The 2023 Recession Just Got...Cancelled?

What's up, Graham? It's guys here. So, despite ongoing mass layoffs, skyrocketing credit card debt, and a 2008-style housing crash throughout four U.S. cities, a new theory is beginning to make its way through the markets, and that would be the chance of no recession after all. Our economy grew by 2.9 percent in the last quarter of 2022. Companies like Tesla reported record revenue and a strong outlook for this year, saying that they've seen the strongest orders year to date than ever in our history. Chipotle plans to hire 15,000 new employees as they get ready for burrito season.

But with rent still skyrocketing and Michael Burry calling the latest stock market rally a mirage, we should talk about exactly what's happening. If this is just another bear market rally, why Congress wants to eliminate the IRS entirely, and if there's a chance of nationwide rent control coming soon to an area near you on this episode of "You Probably Shouldn't Post Your Crimes on TikTok." Although before we go into that, for anybody who wants to be kept up to date on topics like this, sometimes before I'm able to make a full video on them, feel free to check out my newsletter down below in the description. It's totally free! I post my full breakdowns there twice a week, and I would love to have you a part of it. So thank you guys so much, and now let's begin.

Alright, so let's start off with the topic that everybody is wondering about: a recession. For the last year, I've been super warning non-stop about the downfall of our economy, the difficult times ahead, and the Federal Reserve tightening. Will the U.S. government scale back on stimulus? From a stock market perspective, they were right. On June 13, 2022, the S&P 500 officially entered the bear market, having declined 20% from the peak. Technology stocks suffered even worse, with the NASDAQ falling as much as 35 percent, and even housing prices began to fall, with Bay Area homes now selling for 30 percent less than a year ago.

However, even though almost every indicator has been flashing recession warning, analysts are now saying that there's a chance there won't even be one. So what happened, and what's the catch? Well, technically, a recession is defined as two consecutive quarters of declining GDP, of which already occurred throughout the middle of 2022. But since GDP isn't always a true indicator of the overall economy, the National Bureau of Economic Research updated their definition to include a significant decline in economic activity that could last for a few months to more than a year, and that's usually accompanied with lower employment, production, and sales is tracked on a monthly basis rather than quarterly.

The White House even prepped us in advance of this definition with the understanding that there are no fixed rules or thresholds that trigger a determination of decline. Although the committee does note that in recent decades, they have given more weight to real personal incomes, less transfers in payroll employment. In other words, we're not in a recession until they tell you we're in a recession, of which is probably going to be when the worst is already over, and they definitely take their time.

As the Boston Globe pointed out, throughout the last six recessions that have already been confirmed, there is an average lag time of 7.3 months between the time a recession takes place and the time it's actually announced. Why does it take so long, you might ask? Well, if they're 45 years of operation, they have never once had to rescind one of their declarations, which means they're extremely accurate, and that information usually takes about a year to confirm. That means we usually only know about it once it's already behind us.

Now, in this case, though, some analysts say that even though we did see two negative quarters of GDP, one of those quarters was only low because businesses were forced to pay for a stockpile of resources in advance ahead of time by the end of the tax year to deal with supply chain issues, and the job market is still relatively strong, all things considered. In fact, when it comes to this, one paper from the San Francisco Fed argues that an alternative measure of unemployment, which adjusts for those out of work temporarily but likely to be called back, refined jobs quickly as a more accurate short-term predictor of a downturn than the yield curve.

In addition to that, they also note that the consumer's net worth is $145 trillion, up from the pre-pandemic $115 trillion, while average housing prices are still $70,000 higher than they used to be. Therefore, as they argue, we are not currently in danger of a recession, and the Federal Reserve can continue raising interest rates higher for longer than expected until inflation subsides.

But keep in mind this is only really just the tip of the iceberg because some other markets are beginning to see a substantial decline. For example, we should look at the housing market. Just recently, Goldman Sachs shared their thoughts on the four U.S. cities that could see a 2008 housing crash throughout 2023. And if you're curious which cities these are, well, wonder no longer, as they say San Jose, Austin, Phoenix, and San Diego will likely see peak to trough declines of more than 25 percent. Such declines would rival those seen around the country around a decade and a half ago simply because those were the areas which already saw such explosive growth since 2020.

For example, in one year, Phoenix went up 32 percent, San Diego by 27 percent, and Austin had one of the largest gaps between home prices and wage growth in San Diego, tripling in value since 2000. Obviously, that type of price growth is completely unsustainable, and with interest rates going up, it's inevitable that those areas will often be hit the hardest. In fact, Goldman Sachs says that home prices are believed to have peaked in June of 2022, which means on a national basis, we could see a decline of 10 percent before growth begins to recover in 2024.

And of course, they're not the only ones saying this. Morgan Stanley anticipates a 4 percent drop from stagnant demand, Wells Fargo sees declines of 5.5 percent, and Interactive Brokers is calling for more than 20 percent. Basically, they're saying the areas that saw the biggest increases will also be the ones that see the biggest decreases. Although even though housing prices are trending down, there is another topic that's gaining a lot of attention, and that would be nationwide rent control.

