Investing During A Recession | Yahoo Finance

[Applause] [Music] Joining us now with more insight on where investors should put their money, we've got O'Leary Ventures Chairman, Mr. Wonderful himself, Kevin O'Leary. Kevin, always a pleasure to get some of your time, and thanks for taking it here with us this morning.

First and foremost, as you think about and kind of encapsulate the month that July has been within the broader backdrop of the declines that we've seen in the equity markets over the course of this year, where do you look for opportunities to still put your money to work?

Well, what's changed in the narrative of the market in July specifically was the idea that we actually could have an engineered soft landing as opposed to a hardcore recession. That, while that was a 10% probability just 90 days ago, it's a 50/50 bet right now. And so, as a result, investors are starting to place bets in places that they have historically known come back quickly after a recession.

So, tech for example got absolutely slaughtered, and yet very large names are selling at a discount to where they traditionally were just three months ago. They're picking up a bid now; you're starting to see that. Then the results coming in, like the Amazon results, even Microsoft sold off, still had strong outcomes.

So the market's kind of debating where to go in a soft landing, and there are some sectors that will do better than others. On top of all that, you've got to change the political environment. The Build Back Better bill is probably going to arrive under a trillion dollars. While it's very inflationary, it's a big peel back from the 3 trillion proposed originally if it passes at all. I mean, it's still a debate as we get to the midterms.

I like the market right here; I like buying things at a discount. July taught every investor that age-old adage: you can't time the market. If you were not in the market in July, you might have missed 50% of this year's returns. At this point in time, we know part of the inflationary environment certainly does hinge not just on what the Fed is going to do to combat inflation, but as well from the consumer perspective, how quickly some of the supply chain concerns are eased and where much of their dollars are going right now on fuel and energy prices, too, when that starts to come back down.

So with all of that in mind, if we see a resolve in the supply chain issues—and if you're seeing any of that, please do let us know—will that start to cool some of the consumer concerns that they've seen thus far?

I'm not as optimistic on supply chain. I live with it every day across 50 different private companies we're investors in; we monitor this on a weekly basis. It's still very broken. It's really hard to get products out of the ports—very, very difficult. Sometimes when you're manufacturing something and you're missing primary parts, it slows the entire process down—and that's exactly the situation we're in.

Also, for every job we have open, we're having a really hard time filling it. So, we're in a really strange situation now. There are two jobs for every available employee in America. This is unusual given that we'd be in technically what should be a slowdown according to many market pundits, and yet we're at full employment, under four percent unemployment right now.

So it's challenging. I think the way to think about it is there's not going to be a lot of relief on inflation because if we pump another 600 billion dollars free cash—which is basically what this Build Back Better is—into the market after putting six trillion of free money in, there's a reason we have inflation: we just print too much money.

You can be pro or con the bill, but the fact is it's free money, and that's going to be difficult. Next year, inflation will continue, I think, to be around six, seven, eight percent. Meanwhile, it's very hard to get that kind of return on any kind of fixed income vehicle. So, I would think investors will still favor equities, but we'll have a lot more volatility in the market over the next 12 months.

Kevin, just given your access to all the companies that you work with and all the leaders, do you think we're in our pre-recession right now?

Every recession has its own personality. This one is different; there's no question about it. It's self-imposed. There are two major sources that consumers feel in inflationary times that usually trigger a recession. One is energy prices, and food prices. We have inflation in both of those, but they're all in some ways self-inflicted.

Energy is just bad policy—shutting down pipelines, removing leases from the Gulf of Mexico and Alaska—all of that was a mistake; can't have an economy without hydrocarbons. Now we've figured that out; we're trying to change it in this bill a little bit, so hopefully that can be fixed.

But it'll take a long time, and here's the primary reason that nobody really talks about: we haven't built a refinery in this country since the 70s. We need three more refineries. The administration recently cancelled one that was about to come online, so we can't actually make any more gasoline than we're making right now. Hopefully we don't have a catastrophe in one of the existing refinements, like a flood, or a storm, or whatever that takes more capacity offline.

So that's very, very broken. Even the visit that Biden made to Saudi Arabia asking for more crude, they said, "What's the point of shipping or crude to you? You can't refine it." It's a good point, but I think it's another mistaken policy. Food price inflation has a lot to do with supply chain breakdown.

There are parts of the country that are not served protein because they can't get the truckers or they can't get the logistics worked out. Hopefully that gets fixed, but this recession, or this slowdown, doesn't look like it's going to be a hard one. It's going to be an economic slowdown, but probably not as harsh as historic recessions that usually last for 18 months.

I think the primary reason is free money from helicopters never stops. We're printing more and more and more money than ever before in any economy ever. If this bill goes through, it's even more money. The only negative to that is perpetual inflation—that's what the outcome is.

Kevin, you don't sound like you have a lot of confidence in the Federal Reserve getting things right here.

I'm giving them more credit than I would have 90 days ago because this last rate hike of 75 basis points came with more dovish verbiage, if you want to call it that—the idea that they could pause as they see what the outcomes are going to be. The market took that 75 basis point rate hike and actually celebrated it, that it wasn't 100 basis points and that Powell was talking about maybe being stop and see what the results are of these moves in assessment if the data changes.

But I would say there's probably another 75 basis points of rate hikes before he stops; but even that leaves us at historically low interest rates, so it's not as impactful as history in other times, the 70s for example, when we had interest rates as high as 17, 18, 19%. We're not in that place right now because this economy is far more productive.

Kevin, just want to come back to something you were mentioning a moment ago with regard to energy prices specifically right now. There is this whole other headwind that over the course of the year we've had to navigate through on oil, and that is the war in Ukraine.

So the acknowledgment of that, in combination with even prior to that the printing of money that had to take place from the Fed to really counter the effects, the economic detriment that we were assuming would be incurred as a result of the COVID-19 pandemic: what could we have done differently?

I mean, 2020 is hindsight, but at this point in time, it seems like we're just trying to course correct the ship here.

I'm not sure that's 100% accurate, and I'll tell you why. When you have a strong economy, and the metric you look at is employment, it's not really necessary to keep printing money. I mean, we have an extraordinary situation here with the back end of the pandemic. The last 12 months, we kept printing money and incentivized people not to go to work.

If you look at how broken transportation is right now, we can't get people to come and work at the airlines. We can't get people to work in security. We've canceled 20% of all flights in America. Ask anybody that's taken a trip lately to any major airport; it's a disaster. Part of that is a result of just giving free money to everybody all of the time and saying, "Look, stay at home; stay on your sofa."

We've had a whole bunch of people just go out of the economy because their bank accounts are fat; they've got lots of free incentives. Now, many of these programs have stopped, but it was a lot of money, and it may take a year or two before people say, "Well, you know, there's no more free cash; I got to get back to work." But that's part of the problem.

The other area that is concerning is when you have a digital economy, which is what emerged out of the pandemic, where everything is done online and people don't have to go into the office anymore—and by the millions they're not—you have a new economy. You have something that never existed before. You've got to understand what that economy is before you start stimulating it with even more free money.

Even tax policy—the idea of a 15% minimum corporate tax rate—that's not a good move because you want to keep our economy competitive. The whole idea is when you look at a bill like the Build Back Better bill, does that make America more competitive or less competitive? I'd argue less.

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