What is up everybody not the stock market it's Sam from financial samurai and in this episode I want to talk about the probability of a recession happening what we should do if a recession comes and the difference between a Recession and a bear market because there are some subtle differences So I think the probability of recession happening over the next 12 months is about 70% And the reason why is due to four things one the yield curve has flattened So the spread between the two-year Treasury yield which is on the shorter end and the 10-year Treasury yield Which is on the longer end has compressed to the narrowest margin since March 2020 so a flat or Inverted yield curve so inverted yield curve is when the short end yield is higher than the long end yield is a reliable Recession indicator if you look at history you look at the st.

Louis Fred chart every time the yield curve has inverted almost every time it looks like over the next 12 months a recession has occurred and Why is that? What is the significance of an inverted or flat yield curve? Well when it's inverted it means that people are not bullish or optimistic about the future So they're unwilling to invest in the future Because they're uncertain about the future right the worst case World War three happens You know one to ten percent chance some people say and if that happens, there's gonna be a tremendous amount of pain So instead people want to invest in shorter duration.

They're gonna accept lower returns for the higher probability that they'll get their money back Thankfully expectations for aggressive Fed rate hikes over the next 12 to 24 months have declined However, even if the Fed doesn't hike at all The yield curve could still turn negative since the Fed doesn't control the Treasury bond market The market does and this is something very important for people to understand when everybody You know might freak out about the Fed hiking rates and they're like, oh no mortgage rates are gonna go up Well, that's not necessarily the case at all because the Fed doesn't control the bond market the market does you and I do The Fed could be behind or ahead of the curve You just don't know I would rather trust the market then, you know Seven Fed board governors the second reason why a recession could be imminent is because long bond yields are not spiking with surging energy prices Energy prices are obviously surging due to the war in Ukraine Given Russia is one big gas station leaving economic sanctions will hurt the global supply of oil and gas Now President Biden is talking about cutting off Imports of Russian oil and gas and the EU is talking about reducing its dependency by 65% So as a result, there's less supply and prices go up usually in a surging inflationary environment Longer term duration Treasury bonds would normally increase as bonds sell off however the 10-year Treasury bond yield actually declined from about 2% to 1.7 percent and it just can't seem to get past 2% and the reason again is that the fear of a recession The fear of losing money is greater than the fear of higher inflation in other words investors would rather own safety and lose in real terms rather than invest in risk assets and lose in nominal and Real terms.

Alright, so let's say you buy a 10-year Treasury bond that yields 1.8% But it yields a negative 5.7 percent real return because inflation is at 7.5% People are saying that's preferable to losing a nominal 20% in the stock market because it's tanking and a negative 27.5% Return real return because of inflation So for many of us if we could rewind time We could say well the wisdom of investing in I bonds paying 7 plus percent is pretty darn good and the wisdom Investing in municipal bonds that are double tax-free Pretty darn good in this scenario in the future when you're thinking about investing in a low-risk asset Don't think so much about making a small nominal or real return Instead think about how much of your capital you can protect on the downside a third reason why a recession might be imminent Negative real wage growth is a recessionary sign So although real wage growth is strong for lower income earners real wage growth overall is negative due to high inflation We're just not making as much as inflation However, unlike with negative real mortgage rates, which is great for real estate negative real wage growth is negative for the economy Right things are just simply getting more and more expensive even though you're making more and more money There is a chart in my link post from Bank of America That says if real wage growth is still negative by summer the chance of a US recession increases Well, I think there's probably a 90 plus percent probability that real wage growth will be negative in 45 months therefore the chances of a US recession is Pretty high based on this data point and this data point is also a great reminder to continue to try to increase the percentage of your income coming from Investments and not labor because income from investments are much easier in terms of moving with inflation Whereas income from your job, you know, there's a lot more friction.

You've got to be a good employee You have to have good relationships with your manager. You've got to Chart what you've done for the company and you've got to ask for a raise and you've also got to probably thread into job Hop or actually do job hop so it's much harder to get market wage Whereas when it comes to investing it's much more automatic and the final point of why a recession could be imminent Is that drastically higher energy prices have historically preceded a recession another great chart in the post goes back to?

