Record inflation? Check.
Interest rate hikes? Check.
Inverted yield curves? Check.
Consumer confidence index drop? Check.
I believe this signals a brewing recession and some top economists think so, too.
Other experts disagree.
This lack of consensus, even amidst mounting evidence of future economic turbulence, is hardly surprising. Historically, not a day has gone by without some expert predicting a recession, and crying wolf has left the townsfolk apathetic or even optimistic.
As worrying as the current signs might be, the trouble is – there's no single indisputable signal that heralds an unavoidable recession. For instance, while virtually everyone agrees that 40-year-high inflation isn't good news, other often-cited indicators such as super-low unemployment rates are much more ambiguous.
That said, the confluence of various factors, dotted by the recent yield curve inversion has set an anxious world abuzz and left people wondering how to pre-emptively protect themselves from what's to come.
Why the inverted yield curve is so captivating
Each of the 10 recessions since 1955, was preceded by an inverted yield curve. A single outlier – an inversion in the mid-1960s – was followed by an economic slowdown that fell just short of a recession. A correlation that has not gone unnoticed, an inversion is one of the first major indicators that something's deeply amiss.
But what's an inverted yield curve? An inverted yield curve is an aberration when the US Treasury's short-term interest rates are higher and hence more advantageous than their long-term ones, which suggests that there's something significantly wrong with the future economic outlook. To put it simply, the Treasury offers better returns for short-term investments, which may point to a lack of confidence in long-term growth.
On March 31st, 2022, 2-year and 10-year Treasury yields inverted for the first time since 2019. The recent inversion was short-lived, especially compared to previous ones. The 2001 recession was preceded by a 6-month inversion, the 2008 one by 13 months, and 2020 – by 4 months. Admittedly, it was a brief blip, but one that popped up on everybody's radar, sparking worries across the board.
What would a recession mean for you?
Whether it takes shape or not, it's important to be aware of how a recession can affect you. A recession is declared after several months of significant decline in economic activity and is measured in various ways, but typically revolves around downward trends relating to such factors as GDP, employment, production, and more.
Generally speaking, it's an economic slowdown – people spend less, sales drop, and borrowing becomes more difficult, which, in response, leads to loss of jobs, lower salaries, trouble repaying loans, and more. Often it goes hand-in-hand with deflation, as prices drop to ensure continued economic activity, however, if inflation continues rising, then the economy enters stagflation, dramatically diminishing the purchasing power of the hardest-hit groups.
The effects of a recession on an individual depend on numerous factors, chief among which is the industry you work in.
In preparation for a rocky road ahead, it's recommended to create or enlarge an emergency savings fund and move investments to assets that show resilience through economic downturns. But what exactly are those assets and is there a best one to invest in?
Is Bitcoin the answer?
In times of recession, it's commonplace for investors to pull out of volatile stock markets and either keep their funds in cash or reinvest them in assets that don't depreciate in value, such as gold, sometimes real estate, and now – Bitcoin.
Gold is seen as a fantastic store of value given its inherently limited supply and strong performance during recessions. And, Bitcoin, dubbed the digital gold, is increasingly competing with it.
Technically, Bitcoin is an inflationary currency. With around 18,925,000 BTC in circulation, the supply is still increasing, though it's capped at 21,000,000, which is expected to be reached by 2140. Still, for all intents and purposes, BTC inflation can be disregarded, as at 1.74%, Bitcoin bats the inflation rate. Moreover, by design, the currency protects its holders from centralized devaluation – there is no institution that can print more BTC, and thus devalue existing supply.
It's important to understand that in no way does this suggest that Bitcoin isn't subject to price volatility. It is – BTC value dipped alongside the stock market in the early 2020 recession, though it rebounded soon after, and explosively at that. But no traded currency is impervious to crises. For instance, during the 2008 recession, gold also fell 10% at one point only for its price to ultimately rise by 24%.
What matters are year-to-year growth rates, and in that regard, Bitcoin has been outperforming gold for a while now.
In other words, it's a good idea to have Bitcoin as a hedging tool during a recession. That said, judging by the trends, it's a good idea to hold some Bitcoin even if a recession never comes.
