Recession, Stagflation, Hyperinflation, Big One … Here Is Why You Read Everything and Its Opposite

All these phenomena are intertwined and this is something to be desired.

Since the beginning of June 2022, you must have noticed like me that the media, economic or generalists, as well as the economic forecasters, give the impression of being completely lost. In reality, this is not just an impression. The approach of the end of the first half of 2022 and the first balance sheets of the year will amplify this phenomenon.

On the one hand, some people are telling you that a recession is a great danger ahead. On the other hand, others are announcing overheating with hyperinflation that must be fought. In this sense, despite what equity market investors may think, the Fed would be right to finally address the inflationary risk.

Then you hear about stagflation. Then you hear about a rate hike that needs to be amplified to be truly effective, before attacking a rate cut in late 2023 or early 2024. Others tell you about the decline in the markets to be feared with a big financial crash to come. For some, this big financial crash will not happen. There will be no end to the world.

Where it is particularly striking is that you can see these different visions clashing on the front page of the media on the same day.

Many people are confused by what they consider to be a cacophony. But on closer inspection, it's quite simple. Is it? Yes, yes, I assure you!

In the months to come, you will continue to have everything and its opposite happening. The nuance is that it will not happen at the same time ... Do You follow me?

Inflation is here. 8.6% year-on-year in America in May 2022 and 8.1% in the Eurozone. It was already there before the war in Ukraine, and the central bankers are making us pay today for not having acted much earlier on a situation that was becoming obvious. Jerome Powell was hoping to get out of it with luck, but it never works that way in economic matters.

Indeed, the war in Ukraine has amplified this inflation. However, inflation will come down. Be careful, if inflation will go down, prices will remain high. What will make inflation go down is the coming slowdown of the world economy, due to inflation and its impact on purchasing power and therefore on consumption. The rise in interest rates will accentuate this phenomenon.

This slowdown of the economy is already here, but in the current situation, it is desirable!

We can even hope for a short passage through the recession so that the economy can regain its equilibrium and end the tensions and shortages of the post-Covid-19 period. So if you follow me, we need an economic downturn, or even a recession, for the economy to recover. Everything and then the opposite.

The rate hike is also there. Central banks will even accelerate in the coming months, especially in the US. And what is obvious today is that rates have to go up for rates to go down. The faster central banks raise short-term rates, the stronger the expectations of a slowing economy and the lower the long-term interest rates. Everything and the opposite, again.

In the financial markets, many are beginning to hope for this passage through a technical recession as Jerome Powell called it at the end of June 2022. A sort of artificial coma of the economy, which many economists have been calling for several weeks now.

Indeed, a recession means lower inflation, and even the possibility of a return to rate cuts by central banks in late 2023 or early 2024. And as you know as well as I do, equity markets love rate cuts. Everything and the opposite, I tell you.

As you can see by now, the situation may seem confusing, but in reality, it follows a very logical path when you read between the lines. So you're going to get everything and then the opposite in the months to come. This is normal, and I would even say desirable. For us to have a “soft landing” on the economy, we will first have to go through the “hard landing”.