Mild Recession = Growth Stock Surge: 1 Sector to Buy Now
Mild recession ahead.
Yes, that could happen. But it’s not a bad thing. A mild recession would actually be good for our America 2.0 stocks.
I’ll explain and give you a glimpse at where we’re heading:
- Millennials in the housing market will be a driver for our strong economy.
- Interest rates are being priced in WAY higher than what’s actually coming.
- It’s the greatest opportunity in market history to get incredible America 2.0 stocks as much as 70% off!
I can’t say this enough. BE STRONG HANDS! Be #BOP (bullish, optimistic, positive). Our time is coming. And the wins will be HUGE.
But if I had to pick one sector to own now, it would be … (watch for the answer!):
Amber Lancaster: When I saw that Paul would be joining me this week on Market Talk Monday I thought the timing could not be more perfect.
With talks of a possible U.S. recession — a modest one — persisting inflation, decreasing housing affordability, supply chain issues we can actually see in our everyday lives, I think there’s no better person I would like to get a macroeconomic perspective with a Fourth Industrial Revolution, America 2.0 view, than our very own Paull Mampilly.
Hello, Paul. Thank you for joining me today and all of us today on Market Talk Monday. Good to see you.
Paul Mampilly: Thank you for that awesome introduction, Amber. I am thrilled to be here. You have lined up some tough questions for me. No more mercy for Paul. We’re going to ask the tough questions. Let’s get to it. You know what, Amber, for us to useful to folks, let’s answer questions we know you want answers to.
You sent them to me in advance, but that doesn’t necessarily help because these are tough questions. Let’s go. But before I do that, Alex is back there. Our Zoom buddy, our mascot for our publishing company called Bold Profits. Check into us as a way of supporting us.
House-Buying Frenzy Is Fizzling!
Let’s get to the questions, Amber,
Amber: Here they are, Paul. Question number one. Fannie Mae is forecasting a modest recession for the U.S. economy. They believe the house-buying frenzy we’re seeing right now will begin to fizzle. I’d like to get your take on this and your forecast from an America 2.0 perspective.
Paul: I didn’t read the Fannie Mae prediction. I will probably get to it because it’s sitting in my burner email account because I belong to their email list. Let’s inform folks that we told you this housing boom was coming. We told you the millennial generation was coming of age.
When people come of age, they come and buy houses. They buy cars. They start to have families. We also told you as a result of the 2008 crisis we had not put up enough houses for 10 or 12 years. I think the regular rate per year should have been in the millions.
There were several years after 2008 where we put up less than one million houses. We are incredibly under-inventoried in terms of housing. We simply do not have enough houses relative to the demand out there, which is absolutely massive.
Go speak to folks in their mid 30s, late 30s and early 40s who are out there looking. They will tell you they looked at four houses and there were 20 bidders. Then the price just got so crazy they couldn’t do it. Now, with mortgage rates having gone from 3% just six months ago to 5%-plus, I have read reports that the average mortgage payment is higher by as much as $500.
That’s $6,000 per year. Going back, I’m not escaping what you asked me, at $6,000 per year many people are going to reconsider their housing purchases. It doesn’t change the underlying dynamics that are still in place. We still don’t have enough houses.
That’s going to be true for the next five or seven years. That’s what’s driven the housing frenzy. Why have housing prices rocketed up? It goes back to the GoingUpness theory of life. If you have way more demand and not enough supply, the market is nothing other than people coming to pay higher prices because they want a house that fits their standards.
The market adjusts by moving the price higher, which then incents homeowners to potentially sell, homebuilders to build more, other people to push inventory in the market. This is the market-setting mechanism. High prices draw supply, which will come to meet the demand.
We are seeing some amount of weakness that’s going to come as a mix of things. In the short term, one to two years, we have probably seen a peak in terms of pricing for many parts of the country but not all. I can personally where I live in North Carolina we are seeing a massive number of people move here.
Despite my city being reconceived — there are apartment buildings, townhouses being built everywhere. Go an hour outside and there is just land clear cutting going on everywhere. We have a lot of land here, but still, the amount of development is huge.
That is all supply that is going to come online over the next three, six, nine months. That’s going to be soaked up by all the people who want houses. Fannie Mae is likely right that housing prices can’t go up at 30% every year. It’s not mathematically conceivable for that to happen.
