Stocks Drop after Inflation Increases
The latest inflation numbers sent the major stock market indexes tumbling. The Bureau of Labor Statistics revealed that the Consumer Price Index increased by 8.3 percent in August. The Dow Jones Industrial Average plunged more than 900 points on the news. Fears that the Fed will intensify its interest rate hikes in response to the data fueled the sell off.
The rise was worse than the 8.1 percent increase that economists had predicted. The month-to-month figure also came in worse than expected. It went up 0.1 percent instead of going down 0.1 percent as forecasted.1
With the overall cost of food jumping to its highest amount since 1979, regular Americans are experiencing inflation on a personal level. Meanwhile, the economy is prompting those in the billionaire class to issue dire warnings on a global scale.
Warnings from the 1%
Ray Dalio is the founder of the world’s largest hedge fund, Bridgewater Associates. The Federal Reserve has been aggressively raising interest rates to bring inflation down. Dalio warns that the Fed’s hikes will lead to stagflation. He foresees high inflation without the robust economic growth and employment that come with it. Dalio predicts asset markets will decline 20%-25%.2
Elon Musk thinks interest rate hikes are more devastating to the economy than inflation. Unlike others, Musk fears for deflation instead of continued inflation. During deflation, in short, most goods and services become extremely cheap. It encourages people to postpone buying something while waiting for prices to fall further. This leads to an overall drop in consumption. Which leads to a drop in production and investment. Deflation was a crucial part of the Great Depression in the 1930s.
Peter Schiff is the Chief Economist of Europac. He disagrees with Musk. Not that the economy is in trouble, only in the form of trouble. For Schiff, a major rate hike by the Fed could cause “hyperinflation” and a “severe recession.” He added that it could “produce a worse financial crisis than 2008.”3
Billionaire Jeff Gundlach also issued a warning about an incoming recession. He is basing his warning on the yield curve inversion. A yield curve inversion happens when shorter-term Treasury rates move above longer-term yields. The market often considers the inversion of the 2-year and 10-year yield curve as a reliable preemptive sign of a recession down the line. It has happened several times this year already. Gundlach advised not to listen to the Fed saying everything is going to be ok. He tweeted, “Right on cue, the ‘It Doesn’t Matter This Time’ white papers are coming out. Don’t believe them.”4
Tech CEOs Especially Worried
Google CEO Sundar Pichai said, “The more we try to understand the macroeconomy, we feel very uncertain about it.” Alphabet, the parent company of Google, is preparing for tough times. Sundar Pichai has just warned employees that the company will probably not be spared from a potential recession. Google and Youtube will suffer from reduced advertising budgets. As a result, the company has already started laying off workers.
Google is not the only tech giant that fears the impact of a potential recession. Mark Zuckerberg, the CEO of social media giant Meta Platforms, said that he expects “one of the worst downturns that we’ve seen in recent history.” They, along with Microsoft, are laying off thousands and slowing hiring in the face of recession. 5
Jamie Dimon, CEO of JPMorgan Chase, has issued a warning to “brace yourself” for a major economic mess. At a financial conference earlier this summer, Dimon said he initially saw “storm clouds” on the horizon. Then, as inflation grew worse and the price of food and fuel rose, he changed his forecast to a “hurricane.”
“Right now, it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle this. (But) that hurricane is right out there, down the road, coming our way.”6
Overall, some of the world’s richest people are ringing the alarm bell about the state of the economy. Luckily, as an investor, you have the option to do what they do – move your wealth into safe haven assets like precious metals. Ray Dalio believes that in this economy, gold should be a significant part of one’s portfolio.7 Contact us to learn how a Gold IRA can protect your wealth during the impending downturn.