Okay folks, we need to talk about some big recession warning signs and indications that you're going to need to know about. Then we're going to discuss some big catalysts that are coming up this week that you have to prepare for. Let's get to work. Let me start by reading you the sentence over time.

The three biggest factors that tend to drive the U.s economy into a recession are: inverted yield curves, some kind of commodity price shock or fed tightening, inverted yield curves, some kind of commodity price shock or fed tightening. Let's check on each of these things. You go, and you pull up the yield curve chart. We're heading very rapidly towards inverting, symbolized by the greenish blue line.

here. Obviously, we have overall commodities rising sharply, and this is the week where we'll have the much anticipated Fomc meeting, where the Fed is likely going to raise interest rates for the first time. So all three conditions for a recession, at least according to the strategists that I just quoted, are hit. But obviously that kind of misses the bigger picture.

The bigger picture is how much is the Fed going to choke the market, how much are commodity prices going up, and how inverted is the yield curve going to go? Let's focus on the inversion prospect first. From the 1970s to today, Every time we got below that line aka inverted, we tended to have a massive recession in a period not so far in the future, at least within 18 months. In fact, nearly every recession on here, except for maybe one on this chart, was closely preceded by an inversion in the yield curve. What does an inversion of the yield curve even really mean? though, it means that short-term rates are exceeding long-term rates.

which in a stable economy logic says that long-term rates should always be higher than short-term rates, because the longer you lend money, the more you should be compensated for the risk associated with lending said money. if I offered you a ten thousand dollar loan and gave you two different repayment options. one that required a hundred dollars in interest if you get the loan funds and you keep them for a whole year, or another one that allows you to keep the loan funds for ten years, but you only have to pay fifty dollars in interest. Which one is going to make more sense? Well, obviously, you'd rather pay less interest, so you keep the loan funds for longer.

And you'd also think I was crazy for wanting to lend out my money for longer and get less in return. But that's what happens when the yield curve inverts. Why would it cost less to borrow money for longer, you say? Well, because when people are worried about the short to medium term future, they flock out of short to medium term bonds, causing those yields to go up. And they flock in to long term bonds, causing those yields to steady out and flatline a little bit more.

Right now, short-term yields are going up a lot faster than long-term yields because people are seeing a lot more short-term risk right now as compared to long-term risk. For example, from December 29th, 2021, three-month treasury yields rose from a rate of .05 percent to point forty five percent, and then it flattened out a bit, going to point thirty eight percent, which it was at on March 10th. That means that short-term yields went up about seven point five times since that end of December recording. But you look at the ten-year you went from one point five five percent to two percent, which is still a huge jump, but it's a far cry from 7.5 x up.

The faster that short-term yields gain on the longer term yields, the closer that that gap is closed, and the closer we get to inversion you look at maybe a more relative comparison. The one year has jumped significantly faster than the 10-year and it's getting significantly closer to the two percent rate offered by the 10-year On this trajectory, one-year rates could easily surpass 10-year rates by year end, which is an inversion, extending it down a little bit more. The difference between the current rate of the three year and the current rate of the ten year is almost nothing. tightening between the difference between long-term and short-term rates.

Is the market telling you that it sees the short-term capital environment as a lot a lot more sketchy than the long-term capital environment Now, of course, a big part of that is because the Fed is expected to tighten its monetary policy, creating a lot of gasoline to push up short-term rates and long-term rates. But obviously short-term rates are more reactive, and such recessions have tended to follow every yield curve inversion. You could look at the fact that we're getting very, very close to inverting at a very rapid pace as an indication that the risk of recession is increasing at the end of the day. It doesn't really make sense to use one indicator to determine whether or not we're going to head for a recession, but this is a good indicator to look at what the market thinks is going to happen.

And it's a very, very good indicator to use with the overall bigger context of all these other problems that we have. Charlie, Why are you talking about things that are negative for the market? That's fun. I only want to hear things that are good about the market like roses and berries. I think it would be dishonest not to look at the short to medium term problems that we have in this market, but anyways, we covered the yield curve inverting.

The second indicator is commodity prices. Whether you were talking U.s or European listed energy products, Whether you were talking precious metals like gold or silver, whether you're talking agriculture like wheat or corn, everything is on fire. The Bloomberg Commodity Index as a whole keeps reaching newer and newer and higher and higher highs. But commodities.

even though they're often talked about as just food or energy or metals, they're not just that, right? I'd argue that real estate is also a precious commodity that you don't have unlimited of. And real estate costs to buy as well as rent are going through the roof and have been going through the roof. Well, think about this. On a consumer level, your average consumer has a budget that probably looks something like this.

The majority of it is allocated to the essentials: your rent, your food, your transportation, and then the rest is for everything else. your entertainment. your restaurants, new Tvs, cars, computers, iphones if you want to invest. If you want to buy your significant other some sort of present, maybe you're even creating or investing in a startup.

The green part symbolizes everything that you need to spend money on in order to live. The blue part really symbolizes what makes the American middle class and why the American middle class has been so special. Because we tend to have a lot of blue area where we can spend money on things that add quality to our lives, That spending and to some extent, investing creates massive, massive new industries that then go and spread around the globe. I do think that to some extent that Gap has closed in the last couple of decades.

But overall, if you're looking at any country and you're trying to measure the health of their middle class and the health of their economy, they need to have a big blue area, a big discretionary fund area. But the problem is what is happening right now. Well, essential costs are skyrocketing. which means that the blue area, the everything else category is getting crunched.

