Recession by 2023? When Interest Rates and Inflation Go Up!

Recession by 2023? When Interest Rates and Inflation Go Up!

The Fed is staying the course of keeping interest rates low until 2023, so that means the US stock market and everything bubble will continue partying on until the Fed finally raises interest rates when we have max employment and inflation picks up.

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I discuss the effects of recent fiscal policy and monetary policy on trying to stimulate our economy by encouraging spending as of Spring 2021. The potential implications of these government actions could mean an inflation of all kinds of assets, including a skyrocketing stock market, in what I’m terming an everything bubble.

There have been several articles suggesting we could be in a bubble, but maybe people are really positive about the US and world economies to return to normalcy. Maybe current stock prices are warranted for what we’re expecting the economy to put out.

Bubblicious stories have always captured the market’s imagination if we were heading into bubble territory, like the dotcom and housing bubbles of yore. I am calling what we’re in now in the early 2020s the “Electric Vehicles, Crypto, Housing, Big Tech Everything Bubble” where everything seems to just go to the moon, or Mars.

The Real Economy is not equal to the Stock Market. For example, the S&P500 index only reflects 500 large cap companies, while there are over 30 million businesses in the US.

Just because the stock market is hitting all time highs doesn’t mean the economy is fully back to normal yet. Even with the massive government stimulus liquidity injection, some of the key factors the Fed monitors are not yet hitting their goal targets yet.

Fiscal policy manages aggregate consumer demand through spending and taxing actions, while monetary policy involves managing interest rates and money supply in circulation. Fiscal stimulus amounted to $5.6T from March 2020 to March 2021. The stock market skyrocketed when major stimulus bills got passed.

The Fed uses monetary policies to achieve its “Dual Mandate” of maximum employment and price stability with moderate long term interest rates. The Fed’s ideal unemployment rate is 4.5% while their target PCE inflation rate is 2%, and we’re not at these rates yet. I explain what quantitative easing (“dovish”) and quantitative tightening (“hawkish”) means at a high level.

Fed Chair Jerome Powell doesn’t think that our current fiscal spending is on a sustainable path but he and the Fed are dedicated to keeping interest low until 2023.

I discussed Elon Musk asking Cathie Wood of Ark Invest on Twitter what she thought of Buffett’s Indicator. I then explain what the Buffett Indicator of Wilshire 5000 to GDP means and why I think the stock market is incredibly overpriced right now with the Wilshire Total Market Cap being 235% of GDP! The Shiller PE (CAPE) is also signaling a place the S&P500 has only otherwise been right before major economic storms like the Great Depression and Dotcom bust.

I did some Google doom scrolling and saw some articles that are projecting a recession or stock market crash by either 2022 or 2023, like Harry Dent has predicted.

We’ve seen some historical precedent for the stock market tumbling when the Fed’s raised interest rates, like in Q4 2018, where we didn’t have Santa Rally in 2018.

The factor which may end up bursting the bubble is if and when the Fed raises interest rates in a couple of years from now when the economy is resembling what the Fed expects. This may end up leading to some assets in the bubble to come back down to earth a little.

I’m waiting for the day when I can buy some companies on sale, so I’m sitting in some cash like Warren Buffett is doing. I encourage you to do what feels right to you and continue learning to be the best investor you can be!

I look forward to making more investor friends! Add me on Instagram: michellemarki!