Does does a recession even matter? Now we're going to cover whether or not a recession actually matters in the eyes of TS Law Important I Think this is very interesting and they give some fascinating perspective. So let's take a look at this: 2020 has given investors a false sense of security about the recession impact. Now look, most of you know I'm I'm pretty bullish right now, mostly because the conditions that we see in the market today are highly the opposite of the conditions that we saw in January of 2022. Where in January of 2022, the conditions of a wage price spiral were in place.

everybody was Raising prices, pricing Powers Insane Supply chain shortages were a chain. We're insane. We knew the worst was ahead of us. Now, a lot of those conditions have really started their reversal path, and even though that reversal is taking substantially longer than expected, we're not facing the sort of Paul Valkyrie scenarios uh, that we were potentially facing in January of 2022.

However, I'd like to read sort of the more bearish pieces and I think it's very interesting that they start off by saying you know, 2020 gives people a false sense of security. That basically in 2020, as they say was a joke, basically about how the market responded because and I Remember this during the covet pandemic. the stock market I mean the entire economy basically got shut down in March and then in April May Everything is a disaster. Everybody's afraid of covid, everything's hell, and the stock market's just going straight up because the Fed's printing money like crazy.

Uh, and I remember the the memes of the child on the swing, uh, smiling and laughing being labeled the stock market and in the background the whole town is on fire. Uh, being labeled the economy right? and that disconnect those memes. I'll never forget of 2020. And so they bring up basically this this joke.

They don't say it's a funny joke, but basically a joke about how the stock market is not the economy because back then we really had this element of Tina there there is no alternative to investing in the stock market. And so what they argue here was that the big thing about the fake 2020 recession is that if you if your only real experience of a recession uh, like this, this is if you're maybe like in your early 20s or before, like if you you weren't essentially of adult age in the 2008 9, 10 sort of depths of the recession or potentially even seven six. They make the argument here that the 2020 my recession might be people's only actual experience of a recession and that was really a fake recession because the government knew they were shutting down economies and they preemptively printed so much money to backstop financial markets. We basically didn't actually have a real recession.

Yes, GDP went negative, but we didn't actually allow real damage to occur from the lingering of a recession. Now what I think is interesting here is it somewhat relates to me. what Uh, what? some of what Elizabeth Warren said yesterday. Now we know that Elizabeth Warren is pretty far relatively I say extreme on the left.

Uh, as somebody who who enjoys financial and political coverage in the middle, I I see Elizabeth Warren is quite left, not not just left quite left. Uh, But anyway, she she made this argument that hey, look, once you start seeing layoffs in the economy, you're going to create this quote runaway train of more damage occurring. How are you going to prevent that continued damage And she actually has a really good point that we don't know what is going to happen in terms of how long the damage of the recession could actually last. You know the FED could U-Turn when inflation is under control.

But then you look at the pieces of the economy and you go well. what did you just do to the economy? What if now we go into a real and deep recession? Now we? We don't know. We don't know. We haven't had these sort of experiences before, so we don't We don't have a very clear precedent of of war and pandemic in a pandemic that was responded to with the money printing that we've seen right? We've had Wars and we've had pandemics separately, but not both together.

Combined with these modern supply chain issues, we haven't been in these situations before. But anyway. The stock market. Uh.

the stock market performed during an artificial environment during 2020 and 2022 is not necessarily a helpful guide where sessions they say are a process, not just a period of two consecutive quarters of falling. GDP In Fairness in 2021. Oh sorry. Last year 2022, we had two quarters of negative GDP but we did not have the recessionary process.

Now that actually led to a lot of complaining that Joe Biden was trying to re-jegger the definition of a recession like, hey, a recession isn't actually just two quarters of negative GDP And everybody's like, of course, you're saying that you're the White House But to some extent, the White House isn't necessarily wrong. Like we didn't really have the quote unquote process of a recession in 2022. even though we did have two quarters of negative GDP It didn't really feel like we were in a recession, unless the only thing you cared about is the stock market. But stock market, as we know, is not the economy.

But anyway, recessions are a process It says here, not just two quarters of falling. GDP And they sent her on deployments in the labor market, particularly in the United States when U.S companies start to fight fire people. It sets off a highly unstable and reflexive process because falling employment in turn kills consumer confidence, reduces spending, and feeds back into a decline in corporate revenues, which could lead to further job losses. Now I Find it very interesting, but this is literally what.

