Recessions Squash Inflation And Active Risks

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Amid the highest inflation numbers in decades (a lagging backwards indicator) and talk of central bank tightening through 2023, it’s worth noting that Treasury inflation-protected securities fell 12% since last summer.

The ETF TIPS price (lower since July 2019) is now back to the same level as in March 2020, when markets were battling the deepest global recession in decades.

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Commodities (used in the production of goods) are considered a leading indicator of inflation. The CRB commodities index has fallen 9% since June 9, while many key constituents are down further: oil -15% since March, natural gas -30%, copper -24%, aluminum -36% , nickel -54%, wheat – 28%, cotton -38% etc. The price of goods represents 40% of the consumer price index (CPI).

There has never been a time when US inflation (8.6% annualized in May) exceeded 5% without the economy falling into recession. There has never been a recession that hasn’t helped crush inflation, commodities, earnings, employment, stocks and corporate bond prices while boosting government bonds ( lower yields).

Real estate prices have a 93% correlation with stock prices. Periods of falling house prices (the most widely held and indebted asset) have coincided with the deepest recessions in history.

Recessions are officially recognized several months later retrospectively by the NBER, often after they have ended. Recessions are a normal corrective phase of the business cycle, but politicians, central bankers, most financial advisers and economists never see them coming.

The average decline of the S&P 500 accompanying a recession was 42% over 16 months. Even when central banks return to easing, monetary policy operates with a multi-month lag, so stock markets typically don’t bottom out until about 15 months after the Fed’s first rate cut, when masses liquidate the losses.

Central bank policies can help inflate asset bubbles but cannot prevent their bursting phase. It is up to individuals to anticipate and manage financial risks.

Disclosure: No position

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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