A 2023 Recession is All But a Done Deal

The hotter than expected PPI number reported on Friday weighed on the U.S. Treasury market as well as stocks and commodities in general, though silver managed a gain and gold continues to do alright. We are seeing some improvement in general in the mining shares, too, and as Bob Hoye documents, the best environment for gold miners is in a disinflationary environment when the cost of getting metals out of the ground falls and when the Fed starts opening the money spigots again. I believe Chairman Powell is determined to whip inflation and some argue with good reason that he has already tightened sufficiently to set us into significant recession. A growing number of institutions are now suggesting a 2023 recession is pretty much a done deal and it does seem that the Fed’s tightening is starting to moderate the inflation problem, as the PPI chart above suggests. So, in theory, that should be good for gold and gold shares and most likely even better for silver and silver miners. The following account of the PPI numbers is from Peter Boockvar, Chief Investment Officer for Bleakley Financial Group.

“The PPI in November rose by .3% headline and .4% core with the former one tenth more than expected and the latter double the estimate. Also, October was revised up by one tenth for each. Versus last year, headline PPI was up 7.4% y/o/y and by 6.2% ex food and energy. They are though both off the October prints of up 8% and 6.7% respectively.

“With respect to the goods side, a 38% jump in fresh and dry vegetables led the way, along with some other food products like chicken and meats. Energy prices fell 3.3% m/o/m but are still up 16.2% y/o/y.

“With services, the BLS said ‘About 1/3 of the November rise in the index for final demand services can be traced to prices for securities brokerage, dealing, investment advice, and related services, which jumped 11.3%.’ Anything auto saw prices lower. 

“Inflation in the pipeline as measured by processed and unprocessed goods saw continued moderation with declines both headline and core.

Bottom line, and I’ll likely repeat this on Tuesday, we saw the goods prices spike over the past few years and now the decline helped by a lot of clearing out of excessive inventories of many goods products, along with the drop in commodity prices.

But I’m amazed how many think that we’re just going to quickly go back to a pre covid environment with inflation and I just don’t see it, especially if one listens directly to what companies are saying. I still believe that after the comedown in inflation, we’re going to have to get used to a 3-4% inflation trend rather than 1-2%. Can we see some months late next year of 1-2% inflation y/o/y? Yes, but a lot of that will also be due to the tough comps. It’s what comes after that which will matter.

“On the services side, there was NEVER such thing as transitory inflation as it’s been forever persistent and will continue to be. Yes, rents will continue to slow but only by so much when home prices are as unaffordable as they are. Medical care inflation will always be sticky as many other services we use. Lastly, wage growth for most people that work in services, well above pre Covid trends, will also create an inflation floor above what many were used to also pre Covid. With the sharp drop in inflation breakevens, TIPS are attractive here I believe, particularly 5 years.”

I agree with Peter for several reasons. Inflation will be higher, which will likely require higher interest rates and thus a higher cost of capital. U.S. Treasuries being more competitive with stocks will present a headwind. But it is also true that so much consumption has been pulled forward that there will be a natural decline in the auto sector and other durable sectors as well. In addition, consumers have really drawn down their credit cards and consumer debt is at the point where lower credit risk borrowers will be cut off from increases in their credit lines.

Then there is the matter of the housing market, which is the biggest single consumer factor in the market. The chart here demonstrates why the housing market is heading into a depression. With mortgage rates rising dramatically and with house prices falling very little, home affordability for a very large portion of our population simply does not exist. Note that as recently as 2020, the average household had to devote just 24.5% of their income to a mortgage for a new home. Now that level has approached 50%.

The declining oil price is an indicator that global demand is softening, so I’m glad that I recently recommended taking some profits from three energy stocks. Michael Oliver’s crude oil charts show weakness. Of course, the price has been hurt by the shutdown of China’s economy by Xi, who has apparently had a “change of heart” after the massive riots that took place by millions of Chinese citizens sick and tired of being locked in their homes. And I’m reading that China’s GDP and trade surplus have taken a very sharp hit as a result of these lockdowns. If China is seriously opening up again, it could be that oil prices will be on the rise. To confirm that, Michael wants to see a monthly close over $92.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.