30% Market Correction + Recession 'Baked In The Cake' | Steve Hanke
Mar 30, 2025
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In this engaging conversation, Steve Hanke, a renowned economist from Johns Hopkins University, and Mike Preston, a skilled financial advisor, dive into the looming recession and the Federal Reserve's role in income inequality. Hanke predicts a potential 30% market correction and discusses the implications of a shrinking money supply. They tackle challenges posed by economic stagnation in Europe and China's struggles. Additionally, they share insights on gold as a safe haven investment, emphasizing proactive strategies for uncertain markets.
The contraction of the money supply is significantly impacting nominal GDP growth, raising recession concerns later this year.
Regime uncertainty from changing governmental policies is disrupting investment confidence, reminiscent of the economic anxiety during the New Deal era.
Despite current inflation fluctuations, structural issues in economic policy persist and may lead to a stabilization around the Fed's target of 2%.
Deep dives
Economic Contraction and Recession Predictions
The current state of the U.S. economy is characterized by a contraction in the money supply, which has contributed to a slowdown in nominal GDP growth. Since the summer of 2022, the Federal Reserve has reversed its previous monetary policies, leading to a significant reduction in the money supply measured by M2. Historically, such contractions have often preceded recessions, with previous occurrences in the early 1930s foreshadowing the Great Depression. Given the current trajectory, experts predict that a recession could emerge later this year, alongside potential market corrections of 15% to 30%.
Regime Uncertainty Impacting Investment
The concept of regime uncertainty is increasingly relevant as changes in governmental policies lead to disruptions in private property rights and investment confidence. This uncertainty resembles the atmosphere during the New Deal era under President Franklin D. Roosevelt, which was marked by significant regulatory changes and economic anxiety. As businesses and investors grapple with the shifting landscape of regulations and international relations under the current administration, the lack of stability in the rules governing the economy raises concerns about future investments. Consequently, this prolonged uncertainty may contribute to a reduction in economic activity, exacerbating the already challenging conditions.
Global Economic Outlook
The global economic situation is teetering on the edge, with distinct challenges facing major economies. In Europe, economic performance has stagnated since the 2008 financial crisis, compounded by a potential militaristic approach towards Russia, further straining resources and social stability. Meanwhile, China is experiencing a unique crisis of over-leverage, leading to difficulties in economic growth and stability as its monetary supply struggles to maintain adequate levels. Given these dynamics, there is a consensus that no singular force can uplift the global economy, with all regions grappling with their respective downturns.
Inflation and Monetary Policy Analysis
Despite recent efforts by the Federal Reserve to curb inflation through a contraction of the money supply, predictions suggest that inflation rates may stabilize around the Fed's target of 2%. Current inflation rates have shown fluctuations influenced by previous monetary expansions during the pandemic, but the anticipated impacts from changes in money supply will continue to lag in their effect on inflation and real growth. Historically, there is a robust connection between supply and economic activity, which the current Fed appears to underestimate. Thus, while inflation may settle in the short term, the structural issues within economic policy and money supply growth remain unresolved.
Investment Strategies in Uncertain Times
In light of the current economic environment, investors are urged to adopt a cautious approach toward asset allocation, particularly in the stock market. Many analysts suggest evaluating profit growth expectations, which currently may be overly optimistic, projecting around 25% growth while reality may yield closer to 5%. Maintaining a defensive investment posture, akin to the principles embodied by Warren Buffett, could prove prudent amidst market uncertainty. Consequently, prioritizing liquid assets and preparing for potential downturns while being ready to capitalize on future market opportunities remains a practical strategy.
Over recent years, today's expert has consistently been one of the best predictors of where the inflation rate was headed.So, where does he see it heading from here? How about interest rates?And, why is he calling the Federal Reserve an "engine of income inequality?To find out, we have the good fortune to sit down and get a full update today from Steve Hanke, professor of applied economics at the Johns Hopkins University in Baltimore, Maryland.WORRIED ABOUT THE MARKET? SCHEDULE YOUR FREE PORTFOLIO REVIEW with Thoughtful Money's endorsed financial advisors at https://www.thoughtfulmoney.com
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