First of all, it's no surprise that throughout the last few years, rental prices have been going higher. For example, a few months ago, median prices crossed more than $2,000 a month, which was their highest level ever in history. So because of that, a new proposal from the White House is beginning to gain momentum called the Renters Bill of Rights. Under this, the Federal Housing Finance Agency would examine limits on rent increases and prevent tenants from being unfairly denied access to housing. In addition to that, lawmakers have called on the FTC to issue new regulations on excessive rent increases and force actions against price gouging, and limit rent charged with properties that are financed with government-backed mortgages.

Essentially, this would aim to place a ceiling on how much rent could be charged, and some cities are already following suit. Colorado, for example, issued a proposed bill that would allow individual cities to implement their own rent control if they desired. California extended a statewide rent control in 2020, and members of Congress have already expressed interest in extending this throughout the rest of the country. But the real question becomes: does this work?

Well, as I'm sure you're already aware, there are very few things that all economists could agree on, but overall the general consensus is that unfortunately, rent control does not help with housing affordability. In fact, a 1992 poll of the American Economic Association found that 93 percent of its members agreed that a ceiling on rents reduces the quality and quantity of housing. On top of that, a Stanford study argued that rent control actually has an adverse effect on prices for renters and actually makes housing affordability worse.

Like here's what they found: rent-controlled tenants were 20 percent more likely to stay in their unit. Renters were more likely to move elsewhere if they didn't have the incentive of having the rent capped where they're currently living. Landlords of rent-controlled buildings were more likely to convert the building to an alternative use, reducing housing supply by 15 percent. The loss of that housing drove up the price for all the other rent-controlled units. In fact, it was found that a 6 percent decrease in inventory led to a 7 percent increase in rental prices.

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Anyway, the net result is that based on all of these studies, rent control actually restricts the number of new housing units that go on the market. While certainly some renters could get a bargain and win the lease agreement lottery, most people never get access to low rent-controlled pricing. And if they do, they're incentivized to never leave because it's a lot cheaper than current market pricing, and that lowers inventory regardless of how much the tenant makes. This removes a huge chunk of otherwise available inventory on the market; demand stays the exact same, and because of that, prices go up everywhere else.

In San Francisco, for instance, it was found that most older rent-controlled properties were converted into condominiums and were typically sold to wealthier residents, thereby continuing to make the housing shortage even worse. There's also the argument that rent control leads to less property and income values, which in turn leads to less tax revenue for the city, leading to less reinvestment back into the properties because there's no incentive to do anything more than the bare minimum.

So all of that is to say that, in my opinion, based on all the evidence and research that I could find, rent control is simply a Band-Aid fix to a much deeper issue, which is that we need more building, not restricting what's already there. But hey, you know what? At least on the bright side, you might not need to pay the IRS anymore because there's a brand new bill that aims to eliminate it altogether.

That's because the House is scheduled to vote on a bill that would abolish the IRS and income taxes entirely in exchange for a flat 30% consumption tax. As they say, instead of adding 80,000 new agents to weaponize the IRS against small business owners in Middle America, this bill will eliminate the need for the Department entirely by simplifying the tax code with provisions that work for American people and encourage growth and innovation.

In a sense, their thinking is that by eliminating the income tax entirely, people and businesses will have more money left over to expand and grow, thereby boosting economic growth. But logistically, let's be real; this would be a nightmare to implement because each state has the responsibility for administering, collecting, and remitting the sales tax to the treasury, which would be almost impossible. Not to mention, a 30% sales tax would be a hard pill for a lot of people to swallow, and most likely that would just lead to less spending as people try to find a way around it. Realistically, there's no way that this is going to pass, and unfortunately, it seems like wasted resources on an item that was largely doomed to fail right out of the gate.

Personally, I would love just to see a simpler tax code, fewer complications, and responsive IRS agents who pick up the phone and online chat with a real person who could actually help. Like right now, the tax systems are so backed up that it's a 30 to 90-day wait to hear back on a simple tax inquiry. In the best case scenario, in my opinion, that needs to be fixed before anything else is done.

So frankly, I'm disappointed that resources were spent on this when it could have been used towards something that is way more productive that will actually make a difference. So personally, as far as what I think about all of this in terms of a recession, whether or not one is announced should have no bearing on the future direction of the market or any impact on what's currently happening. After all, it could very well have just been a past decline in GDP, and if the unemployment rate doesn't meaningfully increase, there is a chance that we could see these soft landing the Federal Reserve has been aiming for.

Michael Burry, on the other hand, posted a rather ominous tweet of the 2001.com bubble, showing that the prior rebound was eerily similar to what we're seeing today before dropping another 30 percent. And even though anything is possible, my guess is that we're going to be looking to the Fed throughout these next few months to determine whether or not the worst could be behind us. Sure, anything can happen; more layoffs are likely. I wouldn't be surprised if spending continues to decline, and we may very well see more rate hikes longer than expected.

But only time is going to tell whether or not the current stock market rally is sustainable or if it's just another run-up that's going to decline just as fast. So with that said, you guys, thank you so much for watching! As always, feel free to add me on Instagram and don't forget that you can claim a free stock worth all the way up to a thousand dollars with our sponsor public.com down below in the description with the good gram when you make a deposit.

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