There's No Doubt of a Recession – in Europe
There's no doubt of a recession – in Europe... The Bank of England is projecting it... More about jobs... Unemployment claims are trending higher... The past is prologue... 'Hard Times'... Video: Mr. Wonderful on this unprecedented economy...
People may be arguing over the word 'recession' in the U.S...
But they aren't in Europe.
Today, the Bank of England – the Federal Reserve's peer across the pond – raised interest rates by 50 basis points... its biggest rate hike since 1995. In the same announcement, it got the question about an impending recession out of the way...
Its response: Yes, it's coming. And it's probably going to be a long one...
In a summary of the Bank of England's August policy meeting and interest-rate decision earlier today, the bank said it is projecting that the United Kingdom will enter a recession in the fourth quarter of this year – and it will likely last through 2023...
GDP growth in the United Kingdom is slowing. The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe... Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.
If these projections hold up...
It would be the longest recession in the U.K. since the 2008 financial crisis...
Of course, Europe – and Germany in particular – is facing an energy crisis that the U.S. and other parts of the world are not. It stems from the bloody war in Ukraine, which is still dragging on with no end in sight.
The inflation problem is also worse in Europe... U.K. inflation hit a 40-year high of 9.4% in June, not far from the number in the U.S. But the Bank of England said it expects headline inflation to peak at 13.3% in October... and to remain high through 2023.
It's a similar situation to what the American economy is facing, though on a larger scale. Unemployment is currently near historic lows in the U.K., inflation is at historic highs, and GDP growth is slowing. Both the Fed and Bank of England are raising interest rates at about the same pace now.
The only difference is England is projecting a recession... and U.S. officials are afraid to bring up the word, as if it isn't happening and never could. The moral of the story is this: Believe what you see happening in front of you rather than the labels other people want you to see.
To that end, we have some more on the U.S. jobs market today...
Yesterday, we told you that the number of job openings across America has been falling, though the unemployment rate (those looking for work, but who can't find it) has remained at a very low 3.6%.
Today, we're seeing the first indications that unemployment could be accelerating in a significant way. As Stansberry NewsWire editor C. Scott Garliss reported today...
According to the U.S. Department of Labor, another 260,000 individuals filed initial jobless claims in the week ending July 30... This week's report was on par with the highest unemployment reading this year (two weeks ago)... and the third consecutive time the number exceeded 250,000.
As Scott pointed out, since hitting a 60-year low in mid-March (the exact time the Fed started hiking interest rates), jobless claims have been trending higher...
Yet, as we reported yesterday, there are still 10.7 million job openings in the U.S., as of June. That's presumably more than enough capacity for new hires, so long as workers' skills match employers' expectations... and assuming people want the jobs.
We won't get into a deep-dive analysis of that point, though it is interesting...
The timely takeaway for the markets is that, for now, the Fed – whose two-point congressional mandate is "stable prices" and "maximum employment" – has no reason to stop hiking interest rates to "fight" inflation (and slow the economy)...
So, be aware of the consequences...
Finally, a timely example of 'past as prologue'...
Last week, at our headquarters in Baltimore, I was walking past a long bookshelf near the office of our colleague Dr. David "Doc" Eifrig when a title caught my eye... The Impossible H.L. Mencken – a collection of old newspaper articles from the famed reporter in our city.
I've long been interested in learning more about Mencken, one of the more famous journalists and essayists to ever work in Baltimore and a well-known national figure in the early 20th century. To be clear, I don't know much about the man...
But after reading just a small sample of his work so far, a theme has stood out. Mencken – a chronicler of all kinds of topics, people, and everyday life – wrote several reports on finance in the early days of the Great Depression.
Unfortunately, they sound familiar and relevant today...
In one very brief essay titled "Hard Times" for the Evening Sun on March 23, 1931, Mencken wrote a pair of stunning, eloquent, timeless truths about finance in general...
One of the things that will have to be learned by the United States, soon or late, is that men of business, and especially bankers, are usually very poor economists and even worse psychologists.
True. He went on to describe the concepts of inflation and the "wealth gap" that are relevant to us today, though he didn't mention the phrases specifically. Instead, Mencken wrote powerfully...
