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A 'prolonged' and 'engineered' recession with 6-7% unemployment could be near: Here is how to prepare - Lyn Alden and Alfonso Peccatiello

Kitco News

(Kitco News) - Whether or not the U.S. is in a recession has become a polarizing topic. According to Commerce Department figures, the U.S. economy has had two quarters of GDP decline, which fits the traditional definition of a recession.

Yet Fed Chairman Jerome Powell said last week that the U.S. is not in a recession, a view shared by Treasury Secretary Janet Yellen and White House economist Brian Deese. Powell, for example, cited a strong labor market as a reason why the U.S. is not in recession territory.

However, we are in a "technical recession," said Alfonso Peccatiello, Author of The Macro Compass blog. Lyn Alden, Founder of Lyn Alden Investment Strategy, agreed with Peccatiello.

"So far, it's a mild recession," said Alden. "I think the labor market is weaker than it looks like… Wages went up significantly in the past year, but they went up significantly less than inflation. So, the average worker got a pay cut over the past year at a much deeper rate than is normal. It is one of the worst years ever for inflation-adjusted wage growth."

Alden and Peccatiello spoke with David Lin, Anchor and Producer at Kitco News.

Bond Investing in a Recession

As the economy slows down, Peccatiello and Alden had similar recommendations for investments.

As the Fed raises rates due to high inflation, Peccatiello suggested allocating more to cash, as well as to equities that are "defensive" in nature, such as utilities, pharmaceuticals, and consumer staples.

He also advised purchasing bonds.

"10-year yields are north of 3 percent," he said. "We have seen a major rally in the last month as the economy weakens and the Federal Reserve compounds the problem by being still pretty tight."

He said that bonds were pricing in future growth and future inflation, possibly resulting in higher yields.

Although Alden said that bonds were "unattractive" at the start of 2022, due to inflation concerns, she said that we are now seeing "dis-inflationary pressures," which could benefit bonds.

"I'm fairly bullish on bonds, on a risk-adjusted basis, as a six-to-twelve-month trade," she stated.

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How bad of a recession?

Peccatiello predicted that there would be a "prolonged, engineered period of tighter financial conditions." He explained that in 2020, central banks intended to raise interest rates, but were unable to do so due to COVID lockdowns.

"Right now, you're facing the exact opposite situation," he explained. "We're facing policymakers from governments and central banks trying to fight inflation. They're trying to slow down economic activity… they're trying to tighten financial conditions."

He said that as unemployment rises, we should expect to reach a "6 to 7 percent unemployment rate."

Alden agreed with Peccatiello's assessment, and added that she foresees a "stagflationary" environment with "slow or negative real GDP growth" and supply-side "inflationary pressures" due to energy shortages.

"I think we're stuck in a malaise until we have more abundant energy," she said. "For the general consumer, it will come down to wages that are having trouble keeping up with inflation. As [The Fed] tries to curtail demand, you're going to see a weaker labor market, and we're already seeing early signs of that. So, rising initial jobless claims, a contraction in job openings… that's basically what we have to look forward to."

To find out Peccatiello and Alden's predictions for real estate, as well as their views on central bank digital currencies, watch the above video.

Follow David Lin on Twitter: @davidlin_TV

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