With the country’s yearly inflation rate now exceeding 9%, the Federal Reserve has been aggressively raising interest rates to try and combat this.
But with rising interest rates, the economy inevitably responds by starting to slow down.
In today’s episode, you will learn what future implications we will be seeing from these current economic conditions, and if this means we should be concerned about an upcoming recession.
Topics covered include:
*What economists mean when they are referring to soft landings and hard landings.
*Why raising interest rates always leads to a slower economy.
*Why some economists are sure that an economic recession is looming, and why some aren’t so sure.
*How we can prepare for any upcoming impacts from the Feds raising interest rates.
If you enjoyed today’s episode, make sure to share it with a friend or family member!
Transcript:
Soft Landing
Hey, this is Darryl Lyons, CEO and Co-Founder of PAX Financial Group, and you’re listening to Retire in Texas. This information is of general nature only. It’s not intended to provide specific tax, investment, or legal advice. Visit PAXFinancialGroup.com for more information. So, today I want to talk about a soft landing. This is actually the number one buzz phrase on Wall Street and has been since the beginning of the year, soft landing.
And I asked a few people that aren’t in the financial world, have you heard of this phrase? And a lot of people were like, no, I don’t even know what you’re talking about. And in the financial world, it’s a huge, huge buzz word. So, I need to take that financial jargon and make sure you understand why it’s being talked about so much in the marketplace.
And so that’s what we’re going to talk about. And before I get started, relative to soft landing, I do want to tell you about an airline, or I guess a plane ride I was on recently coming back from Cleveland. I was at the NFL Hall of Fame. I have a couple of friends on the board.
And since I was a kid, I’ve always loved the NFL and it’s just fun for me. I can’t really describe it, but just enjoy the NFL. So, I was at the NFL Hall of Fame flying back from Cleveland. You know, the hall is in Canton, but I was in Cleveland and as it landed in San Antonio, it was a very bumpy landing.
And the stewardess said, I’m really, really sorry about that landing. Just so you know, it’s not my fault. And then she said, and just so you know, it’s not the pilot’s fault. Then she paused and she said, It’s the asphalt. And everyone just started laughing. And no one really cared about the bumpy landing. And it was funny, with Southwest, sometimes you just get these stewardesses that are just hilarious.
And I got one. It was fun. So, there’s your joke of the day and it really leads into this soft landing conversation versus hard landing. A hard landing. I think if economists were talking about hard landing, they’re talking about a recession, and where are they landing from? Well, the idea is, is that the Federal Reserve, the Federal Reserve has been raising interest rates and they’ve been raising it aggressively.
And why are they raising interest rates? They’re raising interest rates because inflation was at 9.1%. And if inflation continues at that rate, the economy can’t function. So, they have to fight inflation by raising interest rates and that slows down the economy. So, the interest rates were at 9.1% at its peak. And the Federal Reserve has said we want to get the interest rate, we want to get inflation down to 2%.
So how does this idea of raising interest rates slow down the economy now? I think you know, but let me make sure that it’s clear in the flow of logic, there’s several different ways. But let’s talk about home purchases for a second because you can see this happening right before your eyes as interest rates go up.
It is more challenging to buy a house. I mean, you can logically think about it if you have a 2.85% rate on your mortgage and now interest rates on mortgages are 7%, you’re not likely going to move. And so less mortgage activity, less home buying, less moving or upgrading homes is disruptive to our entire system. Because what do you do when you buy a home and not, I mean, not only does that help the housing market, but when you buy a home, you walk into a room and your kids’ bedroom, you go, you know what?
I want a different color paint. So, you go to Home Depot, and you buy paint or Sherwin-Williams, you buy paint. What if you want to hang some pictures, right? And you need nails. So you go to Lowe’s, or Home Depot, or you want a new table because your kitchen table doesn’t really quite work in this new kitchen. You go to Ashley Furniture or wherever.
