Summary
Highlights
Jim Rickards points out a global economic indicator, an inverted yield curve, which is the best signal of a coming recession, a phenomenon not seen since 2007, just before the 2008 financial crisis. He highlights a divergence where the stock market suggests a 'Goldilocks' scenario and a soft landing, while the bond market warns of a severe downturn. He explains that interest rates are a lagging indicator, and those closest to the real economy, like business owners, recognize the impending crisis first, unlike the Fed and Wall Street.
Rickards argues that the Federal Reserve has likely over-tightened monetary policy and will continue, making the looming recession worse. He suggests that any potential rate cuts or a 'pivot' by the Fed, possibly in August, would not be due to a successful soft landing but rather because of a significant economic downturn or 'crash landing.' He references the 2018 market drop where the Fed continued tightening even as the market collapsed, indicating their concern is more about 'disorderly markets' than gradual declines.
Rickards predicts widespread layoffs, similar to those seen in past severe recessions, and notes that technology companies are already experiencing significant job cuts. He explains why these layoffs haven't yet drastically impacted official unemployment figures, stating that unemployment is a lagging indicator. Employers try all other options before resorting to layoffs, meaning the true impact on unemployment will appear later in the spring, coinciding with an already existing recession.
Rickards challenges the Fed's view on wage growth, clarifying that while nominal wages might be up, real wages are decreasing due to high inflation. He criticizes the Fed's reliance on the Phillips curve, calling it 'junk science.' He also points out the significant decline in the labor force participation rate since 2000, which if factored into unemployment calculations, would push the true unemployment figure to about 9%, a 'depression level.'