Don't Count on a Soft Landing This Time

Editor's note: Now that the Federal Reserve has started lowering interest rates again, many folks are starting to believe we've achieved a "soft landing." But according to our colleague Mike DiBiase, that's just wishful thinking. As he explains in this piece, recently published on our free Stock Market Trends site, this rate-cutting cycle will likely end with a painful recession, despite the market's expectations...

All signs point to the same thing... We're headed for a recession.

Recessions typically begin after the Fed starts lowering rates. That's what happened before the last four recessions, going back to 1990.

We are seeing all the troubling signs you'd expect leading up to a recession...

Credit-card debt is at an all-time high and still rising. The average interest rate on credit cards is now more than 20%.

The interest burden is suffocating most Americans. More and more folks are falling behind on their credit-card and car-loan payments. Delinquency rates are soaring.

About 67% of the workforce is living paycheck to paycheck today, up from 63% last year.

And it's just as bad for corporate America...

The cost of borrowing has risen sharply since 2021, and it's killing companies with high debt loads. In July, 71 U.S. companies went bankrupt, according to S&P Global. And the number of bankruptcies is accelerating. That's up from 66 in June. As of the end of July, 446 companies have gone under, the highest total for this seven-month period since 2010.

We may already be in the early stages of a recession. And while I don't know whether we'll see the kind of carnage and devastation we saw during the 2008 recession, I'm convinced we will not land softly...

Recession Indicators Are Flashing Red

A recession has historically been defined as two consecutive quarters of a shrinking economy.

On an annual basis, the U.S. economy shrank 0.5% in the first quarter and grew 3.8% in the second quarter. But these numbers are skewed by President Donald Trump's tariffs which caused businesses to ramp up imports in the first quarter and slash them in the second quarter.

Without the large swings in imports, our economy would have grown in the first quarter and shrunk in the second quarter. And remember, most of Trump's tariffs went into effect just recently. So we haven't even seen the full effects yet. Tariffs are a tax on consumers and will only slow the economy further.

One "canary in the coal mine" for the overall economy is the trucking industry, which is already in its worst recession since 2008. It's one of many recession indicators that have been flashing red warning signs over the past 18 months.

And tariffs will only make the inflation problem worse.

Inflation Is Still a Huge Problem

The consumer price index ("CPI") spiked to 2.9% in August. Core inflation – which excludes volatile food and energy prices – is running even hotter, at 3.1%.

Not only is this above the Fed's 2% target, but it's going in the wrong direction. The CPI has increased every month since bottoming in April at 2.3%. Cutting interest rates in the face of rising inflation isn't going to bring inflation down.

The bond market seems to understand this...

Anyone celebrating the Fed's interest-rate cuts should pay attention to the interest rate that matters most... the 10-year Treasury rate.

The 10-year Treasury is the most important interest rate in the U.S. economy. It influences mortgage rates, credit-card interest rates, and corporate borrowing costs.

The Fed only controls the federal-funds rate, a short-term rate banks charge each other on overnight loans. But the market controls long-term rates.

And long-term interest rates haven't followed the Fed's cuts. Since the Fed began cutting interest rates last September, the 10-year Treasury rate has increased from 3.65% to around 4.1% today.

This rate likely won't fall until investors are confident that inflation is headed lower. But instead of taming inflation, the Fed is now stoking the fire... That's because lowering interest rates is inflationary, not deflationary.

To bring long-term interest rates down, I believe the Fed will soon be forced to resort to one of its old tricks: quantitative easing ("QE").

QE was a staple of the central bank's playbook following the last financial crisis and the pandemic. It's where the Fed steps into the bond market and buys long-term Treasurys. This market intervention causes longer-term interest rates to fall. And that's likely the only way those rates are coming down.

But QE is also inflationary because the Fed will have to resort to another one of its tricks to pay for it... printing money.

Inflation is caused by one thing and one thing only... a rapid increase in the money supply.

In the two years following the pandemic, the U.S. money supply increased at its fastest rate ever. That's why we have a sticky inflation problem today.

This problem isn't going away until we live through another recession.

As the late Nobel Prize-winning economist Milton Friedman explained, the only way to get rid of the scourge of inflation is to persist with a combination of higher interest rates, higher unemployment, higher taxes, and a contraction in credit and the money supply.

The money supply was contracting for most of 2022 and 2023. That's a big reason why inflation came down from its peak of 9.1%. But since then, the supply has increased every month for the past 22 months.

That trend will likely continue. The only way our government can realistically fund its ballooning budget deficits is by printing even more money. And QE will only make the problem much worse.

Investors are ignoring basic economics. Inflation and higher interest rates won't subside until we see real economic pain and a steady contraction in the money supply.

So don't be fooled by the rosy headlines. And don't count on a soft landing.

Good investing,

Mike DiBiase

Editor's note: Mike has made some of the biggest predictions at Stansberry recently... like calling the bottom of the COVID-19 crash, warning in April 2021 before anyone else that inflation would soar, and predicting the bear market of 2022. And today, he's warning that we're about to see billions – or maybe even trillions – of dollars' worth of assets sold at "fire sale" prices. That's why he's stepping forward to reveal how you can position yourself to profit... before this window of opportunity closes.