenomenon dubbed a ‘richcession’. In a typical recession, lower paying jobs are cut first and in greater numbers. Now, service industries – restaurants, hotel, bars – are hiring. Major job cuts are concentrated in higher paying industries like technology and finance.

³

Economists point out that higher-income individuals tend to have financial cushions to withstand layoffs. Therefore, their rising unemployment is less likely to sink the overall economy. Still, their economic pain is compounded by fewer comparable job openings and salaries. Having the overall economy stay above water is cold comfort to someone approaching retirement age. A recent Bank of America report showed that the number of 401(k) plan participants taking hardship withdrawals was up 13% from the second quarter and 27% compared with the first quarter of the year.⁴

Major companies initiated substantial job cuts, reminiscent of the significant layoffs observed in 2022 when over 120 large U.S. companies downsized, affecting about 125,000 employees. Tech firms bore the brunt, but startups, banks, manufacturers, and online platforms were also affected. Major US banks trimmed 20,000 jobs in 2023. Salesforce let 10% of its workforce go, about 8,000 employees. Amazon fired 18,000 people, mostly impacting corporate roles with hourly staff minimally affected. And Spotify cut 17% of its global workforce. ⁵

A 2023 Randstad RiseSmart report revealed that 92% of employers are gearing up for layoffs in 2024 to address COVID-19’s economic impact and potential overstaffing.

Full Recession is Coming

Analysts don’t see the consumer sector offsetting declining parts of the economy much longer. Most leading indicators suggest consumer spending is slowing. Higher costs and borrowing rates will continue to put pressure on profit margins. And spending cuts by households and businesses will result in an across-the-board recession.

Predictions of a soft landing are being challenged by a couple of factors. First is the lagging in impact of rate hikes. We have not officially past the ‘expiration’ date for those lags. This is seen in the Leading Economic Index (LEI). The LEI is a composite index designed to predict the future direction of the economy. It’s comprised of several individual indicators, including the stock market, job market, and interest rates.

The LEI has declined for 19 consecutive months. Such steep declines typically only occur during recession. This recession signal from the LEI has not expired. The average length between peaks in the LEI and recession start is 11 months. But the actual range is much larger. It’s been as little as three months to as many as 21 months.⁶

Another recession signal is the inverted yield curve. The yield curve has been inverted for more than a year. Now, except for an extremely brief and mild inversion in 1998, all other inversions over the past six decades have had a perfect track record of signaling recessions to come.

Conclusion

Despite hopes for a ‘soft landing,’ the burden of a ‘rolling recession’ continues to impact specific sectors like manufacturing and housing. Moreover, the emergence of a ‘richcession’ signals a unique economic downturn, characterized by job cuts in higher-paying industries. Indicators point towards an inevitable recession when the rest of the economy starts to shrink. As the economic ground shifts, people contemplating retirement should carefully examine how to protect their portfolios. A Gold IRA can protect retirement funds from the effects of recession and richcession. Contact American Hartford Gold today at 800-462-0071 to learn more.

Notes:
1. https://www.schwab.com/learn/story/market-outlook-whats-store-2024
2. https://www.bloomberg.com/news/articles/2023-02-09/what-is-a-rolling-recession-us-could-escape-economic-pain
3. https://economictimes.indiatimes.com/tech/technology/2023-year-in-review-how-layoffs-hit-technology-and-startup-workers/articleshow/106377064.cms
4. https://www.cnbc.com/2023/11/28/401k-balances-are-down-while-hardship-withdrawals-are-up.html#:~:text=’Last%20resort’%20401(k)%20hardship%20withdrawals%20rise&text=Bank%20of%20America’s%20recent%20participant,withdrawal%20amount%20just%20over%20%245%2C000
5. https://investorplace.com/2023/12/layoffs-2023-a-roundup-of-the-biggest-companies-making-job-cuts-in-q4/
6. https://www.schwab.com/learn/story/market-outlook-whats-store-2024