Your Recession Investing Handbook

  • Timing the economy’s not-so-soft landing
  • 2001, 2022 and “What about asset allocation?”
  • Jeffrey Epstein: Big banks sued for looking the other way
  • How a weak dollar means strong outlook for two U.S. stocks
  • Another automaker extorts consumers… Praise for Friday’s Elizabeth Holmes issue… HBS and chilling with Skilling!

“If you’re afraid of going into [a] recession, that’s a ‘you’ thing because there are people who are stoked,” says entrepreneur and serial business owner Alex Hormozi, who reportedly earns $100 million annually.

But it goes without saying, most investors aren’t entirely “stoked” by the prospect of a recession — which, no surprise, is looking more and more certain, despite the unusual mix of low official unemployment (3.7%) and high official inflation (7.7%).

But add the Fed’s relentless tightening to the mix? And most investors have been disabused of the notion of anything other than a recession!

“Grim forward-looking economic indicators, negative real wage growth for 1.5 years and the reach for credit card debt to bridge the purchasing power gap,” says Alfonso Peccatiello, founder and CEO of The Macro Compass, “all suggest this is not going to be a…

Soft Landing

“Updating my macro framework and refreshing some of my leading indicators,” he says, “the base case seems to be a relatively severe recession hitting around March/April 2023.”

Mr. Peccatiello adds: “If you want to get a better idea of how markets and policymakers react to a disinflationary recession, one of the best parallels would be 2001.”

Why 2001?

  • “In 2000, the Fed hiked to 6.5% and took off the excess animal spirits in markets
  • In 2022, the Fed hiked to ~5% and took off the excess animal spirits in markets
  • In 2001, job market losses and earnings contraction followed
  • In 2023

“… the economy is going to be a reflection of the massive monetary and fiscal tightening in 2022.” However, Peccatiello expects the Fed to “pivot” during the second half of 2023 — “exactly like it happened in 2001,” he says.

The best-performing sectors of 2001?

Click to enlarge
Source: The Macro Compass, Substack

As happened in 2001: “Bonds were the clear winners, and USD cash also did well,” he says. “Despite the massive Fed pivot, the S&P 500 dropped another 12%.”

So, today?

“What about asset allocation?” Peccatiello asks. Generally speaking, “Prefer safer assets to risk assets,” he says.

“Over the next few quarters, fixed income should emerge as one of the best risk-adjusted asset classes amidst this disinflationary/lower economic growth cycle.

“Accordingly,” he concludes, “my… portfolio remains positioned as follows:

  • “A good chunk of (USD) cash
  • Higher-than-usual exposure to 10-year+ government bonds
  • Low exposure to risk assets (preference for high-quality growth names and noncyclical, low-beta industries: good tech, utilities, health care).”

[To that last bullet point: We spied the top holdings of Jeremy Grantham’s firm GMO LLC. If you recall, Mr. Grantham sounded the alarm on the threat of a “superbubble” about three months ago.

And as of Nov. 10, GMO’s top holdings jibe with the “preference for high-quality” tech and health care names, including Microsoft (MSFT), UnitedHealth Group (UNH) and Johnson & Johnson (JNJ).

But as credible as these ideas are for hedging your portfolio during a recession, they don’t hold a candle to something the Paradigm team has been researching all summer and fall. It’s a totally unique asset class that’s brought together Rickards-Altucher-Blanco in a unique partnership to which you’re invited on Thursday, Dec. 1 at 7 p.m. EDT. You can register, with one click, right here.]

On this first full day back at the market since the Thanksgiving break, it’s red all over. The Dow is holding up best, but still down 1.3% to 33,890; meanwhile, the S&P 500 and Nasdaq have both lost around 1.5% to 3,965 and 11,055 respectively.

One Nasdaq-listed stock, Apple (AAPL), is down almost 3% at the time of writing as rioting against China’s zero-COVID policy breaks out throughout the country.

kakashil Tweet

Even commodities like oil are bracing for impact from events in China; a barrel of West Texas crude is selling off for $77.06. Precious metals aren’t getting any love either: Gold is down 0.80% to $1,739.60 per ounce while silver is down 2.5%, just under $21.

Turning to the crypto market, Bitcoin is down 2.4%, but still hanging out above its $16K floor. Ethereum, on the other hand, is down a dismal 4% to $1,160.

For the record: Two of Jeffrey Epstein’s accusers filed federal lawsuits against Deutsche Bank and JPM on Thursday, claiming the big banks ignored obvious signs of the scumbag financier’s criminality.

The crux of both lawsuits: “The banks violated human-trafficking laws by aiding Epstein with access to accounts and cash,” The Wall Street Journal reports.

“The suit against JPMorgan says that Epstein started banking with the firm sometime around 1998 and developed a close relationship with Jes Staley, who was… head of private banking,” says WSJ. “Epstein turned to Deutsche Bank when the ties with JPMorgan ended around 2013, the lawsuits say.”

Attorney Bradley Edwards writes of the lawsuit: “The time has come for the real enablers to be held responsible, especially [Epstein’s] wealthy friends and the financial institutions that played an integral role.

“These victims were wronged, by many, not just Epstein. He did not act alone.”