Essentials are taking up more and more of the pie, engulfing the blue territory. In what I've marked in red, this red here is all of the extra ground that the essentials are taking up right now. and as this crisis gets worse, we risk the essentials engulfing everything and perhaps in the future even more than everything. Point here is that a lot of people are looking at analysis from a 2021 playbook where a lot of people had intense personal savings on the sidelines, and they were also very, very pent up in terms of their demand.

A lot of people held back all of 2020 and made all this extra capital to spend in 2021 as well as extra desire. So they did, and they were willing to pay those increased pricing pressures. But those times have come and gone and now we're in the situation where increasingly everything's being taken up. You're getting the everything else segment, the blue section just get eaten.

I read a lot of analysis pieces from different economists and a lot of them like to use these complicated formulas, and they use the formulas to prove just why. commodity prices can keep going up and consumers aren't going to get hurt. But the point is, if you look at this chart, it's a pretty simple kindergarten formula to determine if commodity shocks are enough to cause a recession. If commodity shocks get you to this point, hey, maybe you're not going to have a recession, But once you get to this point and especially this point, you're in for a massive, massive shock to the system.

It doesn't make any sense to say that consumers can keep paying increased pricing pressures if they don't have any money to do so with, right? It's not a question of, oh, consumer behavior, it's a question of, well, how much money is there and are they getting raises. And then if they are getting raises, then you get back into the next level of the spiral, where eventually prices go up again, and then you have to ask again. are they getting raises? You can look at it whatever way you want. But if commodity prices go up to a level that causes pricing pressures of everyday life to go up so much, if the average person can't afford non-essentials or even can't afford essentials, then all of a sudden you get to this point where, yeah, you're in a recession.

I think we're probably somewhere here, but we're increasingly getting to that other edge. Now, the other argument for a recession is the Fed raising rates at the same time that you have this commodity shock and overall scared capital environment. And the Fed was clear last week that they are going to be raising rates, but basically at a snail's pace. Yet there's still some folks that really strongly believe that the Fed won't do anything but just to show you how stupid that would be if the Fed doesn't respond.

Since 1954, Cpi inflation has almost always been responded to very aggressively by hiking the Federal Funds rate, which you can see in purple. and obviously the Cpi rate is in red. Now, the Fed doesn't necessarily refer to the Cpi to make decisions, they prefer the Pce and some other data sets. But still, the point is clear: during periods of time where Cpi inflation has been hot, the Fed has been responsive.

They were certainly very, very slow to respond after 2008 and 2009, But throughout long-term history, the Fed has responded very quickly to inflationary problems, whereas in this crisis, the Fed hasn't responded at all, despite Cpi inflation having one of the most, if not most, stork increases in modern history. And part of this new policy is because the Fed has been used to inflation not getting out of line at least not too much, but Covet ended up being a much bigger supply issue than a demand issue and we added a ton of fuel to the fire with demand, which did help the economy get back on its feet, but at this point in the process the fun is over and we have to pay. At this point. it's sort of like the Fed as a Ferrari that Jerome Powell is driving really fast downhill and the American people are the passengers.

It was fun for Jerome Powell to show off the acceleration of the car and the engine roars from zero to sixty. It was kind of fun for him to show at 60 to 90. But now that it's going over 90 miles per hour and it's barreling downhill, Americans are like, you know, Jerome, are you gonna lay on the brakes a little bit? I'm getting kind of scared and Jerome's like look, no hands and this week drum is going to slightly push on the brakes but the Ferrari's still going downhill very very quickly. Hopefully it doesn't hit a wall or go off the cliffs.

And guess what? all these other problems were making those cliffs steeper and steeper? The Russian invasion of Ukraine, Guess what that did it made the cliffs go from like this to like this. and now the Ferrari's going. It's like, so, I don't know folks. If you're going to talk about these three different recession indicators, all of them are looking pretty bad.

The inversion hasn't happened yet though, and maybe it doesn't but these are the three that you're going to want to really, really watch closely if you're worried about the prospect of a recession. Okay, Catalyst, what do we have going on? So this week, on Tuesday, Opec will be issuing their monthly oil market reports check for signs of production increases. There has been some notable Western pressure from the U.s President as well as European leaders on Opec countries, especially countries like Saudi Arabia to increase the oil production to help fix the rising prices. And of course, I'm sure that those countries are very, very adamant to bring down prices as fast as possible on their biggest exports.

But do expect a lot of market volatility around that, because whatever moves, oil is going to move the market. Because I think the number one indicator right now for what's moving the market is oil and overall commodity prices. Uh, then you have Tuesday. The producer price index markets are fearing maybe 10 11 plus year over year.

that would be very, very red hot and continuing a broader trend. I almost think that ten percent might be a little bit lower than what people were expecting. Anything above that's going to be red Red Hot. Tuesday and Wednesday are the much anticipated Fomc meeting.

The rate hiking cycle is likely to start. Jerome Powell is going to be holding this press conference. A lot of volatility around that. And then on Friday you have quadruple witching day, which tends to add a lot of volatility as well.

So definitely going to be a very, very big week. Um, let's go over to earnings. In terms of earnings, it's not a huge week. We are through most of the main players in both the large Cap, the medium cap, and really the small cap markets as well.

Out of the ones I'm watching, we've got Koopa on Monday, Mark Forged and Shift on Tuesday, Ideonomics on Wednesday, Hut 8, Fedex, Canadian Solar, and Dollar General on Thursday. And honestly, I'm also watching to see how Gamestop does and trying to see if there's any of that retail. 2021 Momentum still in there, and I know some people that follow Gamestop are going to be like, yeah, we're still here, Charlie. But overall, with the overall scared capital environment that we're in, it is going to be interesting to see how much momentum is still left for some of the more meme names.

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