Elizabeth Warren was talking about and I can't believe I Somewhat find myself finding basically an Institutional piece of evidence that reiterates what Elizabeth Warren says because I generally don't like to amplify what people on the extreme say, but she's right, she's not wrong. We don't know what happens when employment unemployment starts to rise and then we get that potential runaway train and here T.S Lombard is telling us like yeah, like the 2020 recession didn't matter, but this recession we're about to go through, You know this could actually be a really big problem. Falling unemployment in turn kills consumer confidence. I mean think about it, you lose your job All of a sudden you're like oh damn, I I'm not going on vacation this year now In Fairness to myself.

Okay, well, I'm not trying to sound conceited here, but I've been pounding the table since like March of 2022 Uh, and January of 2022 around that region. The reason I say Bart is because I did an interview with a good friend of mine. Matt Reisinger I Love the guy I got to go visit him in Texas and I remember going on his podcast and I said if you're a contractor right now, just get ready I Don't know when, but probably over the next one to two years you're going to be in a recessionary environment and you want to get ready. Start saving more money now, right? And I'm trying to provide that warning like get ready.

Uh now. I'm glad I did, because you know the building permits are starting to fall. we're starting to wreck. Recognize that there could be lagging effects that affect the construction.

Market In fact, I Thought it was very fascinating. There's this researcher who put together a phenomenal piece this morning on on the lags of construction data and how that potentially affects real estate. I'm going to go ahead and pull that up right here because it's and I'll give you some bottom lines on it too. We're not going to go through the whole thing on it, but uh, let's see if I could find the darn thing here.

Here it is. EPB Research Okay, and I'm going to bottom line this because it's it's a little bit long-winded and that's no offense to him. He's providing data, but we're going to just keep it simple for the sake of YouTube here. Although usually I go into more detail on YouTube this one is not as necessary.

I Could sum it up faster. So basically he talks about construction being a major driver of recessions. and essentially what he's saying is construction is really broad. It's really residential construction that leads recessions.

And the Really Fascinating part here is he talks about how building permits are one of the most reliable indicators of construction because obviously you need a building permit before for you can build. And he talks about right here: Building Permits Blue Line Recession Gray Bars: Okay, so what do you have before the recession of the early 70s? What do you have? A massive drop off in permits? What do you have before the late 70s recession? Massive drop-off and permits. What do you have before the 82 Paul Volcker Era Massive drop in permits? What do you have before the late 80s Recession 89 Recession Drop in Permits: Not not very soon before or not very early. It's not like a super leading indicator of recession, but what do you have over here before the housing recession? Obviously Massive drop in permits and look at what you have now.

Massive drop in building permits. and I Thought it was a really fascinating piece because he's really saying hey, like Hello uh, the leading indicators are screaming that we're basically barreling towards a recession. He says when you see a big decline in building permits, you know some number of months later the number of units under construction will Decline And this is sort of a lining with sort of my idea that like if you're a contractor like get ready and I've been saying that for like a year now. but I mean it when the number of units under construction starts falling.

Construction Employment: Falls Almost instantly remember construction employment has residential and non-residential components. Residential labor tends to react more, uh, clearly with the actual economy because you could have you know, institutional. Uh, well, I should say like government for example, construction like roads or highways or whatever those tend well I shouldn't say 10, but maybe more recession agnostic? Uh, and and they're not as as you don't turn those projects as quickly as you do a house right, you could build a house in in, you know, three months. You know, building a highway could take you three years.

so that's why you get more responsiveness for residential construction. But anyway, basically he talks about how going back to the 70s, there have only been a certain number of times where building permits declined 20 uh. and and pretty much at all of those times we've seen a recession and we've had We have basically that showing up again. And then he talks about how there's about a six-month lag between when permits fall and when construction jobs start falling and I think that's that's a fascinating warning because he's basically giving us a leading indicator that like hey, like this could actually reiterate what Janet Yellen is saying here and maybe we should be careful on how much we tighten because if we do get this right away, train, there are a lot of actual lagging indicators that suggest we're running into problems.

Look, uh, Minecraft Steve uh is here as Jack described you yesterday saying Lumber price is probably or in an early indicator as well Steve here says construction is the number two GDP driver in Canada after real estate. Oh, look at that. Steve what part of Canada are you in I'm going to come visit you and then we can talk about uh. garages? eh? Okay, sorry bad Canadian jokes.

Uh, we'll trade loonies and toonies instead. Okay, so investors can be sure. remember my family is half Canadian so I I feel like I I we we get to make those jokes and then have beer we'll go to LCBO if you're in the Ontario area. Uh, just as long as it's in accordance with their hours because they have weird operating hours.