1970 and if you see every single spike in oil Brent price, you know over 104 a Recession looks to be highly probable over the next 12 to 24 months right now oil is spiking to $130 a barrel could go higher and higher who knows but what we do know is that you know prices at the pump are Going, you know, it's over $4 per gallon average in America, which is still much lower than in the UK Let's let's not take our prices for granted.

But you know in coastal cities. We're talking $6 Price per gallon which is a lot and that just squeezes the consumer and thankfully, you know heating costs for your home should go down Because we're entering spring and summer months which use less energy But then again, there's cooling costs to deal with for probably half of the country So given I believe there's a 70% chance a recession is coming over the next 12 months There are some things you should really think about The main thing is if you have a job is to develop your relationships now with the people who control more power at your organization You know reach out to people before you need something instead of after you need something right now The labor market is robust.

No doubt about it If you go on the streets people are spending their money having a good time because kovat is waiting. Thank goodness, right? However, we're trying to think forward. We're trying to think over the next 12 months Just put yourself in the shoes of the CEO or your direct hiring manager who has seen their share price go down 20 to 80 percent or they've completely round-tripped any gains they made since the pandemic began in 2020 But the labor force is much higher and then profits are waning or slowing down so it stands to reason very logically that Managers are gonna try to make employees do more with less They're gonna slow down their hiring and as a result, you know wage pressure will slowly Decrease and if things get too bad or some companies just have just kind of crushed They're gonna start letting people go and historically even in good times companies would let go Five to ten percent of their worst performers every single year.

This is like the GE Jack Welch tradition And if we go into a recession, obviously that's going to increase so you've got to be thinking ahead Six twelve twenty four months and all the signs are pointing towards a slowdown So it's wise for you to boost your cash reserves boost your defensive assets Network strongly and look for other jobs now before the rush Happens where everybody is starting to freak out and look for new jobs Even though I believe there's a 70% chance a recession will come over the next 12 months That still means there's a 30% chance that there will be no recession We're gonna be able to navigate this cruddy time right now.

Maybe the war ends over the next couple of weeks maybe there's just peace on earth again and You know things stabilize the VIX or the volatility index is currently trading above 30. That's an elevated level But that's actually good So the VIX measures the level of risk fear or stress in the market when making investment decisions and when it is elevated Historically if you're buying when the VIX is at 30 or above over the next 12 months There tends to be a really good return on the S&P 500 Specifically we're talking about a 15 to 25 percent return Well, you know, hopefully that doesn't happen because hey the S&P 500 is already down about 15% The Nasdaq is already down over 20% and speaking of the Nasdaq.

It's officially in a bear market So what's the difference between a bear market and a recession not too much? but if you are an investor who has a predominant portion of your net worth in risk assets or if you're a Retiree who is depending on most of your investments to fund your lifestyle Then a bear market is worse than a recession at the margin here.

I look at my own example I don't have a day job. Yeah, my wife could fire me, but that's probably not wise It's probably not gonna happen, but I don't have a day job to fear losing When you're in a recession The biggest fear is losing your job and losing money in your investments that double combination is pretty bad Because if you lose your job You don't have that disposable income power to buy on the low and to make up for your paper losses So if you have a day job, you should fear a recession more if you don't have a day job Then you should fear a bear market more.

However, obviously either scenario is a suboptimal scenario It's just the way you want to think about things going forward Personally, my goal is to continue living the way I want even if a recession or a bear market arrives Living the way I want means spending more time with my little ones and less time working online I also plan to travel more with my family to see my parents and in-laws, you know this summer I think is gonna be a boom time for travel I'll just be poor in the process right because my investments are going down Look, it really stinks to be losing money and losing our progress our financial progress buys us time And that's the most important commodity of all however I will conclude by saying the best hedge against a recession is to continue living every day with joy and Meaning thanks so much for listening.

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