The Demand Shock Of 2022

Time, Time Management, Stopwatch, Industry, Economy

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Investors are growing cautious as we move into the fourth quarter, and their trepidation is justified.

Here’s a brief summary of the situation: there is a potential global financial crisis stemming from the Chinese property market meltdown, supply chain bottlenecks are growing worse, Q3 earnings warnings are being reported from many large corporations, interest rates are rising, inflation is at a 40-year high, tax hikes are coming in 2022, and the threat of a U.S. debt default still hangs in the air until the end of November. 

The macroeconomic situation today is one of stagflation. Meaning, inflation rates are higher than normal at the same time that GDP growth is slowing. To this point, the data shows that 6.2 million people lost their benefits in the week of Sept. 11, as most government pandemic unemployment relief programs expired.

These people all need to find a job - and quickly - to supplant the government stipend that is now gone. Instead, we find that weekly layoffs are consistently higher than any other time, even before the pandemic and all the way back through 2015. And, we see that only 194 thousand net new jobs were added during the month of September.

Capital Economics has this to say about the situation: “With the labor force still three million individuals lower than it was in February 2020, and surveys suggesting that the number who don’t want a job is increasing, it’s looking more and more likely that labor supply has suffered a permanent hit from the pandemic.” 

We also note that the Q3 GDP growth estimate from the highly accurate Atlanta Fed plunged to just 1.3% from the 6.7% pace of growth recorded by the BEA during Q2.

So, it is stagflation for now; but deflation is just a few quarters away because there is a demand shock set to occur that is stemming from plunging asset prices. The stock market’s recent volatility can be likened to a typical pothole in the pavement. However, a huge crater has formed just down the road. The perfect storm for the stock market and economy is in full development and it should hit the U.S. by the second quarter of next year. 

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called,  more

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