And when homes aren’t being bought and sold, then consumers aren’t going to these stores and buying these little things that make these companies profitable, like Home Depot and Lowe’s and Walmart. And I mean, you name it, there’s so many different companies attached to the homeowner’s market. So, when that happens, when the housing market starts to slow because the Federal Reserve has raised interest rates, there’s this ripple effect across the economy.
And then eventually, the foot traffic slows down in all these stores, and they have to let people go because they just don’t have enough business. So, the question is, here’s where we get to the soft landing. And every economist knows that it’s going to slow. That’s how this game works. The Federal Reserve has raised rates.
The economy is going to slow. That’s not a surprise to anybody. The question is to what degree will it slow? So, some people think it’s going to slow down to the degree that Home Depot, as an example, will maybe let a couple of people go. But it’s not that big a deal. Like, okay, we can work through this with our earnings.
And, you know, they’re kind of down right now, but not too bad. By the way, I watch these earnings all the time. I mean, I can’t say that I see every single one, but the earnings right now are not terribly bad, but they’re starting to slow a little bit. They call it same store sales, comp sales sometimes, but they’re starting to slow a little bit.
And so, if they just slow a little bit and a few layoffs happen here and there, then that’s called a soft landing. But if they’re laying off a ton of people and they’re laying off middle management and supply people and warehouse people and they’re laying off a ton of people and going to a skeleton crew, that’s a recession.
And you often know recession because people that, you know, are getting laid off. That’s when, you know, it’s a recession. People that you know are getting laid off. They say a recession is when your neighbor gets laid off, but a depression is when you get laid off. That’s kind of the scope of the economic environments when you’re decelerating, you’ve got a soft landing, a recession and a depression.
Most people, most of these economic nerds think it’s going to be a soft landing. I think there’s still some debate here. There’s a research paper, and I’ll put a link to this here by a bunch of economists that researched environments where there was high inflation and the Fed had to raise rates. They reviewed 16 episodes of this environment since 1950 when inflation was high.
And the central bank, like the Federal Reserve, had to raise interest rates to fight inflation. So, they reviewed 16 episodes since 1950 in the U.S., Canada, Germany, and the United Kingdom. In each of those cases, a recession happened, just like the environment we’re in today, where we had high inflation and the Federal Reserve had to come in, raise interest rates, slow the economy, it wasn’t necessarily a soft, soft landing.
It was a recession. So, does that concern you? Are you curious if I’m concerned about it? I mean, I am an expert, in my own opinion, but I’ll give you my opinion. I’m not concerned. I’m not concerned for several reasons. First of all, let’s make sure that we distinguish between a recession and a stock market crash. I’ve said this so many times, but I have to make sure it’s hitting us the right way.
The stock market and the economy, which when we talk about a recession, we’re not talking about the stock market, we’re talking about the economy. We’re talking about jobs generally, the stock market. They’re connected, but they’re also disconnected in a very material way. The stock market is like binoculars looking into the future, whereas the economy often when we talk about a recession and depression, that’s like a microscope looking at the here and now.
So, if a recession is going to happen, and all the nerds on Wall Street and all the smart people see that a recession is going to happen, the stock market will fall well below before a recession happens. And oftentimes in the height of pessimism, at the very worst time in the recession, that’s when that stock market climbs back up that wall of worry.
If it had gone down, does that make sense? They’re just different. And I want you to understand they’re different. So, the idea when I reference the stock market and what we see a stock market crash as the result of a recession, I don’t really know again, because I don’t have that foresight necessarily, but it seems to me that the basic what we call fundamentals of the economy, there’s good jobs, there’s the fact that the U.S. is healthy despite the debt.
We’ve got a lot of cash on the sidelines. There’s just several different elements that lead me to believe that if there is a pullback as a result of an upcoming recession, that it wouldn’t be deep and pronounced. So, a recession may be deep and severe, that would cause a deep and severe stock market, a downward trajectory in stock market, I think the probabilities are generally low that there will be a deep recession.