(Yes, that was the sound of scores of high-level sex abusers — and their enablers — collectively evacuating their Thanksgiving dinners, with any luck, into their designer pants!)

Perhaps now names will be named… Or will Epstein’s “friends” manage to keep hiding in plain sight?

“Today, I want to show you how a shift in one chart can lead to retirement income for you,” says our retirement-and-income expert Zach Scheidt.

The following chart “is a picture of the U.S. dollar compared to a basket of other international currencies…

DXY
Source: Rich Retirement Letter

“As you can see, the dollar has been trending higher for much of the year,” Zach notes. “That’s largely because the Fed has been hiking interest rates, which means foreign investors can get better yields for dollar-denominated investments.

“And while this trend has been in place for several quarters, we’re now seeing a major shift,” he says. “The U.S. dollar… is weakening compared to other currencies like the euro, the British pound or the Japanese yen.

“The trend has a major effect on American businesses…

“A weak U.S. dollar is great news for American companies with customers around the world,” Zach explains.

“For example, a stronger euro, British pound or Japanese yen makes it easier for international customers to afford the goods or services that American companies offer.

“Think about it this way… A $1 million monthly service contract would have cost a customer one million euros when the dollar and euro were trading at parity.

“But that same $1 million contract would only cost about 833,000 euros if the dollar weakened to where it stood at the beginning of 2021,” Zach says, when, at the time, it took $1.20 to buy a single euro.

“So American goods and services are more affordable when the dollar weakens,” he says, “making U.S. companies more competitive in international markets.

“As the U.S. dollar weakens, I’ve got my eye on a couple of important U.S. stocks that will benefit,” Zach details.

Procter & Gamble (PG) is a well-known company that sells consumer staples products around the world. Customers will purchase these products in good times and bad. Because even in a recession, you still need to brush your teeth, wash your clothes and keep your house clean.

“So PG’s underlying business will remain stable,” he says. Plus? “PG pays a 2.6% dividend yield,” Zach notes. “which makes the stock a great income play for your retirement account.

“Similarly, Coca-Cola (KO) is an American company with customers around the world — plus, it’s another great dividend stock, paying a 2.9% yield. Again, the weakening dollar makes KO’s products more affordable for restaurants, event venues and individual consumers.”

Zach’s takeaway: “As profits grow, I expect both of these companies to increase their dividend payouts over time… And although a weakening U.S. dollar might sound negative, there are several great investments that will pay off as the dollar trades lower.”

Oh, for the love! Mercedes-Benz is getting into the subscription game: For $1,200 a year (plus tax), the carmaker is offering its EV drivers in the U.S. a chance to drive faster.

 

“All told, [Mercedes-Benz] estimates this” allows certain EQ models “to accelerate from 0–60 mph in about 5.2 seconds, as opposed to 6.2 seconds without the subscription,” the BBC reports.

The subscription is the latest trend from automakers, including BMW, seemingly extorting every penny out of consumers.

“Mercedes is asking you to pay for hardware it has already installed in the car,” says Jack McKeown of the Association of Scottish Motoring Writers, “and which it presumably already made a profit margin on when you bought the car.

“Trying to leverage even more profit out of subscription services is a worrying trend and I hope there is a consumer backlash against it.”

“I have been reading The 5 Min. Forecast for about a decade and always thoroughly enjoy it,” a reader writes.

“I have never thought of writing in, but after Friday’s Forecast, I can’t help but thank you for the deep dive on the corrupt financial system in America today.

“Especially liked the MBA acronym as it very much aligns with my 35 years’ experience in the business world.

“Keep up the great work.”

“I’ve known quite a few Harvard grads, several of them I consider good friends. However, every one of the HBS grads I have met were con men and crooks.

“I labeled them Harvard Bottom Liners… They ruined every business they got involved with, one way or another.

“Now, after reading your article, I’m thinking maybe that was due to the Harvard BS culture, rather than that they were just born psychopaths. I guess another possibility is that HBS somehow screened for, trained and graduated psychopaths.”

The 5: Apparently, HBS has been cranking out mini Patrick Batemans — a la “American Psycho” — since the 1970s, at least.

In 2018, we relayed an anecdote from former congressman John LeBoutillier who told Duff McDonald of Vanity Fair about his HBS classmate Jeffrey Skilling of Enron infamy.

In class one day, the students discussed what they would do if they were the CEO of a company making a product that might be lethal to consumers. “I’d keep making and selling the product,” LeBoutillier recalls Skilling saying. “My job as a businessman is to be a profit center and to maximize return to the shareholders. It’s the government’s job to step in if a product is dangerous.”

Just disturbing. (Skilling, by the way, served half of his 24-year prison sentence, and, according to CNBC, as of December 2021, was working for a “startup firm in the energy industry.” Oy.)

Back to the new Jeffrey Epstein lawsuit, it sorta makes you wonder how many conscienceless HBS grads are working at Deutsche Bank and JPM, right?

“Your look back at Elizabeth Holmes reminded me of some advice I got from upperclassmen as a freshman in college,” a longtime reader concludes today.

“If you can’t dazzle them with your brilliance, baffle them with your bull****.”

Sounds about right…

Take care, and join us tomorrow for another episode of The 5.

Best regards,

Emily Clancy
The 5 Min. Forecast

Emily Clancy

Emily Clancy

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