Anyway, investors can't be sure how deep the recession will be, when it will end, or whether there will be a strong and full recovery. But we can agree that a recession should be in the mind of investors, right? And we want to be aware. because uh, you know right now the assumption is that the recession is going to be mild, but a big red flag that you want to pay attention to is every recession is assumed to be mild now I Think that that was actually really interesting. What's up Max I'll come visit you in Toronto that's only like 30 40 minutes from Barry depending on traffic.

Anyway, uh this I thought was really interesting because yeah, everybody right now is like okay, if we have a recession, it's going to be mild. Well dude I remember 2006 and you know what Realtors said in 2006 they're like ah, we're just gonna have a leveling off of home prices. It's just gonna be leveled off. It's just gonna be mild.

Dude, it was not mild. It was hell. It was hell. Some condos in many markets fell as much as 55.

It was insane. If true recessionary Dynamics kick in, at which point people start to feel uncomfortable with the mild recession thesis. There will be a particular point of danger for risk assets and will be particularly dangerous if the response from policy makers is less preemptive than everyone has been assuming. In other words, well, inflation is still up We EFT and we're just gonna have to keep hiking.

So in other words, every recession is supposed to be mild until it isn't This is like, uh, quite frankly, like chilling this this piece right here. especially when you combine it with with, you know leading indicators Elizabeth Warren and Jerome Powell And and this piece here. it's it's. this is bear bearish I Don't like this, right? Even if it lasts only a matter of weeks, the combination of rapidly deteriorating economic data and residual monetary hawkishness could substantially deep stabilize Global Markets investors are focusing on the softness of the soft Landing but even a soft Landing could be disturbingly bumpy.

Corporate earnings could. Okay, So then we get into one final thing about a normal recession is we don't know what sort of economy will emerge on the other side. Often, the whole trajectory of nominal GDP turns lower, which means corporate earnings are permanently reduced compared to what investors expect before the downturn. More subtle point is that sectors that performed well during the previous expansion might not be the growth leaders of the news cycle.

take famously the mid-2001 recession Manufacturing in the developed World never fully recovered with many of these industries migrating to China and developing economies out of the US U.S tech companies suffered years of structural derating with with Europe and Emerging Markets expering the best period of outperformance in decades. It is possible we could see another big rotation after the next recession, particularly if underlying inflation pressures were to linger and there was no return to quantitative easing. and the this is basically near zero interest rate policies of the 2010s, which had previously given stocks distinct advantages. So we can tell ourselves the next recession doesn't matter, but it is like and that it is likely to be mild, especially if we manage our own jobs, but that view could well be tested at some point this year.

Oh, that is. this is a pretty damning piece on the recession and uh, and and you know, how does this affect my likelihood of flip-flopping Well, uh, right now it doesn't I'm going to be as the FED says, data dependent I think our trajectory is substantially different than that, again of where we were in January of 2022. Uh, However, this is a very good point and this is something that I'm going to put on my bear belt. So I like to say I have a bear belt and so that way if I need to reach down to my tool belt and go I got a gun I mean I gotta I got bear information I can go down and go.

Oh, this is starting to align and so every so often I kind of like to look and go. Hmm. Okay, the Bear's argument. you know they have a point here here and here this is a really good point.

I Think this is a fantastic bear argument is that we don't know how dirty this recession could be. We have no idea. Uh, and so we just have to see hey, how, how's our, how's our progress growing and uh, what is the likelihood that the amount of wealth and excess savings that has been built up uh will actually sustain us through the recession? Now Somebody left a comment yesterday which I thought was actually a very fair comment. They're like Kevin Can you clarify why Everybody keeps saying that you know the savings rate is down and uh, a credit spending like Consumer Debt is up.

But somehow people have excess savings and this is actually a very weird phenomenon. So let's say you have twenty thousand dollars of excess savings, but you're saving zero right now. your savings rate is zero so that could be explained away. We can explain a way that you have more money while the savings rate is lower than usual.

That's fair. But then why is debt going up? Well, it's financially stupid. but a lot of people do this. They will actually look at money in their bank account and say yeah, I'm going to keep that.

That's my. that's my safety net now. I'm going to go spend on my credit card and borrow more money. It's It's generally terrible of a terrible financial decision to pay interest on a credit card while you have money to pay it off.

but people do it. I Don't know why I Don't think it's a good idea, but it does happen. So uh, you know the conditions are definitely present for uh, for some bearishness. Uh, but we'll see how the leading data comes out over the next, Uh, over the next period of time here.