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“Potentially Brutal Recession”: Famed Investor Shouts “Danger!” As Warning Signs Loom

In his State of the Union address, President Joe Biden touted the strength of the nation’s job growth in 2021.

“Our economy created over 6.5 million new jobs just last year, more jobs in one year than ever before in the history of the United States of America,” Biden said.

He had a point, but it’s important to put these gains into context. The United States did finish 2021 with some 6.6 million more jobs than it started with the previous January. This far exceeded the previous one-year record of 4.2 million additional jobs in 1979. Learn more here and see this in the chart below.

Job Growth Historical 2022-03However, there are the lies of commission and the lies of omission. Without setting this fact with context, to merely make the statement Biden did is a lie of omission. Even Politifact gave this claim only a half-truth. What is the context? Covid, of course.

So what is the real job growth situation without Covid? Look at the chart below. First, we note the massive drop in jobs due to the Covid lockdowns. For about two years, we have slowly inched our way back, though nowhere near where we left off pre-Covid.

To recover jobs to the level they were at pre-Covid, the economy needs 152,504,000 minus 149,721,000, or about 2,783,000 total jobs. But to recover to the trend of the economy and demographic growth, we really need 6,279,000 jobs. Or double what Biden touts to what he says he has done. And remember, this is merely to stay on our normal growth path – it would not be doing anything extraordinary to brag about.


Nonfarm Payrolls Historical 2022-03

But even this does not tell the whole jobs story of the Biden administration. In order to achieve his mere 6.5 million new jobs, he has applied a total economic stimulus since taking office of about $7.7 trillion. The results of this policy have landed the economy with a severe inflation problem – the worst in 40 years.

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For the Biden administration to match the Trump administration’s job results, Biden would need to spend $6 trillion less and double the jobs he claims to have produced, assuming Covid has largely now ended.

Nevertheless, the inflation story has finally awoken the Fed to start raising interest rates – to what extent we will have to watch. If the Fed raises rates too much, it will cause a recession. If they don’t, even worse inflation. Though they will try to thread the needle, it looks like an impossible task.

A growing choir of billionaire money managers are getting quite pessimistic. Famed corporate raider Carl Icahn said in a recent interview, that he feared the US economy is heading for a potentially brutal recession – or even worse. See his comments in the video below.

What can the Biden administration do to avert this economic and political disaster that is about to happen? Go to war, of course. Can you think of any place he could start one?

 RWR original article syndication source.

Part 2: The Yield Curve Issue:

Uggh, nothing is more boring than looking at “yield curves” in the debt markets. But, before you dismiss it as unimportant, read on, and maybe you should care, as it is about to affect your life in a very significant way.

What Is a yield curve? A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. Hold this thought of “bonds having equal credit quality but differing maturity dates.”

The yield curve is currently nearly flat between three years and ten years. The curve has two inversion points. This past week, the Fed hiked interest rates for the first time since 2018. The hike was 25 basis points BPs (a quarter-point hike) as widely expected.

The yellow highlights are the inversion points. Economists watch this yield spread as a recession indicator. History shows the Fed generally stops hiking as soon as the 2-10 spread inverts for longer than a month. See this in the chart below and learn more here.

This yield curve model uses the slope of the yield curve, or “term spread,” to calculate the probability of a recession in the US twelve months ahead. In the chart below (source data), the term spread is defined as the difference between 10-year and 3-month Treasury rates. As you can see, the rise in this spread proceeds recessions. See this in the chart below and learn more here.

Yield Curve Recessions

Where could this go all wrong? The interest on the national debt is how much the federal government must pay on outstanding public debt each year. The national debt includes debt owed to individuals, to businesses, and to foreign central banks, as well as intragovernmental holdings.

President Joe Biden and the government released the fiscal year budget for 2022 in the first half of 2021. The table below includes figures from that budget. The interest on the debt (net interest) information and total outlays can be found in Table S-4. Dividing the interest into the total outlays gives us the percentage of the budget for the fourth column. The 10-year interest rate figures used in these calculations can be found in Table S-9. Public debt is found in Table S-1. See this summary in the following table and learn more here.

2022 $305 1.4% $26,265 5.0%
2023 $320 1.7% $27,683 5.3%
2024 $368 2.1% $29,062 5.9%
2025 $445 2.4% $30,539 6.8%
2026 $524 2.6% $31,598 7.8%
2027 $603 2.7% $33,266 8.7%
2028 $674 2.8% $34,691 9.2%
2029 $744 2.8% $35,996 10.0%
2030 $829 2.8% $37,481 10.6%
2031 $914 2.8% $39,059 11.1%

So under the best estimates of the Biden administration, in about eight years, the US will be paying close to $1 trillion per year just to pay the interest on the national debt. However, the key is the percentage of the budget – rising from 5% to about 10%.

Remember when we said above, “bonds having equal credit quality but differing maturity dates.?” Think about it, can this yield curve maintains this “flatness?” Typically credit risk should rise with maturity, reflecting more risk with time. The point here is that these Biden interest rate projections are most likely far too optimistic. This eight years to get to 10% of the US budget could go to 25% in four years.

Very soon the interest on the national debt could begin to crowd out other budget spending. What could be cut – entitlements which are nearly 2/3 of the budget already? Good luck politically doing this. The Fed could artificially hold rates down and/or just print more money, but this is risks even more inflation than we already have today. The trend is not good and a day of reckoning is coming.

What could go wrong?

See more Chart of the Day posts.

 RWR original article syndication source.