A ‘prolonged’ and ‘engineered’ recession with 6-7% unemployment could be close: Here’s how to prepare – Lyn Alden and Alfonso Peccatiello

(Kitco News) – Whether or not the United States is in a recession has become a polarizing issue. According to Commerce Department figures, the US economy has seen a two-quarters drop in GDP, which fits the traditional definition of a recession.

However, Fed Chairman Jerome Powell said last week that the United States is not in a recession, a view shared by Treasury Secretary Janet Yellen and White House economist Brian Deese. Powell, for example, cited a strong job market as one reason the United States is not in recession territory.

However, we are in a “technical recession,” said Alfonso Peccatiello, author of the macro compass Blog. Lyn Alden, founder of Lyn Alden Investment Strategy, agreed with Peccatiello.

“So far, it’s a mild recession,” Alden said. “I think the labor market is weaker than it looks… Wages rose significantly last year, but rose significantly less than inflation. So the average worker took a pay cut over the past year at a much higher rate.” which is normal. It’s one of the worst years for inflation-adjusted wage growth.”

Alden and Peccatiello spoke with David Lin, host and producer for Kitco News.

Invest in bonds in a recession

As the economy slows, Peccatiello and Alden had similar recommendations for investments.

As the Fed raises rates due to high inflation, Peccatiello suggested allocating more money in cash, as well as in stocks that are “defensive” in nature, such as utilities, pharmaceuticals and consumer staples.

He also advised buying bonds.

“10-year yields are above 3 percent,” he said. “We’ve seen a big rally in the last month as the economy weakens and the Federal Reserve compounds the problem by remaining fairly tight.”

He said the bonds were pricing in future growth and future inflation, possibly resulting in higher yields.

Although Alden said the bonds were “unattractive” in early 2022 due to inflation concerns, he said we are now seeing “disinflationary pressures,” which could benefit the bonds.

“I’m pretty bullish on the bonds, on a risk-adjusted basis, as a six- to 12-month trade,” he said.



How bad is a recession?

Peccatiello predicted there would be a “prolonged and engineered period of tighter financial conditions.” He explained that in 2020, central banks intended to raise interest rates but were unable to do so due to COVID lockdowns.

“Right now, you’re facing the exact opposite situation,” he explained. “We’re up against policymakers from governments and central banks who are trying to fight inflation. They’re trying to slow down economic activity…they’re trying to tighten financial conditions.”

He said that as unemployment rises, we should expect to hit a “6 to 7 percent unemployment rate.”

Alden agreed with Peccatiello’s assessment, adding that he envisions a “stagflationary” environment with “slow or negative real GDP growth” and “inflationary pressures” on the supply side due to energy shortages.

“I think we’re stuck in a malaise until we have more abundant energy,” he said. “For the general consumer, it will come down to wages that are having trouble keeping up with inflation. [The Fed] try to reduce demand, you will see a weaker labor market, and we are already seeing the first signs of that. So the increase in initial jobless claims, a contraction in job openings… that’s basically what we have to expect.”

For Peccatiello and Alden’s predictions on real estate, as well as their views on central bank digital currencies, watch the video above.

Follow David Lin on Twitter: @davidlin_tv

Follow Kitco news on Twitter: @KitcoNewsNOW

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has gone to great lengths to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange of commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage arising from the use of this publication.

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