For it is an absurdity to call a country civilized in which a decent and industrious man, laboriously mastering a trade which is valuable and necessary to the common weal, has no assurance that it will sustain him while he stands ready to practice it, or keep him out of the poor-house when illness or age makes him idle.
In another piece titled "On Banks" from the Evening Sun on June 22, 1936, he wrote...
What is to be done about crooked banks, nitwit banks, bad banks in general? The problem seems to be beyond the capacities of American legislators, for every solution they have arrived at in the past has turned out, in the light of experience, to be no solution at all.
So far as I can make out, there is nothing in the present law to prevent another Baltimore Trust Company [bank failure] being launched tomorrow. Indeed, if the current business recovery develops into a boom we'll have one almost inevitably, and all the innocents who were hornswoggled the last time, including especially the great public journals of this town, will be taken for another dizzy ride.
Eighty years later, have we learned? Are we civilized? It doesn't seem like it. Though the "dizzy ride" and the inevitable fallout from the busting of an overzealous boom sounds very familiar. The past is indeed prologue.
Mr. Wonderful: 'We've Never Seen This...'
History might repeat, but Kevin "Mr. Wonderful" O'Leary says we've never seen what's happening now with the U.S. economy. Listen to what the Shark Tank star had to say in this exclusive interview with our editor-at-large Daniela Cambone...
Click here to watch this show right now. And to catch all of the videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.
New 52-week highs (as of 8/3/22): Booz Allen Hamilton (BAH).
In today's mailbag, more feedback on T-bills... and a question about the Pelosi trade... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Hi Corey, Thanks for the information on the T-Bills (and I-Bonds) that E.B. discussed with Daniela. I set up an account with Treasury Direct several months ago and maxed out on the 9.62% bonds. Since the last podcast, I have begun purchasing the four-week T-Bills, as well. I am appreciative when I learn of, and can easily deploy, another tool from the toolbox to earn during these turbulent times." – Paid-up subscriber Mike D.
"[You wrote Monday] 'As we suspected when we wrote about this two weeks ago – when we said Paul Pelosi had reported exercising Nvidia options he bought last year – this trade netted the Pelosis a loss... to the tune of $341,365.'
"I don't understand how can one exercise an option and immediately book a loss – except if the option was out of the money (OTM). But on the other hand no one exercises OTM options (for guaranteed loss). It only make sense to exercise in the money (ITM) options.
"Can you please explain this?" – Paid-up subscriber Marjan S.
Corey McLaughlin comment: I definitely can't explain Paul Pelosi's thinking with this trade. But I can tell you what the public disclosures required by law show about when he bought and sold – and what that indicates...
When Pelosi bought call options on Nvidia on June 3, 2021 (a few weeks before the company's 4-for-1 stock split), shares traded around a split-adjusted $169 per share.
When he exercised these options on their June 17 expiry date of this year, shares closed at $158.80.
So, Nvidia's share price was down from when the options were bought. That's one reason.
But more likely, the bulk of the loss came simply because of the length of the trade – a year. The closer an option gets to its expiration date, the more "time value" (the premium you pay for buying it) it loses. And this value erodes quickest in the final month before expiration.
As our Director of Research Matt Weinschenk explains...
An investor can exercise an option and collect the proceeds, but there's no guarantee that those proceeds will be more than the price the investor paid for the option. Most likely, it's the time value of the option that the investor paid for upfront that has now decayed away.
I hope this is helpful. You can find information about the ins and outs of options, including the concept of "time decay"– which most people don't naturally understand – in the work of our colleague Doc Eifrig, a former Goldman Sachs trader...
Subscribers to Doc's Retirement Trader advisory, for example, have access to his comprehensive explanations of how options work... and a strategy he recommends using to boost your portfolio with "instant cash" payouts... by selling options.
If you don't subscribe to Retirement Trader already and are interested in learning more, click here for more information on how to get started. Alliance members can access Doc's work here.
All the best,
Corey McLaughlin
Baltimore, Maryland
August 4, 2022