And so, let’s say there is a recession that’s coming, and you get the difference. You’re like, okay, Darryl, I hear you. The stock market, it’s going to go up and down. Okay, So I won’t mess with my money. I’ll leave that alone and weather that storm. Okay, good. You’ve got the right attitude. Hey, a recession is coming.
Stock market will react to that before the recession hits. Just weather that. That’s why diversification is a part of the plan. Just weather it and it will be fine. Okay. You get that. But what if you’re, now let’s talk about the economy, which is different than the stock market. I keep saying that, but talking about the economy, how do you prepare for a recession?
Well, I think you have to look at it in light of your situation. So, if you’re retired, or retiring in a recession is coming, I highly recommend that you revisit the pivoting process that I’ve talked about a thousand times, that we have a pivoting e-book on the website. And there is a strategy for navigating through those volatile times because they always come, they’re very predictable that you just don’t know when and you just don’t know what the name of them, but they always come and so we have, in our pivoting strategy, a specific approach to weathering storms at a high level, it’s typically putting aside one year of cash reserves. But if you want to know why that’s important and a few more details, again, there’s an e-book on our website that’s free. You can grab it and it’s pivoting your retirement or something like that. If you’re employed, if you’re currently employed and there’s a recession coming or you think that it’s going to be deep, which again, I don’t think it’ll be deep.
I think it’ll probably be a soft landing or maybe a mild recession. If you’re middle management, that’s the position that usually gets cut first. So just know that and make sure your family has adequate reserves and pay attention to your industry. And don’t be naive and you don’t have to freak out. But I do think that there’s some industries that are more vulnerable than others and some companies that aren’t in a good financial position.
And so, you just need to know those things and make sure that your family has adequate reserves so that you can make a transition into another career or another management job. But if you’re in middle management, watch out for that. I’ve already seen some signs in the marketplace that middle management is under stress, just so you know. And then finally, when we go back to those that are investing, just embrace the volatility, if anything.
I mean, when it goes down and people freak out, when you feel a little poorer and pessimism is at its height, hey, I’m not joking. You’ve been doing this a long time. You know this game, it’s on sale. Talk with your advisor. You know, you could shift a little bit more into equities or stocks again, within your risk profile and all those things that are reasonable and practical.
But just don’t let emotions get the best of you, because what happens in these recession environments is Chicken Little comes out in the Chicken Little, by the way, also sells gold. So just know that Chicken Little who’s on the radio and podcast and everywhere, Chicken Little typically sells gold, and they love to scare the heck out of you.
And so, you turn it off just very gently, turn it off, talk with your advisors and say, look, I’m freaking out. As I understand it, this is the time to buy, or this is the time to maybe even shift a little bit more into equities or stocks. I think that’s a healthy, mature conversation and I can’t say every time, but if you go back historically, if we could kind of go back in time and talk to our past selves, we would have probably told our past selves, hey, instead of freaking out, you should probably buy now.
And so, if you’ve been through a lot of economic environments now, you do have the skills to navigate this next one. So again, I think that if we have anything coming around the corner, a soft landing is probably a likely scenario, maybe a mild recession, not too deep. I’m not freaking out. We diversify, we plan accordingly.
We focus on what we can control. We turn off the noise and go on with our life. It’s just part of the seasons of the economy. And so, I think that’s the healthiest approach. And so, I just love this conversation because we’re training our future selves to respond to the environment that’s coming around the corner.
And that training is going to be so stinking helpful for you. So that way you don’t react because money, stress, hear me out here, money stress weakens our decision making. So, thanks for tuning in today. I hope this was helpful and useful as we navigate this economy over the next six months. As we are four months now, we’re in August, so we’ve got four months until the end of the year.
A lot of uncertainty, a lot of unknowns. But Christmas will be here before you know it and enjoy the time with your family. Make memories and remember, you think different when you think long term. Have a great day.
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