“Recession Is Coming” – All Global Central Banks

Central bankers are "happy" the markets reacted this way...

Now they’ve gone and done it.

Jerome Powell, Chairman of the Federal Reserve, torpedoed the market.

At his speech at the Jackson Hole Symposium on August 25, he said,

"Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions."

Let me translate this into plain terms. The Fed is going to drive the economy into a recession to reign inflation in.

And he’s not the only one… In the hours and days following Powell’s speech other world leaders echoed Powell’s sentiment.

German Bundesbank Governor said

“Inflation is much too high. And so the answer in a situation like this is also obvious. This is what central banks have to do in a situation like that. We have to raise rates"

And International Monetary Fund Deputy Managing Direct Gita Gopinath said:

"Central banks must act decisively to bring inflation back to target and anchor inflation expectations… The pandemic and war suggest that temporary supply shocks may have broader and more persistent effects on inflation when an economy is very strong, or the shocks are very large. Under such conditions, central banks may need to react more aggressively to control inflation"

I could go on, but the point is made.

The low interest rate experiment of the past 20 years is coming to an end. And the central bankers are warning us. Warning us that pain is coming.

I’ve Never Been So Certain of an Impending Market Drop

Rarely in our lives will the stars align as they are right now. The “Masters of the Universe,” the central bankers that control our money supply are on the same page.

Never before have we seen the entire world undergo monetary tightening in one time.

Now I can hear the Modern Monetary Therorists says, “but monetary policy doesn’t cause inflation.” And they’re half right. Soft monetary policy decisions don’t directly impact the price of real goods. Fiscal policy does this. But what soft monetary policy do, is impact the prices of financial assets.

This is an important distinction to understand.

Knowing this, when monetary policy tightens, we should expect financial assets to decline in value. That’s happening right now. And will continue to happen as long as the Fed keeps tightening the screws on the monetary system.

Sometimes things are this simple. And this is one of those cases. Since Powell talked 6 trading days ago, the S&P has fallen from 4,200 to 3,900. A 8% decline in just over a week is a major move in the world’s biggest stock index.

How a Barbell Investor Should Protect Themselves

The bar part of portfolio… The part that should remain stable, should now be in cash or cash equivalents.

There’s nothing wrong with owning Treasuries in this environment… As long as you plan to hold them until maturity. You’ll know your exact yield through the duration of the bond.

I also have recently started buying I-bonds. These are government bonds that are linked to inflation. These bonds can be bought directly from the Treasury… But one can only purchase $10,000 per year of new bonds.

The rest should be in cash.

As for the barbells – the 10%-20% of the portfolio that juice returns – we must be careful. High returns are unlikely if we are long only.

If we utilize options (which I recommend), it’s time to allocate 1% - 2% of the portfolio to put options.

This will help our portfolio maintain its value as the market goes down… Or if it crashes a way to greatly increase its value.

Traders can speculate on shorter term movements with weekly options if they want. But if you want to place one trade and forget about it for a while, the November expiry puts should give enough time for this to play out. The $350 SPY puts look appealing.