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Inflation – Recession Warnings Increase

Bank of America’s chief investment strategist Michael Hartnett warns that the inflation shock in the United States isn’t over yet and that the economy is in “technical recession,” even if most people are unaware of it.

“We’re in technical recession but just don’t realize it,” Hartnett said according to reporting by Emel Akan of the Epoch Times.


A recession is technically defined as two consecutive quarters of economic contraction. But, according to Hartnett, the U.S. economy is “a couple of bad data points away from ‘recession.’”


The economic growth for the first quarter was negative 1.5 percent, and the Atlanta Fed GDPNow prediction for the second quarter is only 0.9 percent, Hartnett said.


U.S. annual inflation rose to 8.6 percent in May, the highest level in 40 years, as key drivers such as food, energy, and housing showed no signs of abating. The markets now anticipate a more aggressive response from the Federal Reserve, which may result in a larger economic downturn.

In short, Hartnett said, “inflation shock” isn’t over, “rates shock” is just beginning, and the “growth shock” is on the way. He also said there’s “no release valve from peak in yields” and that the bear market rally is “too consensus.”

After the May Consumer Price Index (CPI) data, the bear market rally for stocks has ended. The Dow Jones Industrial Average plunged by more than 800 points, the S&P 500 dropped by nearly 2.3 percent, and the Nasdaq Composite Index plummeted by 3 percent on June 10, as markets expect more rate shocks.


A recession is not inevitable, but clients constantly ask what to expect from equities in the event of a recession,” chief U.S. equity strategist David Kostin wrote in a note to clients on May 19. “Our economists estimate a 35% probability that the U.S. economy will enter a recession during the next two years and believe the yield curve is pricing a similar likelihood of a contraction.”


Kostin pointed out that the latest rotations in the U.S. equity market suggest that traders are pricing growing odds of a recession that doesn’t mirror “the strength of recent economic data.” The research note cited that the dividend futures market suggests that S&P 500 dividends will drop by close to 5 percent in 2023.


“During the last 60 years, S&P 500 dividends have not declined outside of a recession,” Kostin stated.

However, Bank of America’s Michael Hartnett isn’t the only economist warning of a recession.


“I think the cake has been baked from the sentiment perspective where people are now acting on the assumption that a recession is coming. And remember, it’s that action that actually causes a recession to come,” said Peter Atwater, former hedge funder and now lecturer at the College of William & Mary in Virginia, during a recent Wealthion interview.


As Atwater sees it, thousands of companies have fudged their earnings with easy cash due to the ultra-low interest rates set by the Federal Reserve.


“With free money, the ability to financially engineer your earnings results is unlimited,” he said.


Now that rates are going up, such companies will start having trouble rolling over their loans.


As credit gets tighter, a lot of “dream” ventures will prove to be unfeasible and fail, he predicted, noting that overconfidence in the market has caused investors “to buy promises of even the most ridiculous things.”


“There was so much capital irresponsibly deployed to capture dreams that the volume of equity destruction is going to be massive,” he said.


The financial elite is, so far, failing to appreciate the direness of the situation because their lifestyle has become extraordinarily insulated from a commoner’s reality, he surmised, calling it “work from home blindness.”


“The financial elite are spending so much time sequestered away from the real world that I think they’ve lost sight of the fact that the folks who are delivering things to them, who live in the real world, have to buy gas,” he said.


The U.S. economy has become polarized sharply where we are witnessing the biggest wealth gap in our recent history. Since the 1980s, economic recoveries in the U.S. have been vastly benefiting the wealthiest households. Essentially, the rich are getting richer and the vast majority are losing ground, especially the middle class. Even the government is in a bind, knowing that simply increasing taxes cannot suffice because of how large the debt has gotten. The nation could be heading towards an enormous financial breakdown of the likes never seen before observed the writers for Allegiance Gold.


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