For well over a year now, inflation has been a big thorn in the side of U.S. households. You may recall that as recently as June, the consumer price index (CPI) topped 9% –something it hadn’t done in the nearly 41 years that came before.
Recently, there have been some signs of relief. One of those is November CPI, which came in at a year’s-lowest 7.1%.
Considering that headline inflation was more than 9% just five months earlier, the measure for last month does seem like good news. But make no mistake about it: 7.1% is still high, and the Federal Reserve knows it. You’ll notice that even on the heels of the most upbeat inflation report since the beginning of 2022, the central bank still hiked interest rates by a sizable 50 basis points this week.
Inflation may be trending down right now – but it remains a problem. And there’s a growing consensus that inflation is so thoroughly embedded in the nation’s economic fabric that it will take a steep downturn to fully rein it in. On that note, 98% of America’s CEOs said that we can expect recession in 2023, while a Bloomberg Economics forecasting model indicates there’s a 100% chance that our economy will fall into recession next year.
Among the more notable recession forecasts for 2023 is one from BlackRock, the world’s largest asset manager. In the firm’s formal 2023 Global Outlook, BlackRock says not only will we see recession next year, but that it will be unlike any that has come before it.
That forecast seems dramatic enough – but there’s even more to it. The conditions that BlackRock says will make the 2023 recession so uniquely painful are conditions they imply will persist for the foreseeable future, beyond whatever official downturn may be looming. In other words, those conditions also are characteristics of a new economic order that BlackRock says will prevail going forward.
If the conditions BlackRock foresees come to pass, retirement savers may be best served by having made appropriate revisions to their savings regime beforehand. One of those adjustments could include the prioritization of select assets that have thrived through history in adverse conditions similar to those BlackRock says will prevail in the years ahead.
I do want to spend some time discussing risk-mitigation strategy before I’m finished writing today. But first, let’s see why the world’s largest asset manager is so convinced conditions necessitating such measures could be necessary.
The crux of the BlackRock case for a recession that is different from previous recessions involves something I and others have been talking about for some time: a major, long-term shift in the outlook for inflation, including its catalysts.
What BlackRock is saying – which I’ll detail shortly – is that unlike previous recessions, this time when the Federal Reserve succeeds in wringing the life out of inflation and the rate-hike cycle is finished, price pressures will remain.
“Even with a recession coming, we think we are going to be living with inflation,” writes BlackRock.
In other words, BlackRock sees long-lasting stagflation as our destiny – even though they don’t use that term in their written outlook.
Let’s talk about the drivers of this persistent inflation, because they explain a lot. BlackRock sees inflation-drivers that are separate from expansionary fiscal and monetary policy. The asset manager also says chronic, unshakable inflation will be fueled by various obstacles to optimal production, such as aging populations and deglobalization.
“Aging populations mean continued worker shortages in many major economies,” notes BlackRock, while “persistent geopolitical tensions are rewiring globalization and supply chains.”
In BlackRock’s view, higher inflation and associated “output volatility” will help usher in a new period of economic uncertainty unlike any we’ve seen previously.
Here’s why we’ll be living with inflation after the Fed has tightened as much as it realistically can: The structural supply-side drivers of inflation can’t be as effectively addressed by rate hikes as demand-side drivers can.
“Central bank policy rates are not the tool to resolve production constraints,” notes BlackRock. “They can only influence demand in their economies.”
BlackRock notes that, as the current rate-tightening cycle continues, we eventually can expect a Fed pivot, of sorts. That will happen when it becomes clear to the central bank that the economy is facing the prospect of being crushed. In BlackRock’s opinion, we won’t see an explicit reduction in rates at that point. However, we will see a cessation of rate hikes and a reluctant acceptance of the higher ongoing inflation – a kind of inflation that rate increases would have difficulty addressing, anyway:
As the damage becomes real, we believe they’ll stop their hikes even though inflation won’t be on track to get all the way down to 2%.
The end result? A recession characterized by inflation – stagflation, in other words. And once output improves, an economic environment burdened by ongoing higher inflation that consequentially impedes the optimal performance of the risk assets that are almost entirely responsible for the world’s wealth:
We’ve entered into a new world order. This is, in our view, the most fraught global environment since World War Two – a full break from the post-Cold War era. We see geopolitical cooperation and globalization evolving into a fragmented world with competing blocs. That comes at the cost of economic efficiency. Sourcing more locally may be costlier for firms, and we could also see fresh mismatches in supply and demand as resources are reallocated.
All this will likely contribute to the new regime of greater macro and market volatility – and persistently higher inflation.
This is hardly the most optimistic assessment of the economy’s foreseeable future. And it’s worth noting that BlackRock analysts are not the only ones who see the upcoming environment as they do. In fact, those responsible for guiding the world’s largest hedge fund are right there with them.
Greg Jensen is the co-chief investment officer of Bridgewater Associates – the world’s biggest hedge fund. He’s another who’s been beating the drum particularly hard on the economy being in for a world of hurt in 2023.
In a recent interview with MarketWatch, Jensen predicted flatly that “2023 will likely be the year of a very significant global recession.”
Essentially echoing the sentiments of BlackRock, Jensen believes the economic volatility that has wiped away as much as $10 trillion this year in U.S. household net worth may be a drop in the bucket compared to what could be on the way.
Here’s what Jensen had to say about that at the SALT hedge fund industry conference in September:
This is the early phase. You actually don’t face the dilemma yet. You have a 3.7% unemployment rate. It’s easy for the Fed to talk tough about inflation. What I think will happen going forward is you’re going to have inflation staying stubbornly higher than markets are expecting as growth starts to turn down. That’s when it gets really tricky.
So, as the biggest asset manager in the world sees bad times ahead and the biggest hedge fund in the world sees the same, the question that’s reasonably beckoned is:
What can anyone do about it?
Let’s talk about that now.
To help beat back the challenges BlackRock, Bridgewater and other renowned money managers believe are on the way, retirement savers might consider including assets among their holdings that are viewed as safe havens and stores of value.
One such asset class is precious metals. I’ve talked before about metals’ solid record during periods such as calendar year 2020, when pandemic lockdowns were in full effect, as well as during the financial crisis and “Great Inflation” of five decades ago. And since the beginning of the millennium, which has seen a significant increase in chronic global turbulence, precious metals have acquitted themselves pretty respectably, in my opinion – the price of silver has appreciated more than 400% over that long-term timeframe, while gold is up more than 550% over the same period.
In fact, Bridgewater Associates’ chief investment strategist Rebecca Patterson recently cited gold as a favorite asset for the economic environment she and her colleagues see in the near- and intermediate-term futures. For his part, Bridgewater’s Greg Jensen named gold as a go-to asset a couple of years ago as a way to help diminish the impact of the “boiling conflict” and “more volatile set of circumstances” that he suggested could characterize the economic environment in the years ahead.
I’ve said this before: Precious metals may or may not be an appropriate component of your retirement savings profile. You can and should make that decision for yourself. What I’m most interested in doing today is highlighting the degree to which professionals with the most to lose – in terms of customer assets under management – see an exceptionally challenging economic period around the corner. That’s because their perspective could be helpful to individual retirement savers who see their own “assets under management” as being at least every bit as valuable.
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