High mortgage rates will slow some amount of demand. The inflation in building materials has also driven the price of new buildings up in particular. That will also have slowed demand. We also have a lot of supply that has begun but not yet finished.
That’s as a result of something you mentioned that’s in a future question. It’s some amount of limits in terms of what you can get for building materials. There is still a supply shortage out there. Bottom line: We still need millions of houses to meet the demand profile that is out there.
We have more and more millennials entering that period of time where they want to buy a house and they are going to buy a house. Any weakness will be, in my judgement, fairly small. Nothing that is happening is going to change the ultimate demand and supply balance, which has been in the making for a decade plus.
Now in terms of a recession, a recession is defined by two consecutive quarters of negative economic growth. That is the official definition of it. Will that unfold? I did some work over the weekend. I posted a note on Twitter written by Gary Shilling who talked about the fact that in pre-COVID times our economy is 70/30 in terms of services.
70% of the consumption is in services. When you travel, go to a hotel, get on a plane, go to a restaurant, go for entertainment to Disney or wherever you go, that’s all services. Our economy being highly developed pre-COVID was 70% services.
That balance shifted huge in 2020 as we went through lockdowns and a goods-buying bonanza because we were at home, but we still had internet and our credit cards. We went on Amazon, Etsy, Wayfair and we just bought the store out. That article by Gary Shilling says that in all likelihood we have way too much inventory.
We have too much inventory sitting on ships waiting to be unloaded. There are 60-plus ships sitting off the coast of California that represent inventory sitting out there. The docks are full. I actually drove by Richmond this weekend and their docks are full.
The warehouses are full. We’re still having some amount of trouble getting some of these goods to the actual shelves. We have a massive pipeline of inventory and more is coming because retailers having experienced out-of-stocks, people being unhappy and lost sales, have over-ordered by some estimate a factor of two or three.
As that inventory is coming in, we are about to experience a goods demand slowdown as a result of higher prices. Will that cause a recession? If the services part of the economy normalizes, I am betting we stay out of a recession. If we do, it’s going to be marginally negative.
I would bet people are planning to travel and do things. If we revert and we have a bit of a services boom, it will offset a goods decline and goods recession. We will have a breakeven economy. Maybe a 1% growth or maybe -1% recession. It won’t feel like a full recession.
All the folks who benefitted from all that lockdown spending, those folks are going to be in a recession. There’s already a freight recession unfolding. You are starting to hear about any number of stores that take in excess inventory — like TJ Maxx — they are being flooded with goods.
There’s also a mismatch going on between what was ordered six or nine months ago and what is being demanded right now. It’s quite different. Long story short, yes, there is a possibility of a mild recession and Fannie Mae is right. In all likelihood, housing prices are likely to see a slowdown in terms of price gains.
We’re going to see more supply. But because of the millennial generation and gen Z out there increasing spending, increasing consumption, getting raises, they are still going to be out there as a strong force keeping our underling economy strong.
What Should American 2.0 Investors Do Now?
Amber: Thank you for giving me that perspective. From my point of view as a layperson investor, what do investors in America 2.0 investment do now? What should be their top of mind agenda?
Paul: I think the top of mind thing is to have a BOP mindset. Bullish, optimistic, positive mindset. The stock market right now is being ruled by people who have the opposite mindset. They are of the viewpoint right now that the world’s about to go to hell in a handbasket and you should hunker down and prepare for the end of the world.
We think that’s wrong. We think that’s completely wrong. Those folks have been setting prices for six or seven months now. At any given time prices can be set by a dominant group of people. The folks who have been dominating the price-setting mechanism on Wall Street have been macro hedge funds, macro traders, who don’t’ care about sales, revenue, anything.
They only thing they’ve been trading on is what interest rates are going to go to and what data is saying. For them, data is backward looking data looking at statistical models. It doesn’t project the future. It doesn’t think if you go through different periods of time you have to match the scenario to the data.
They are short. By short we mean they have made very large bets that our markets are going to go down and our stocks are going to stay down forever. In our stocks across our services we have experienced a brutal beat down. Stocks with 305 of their market cap in cash have gone down 60%, 70%, 80%.
They are trading for one, two and three times sales. That’s the price stocks trade at when they’re going to go bankrupt. Remember, they have 30%, 40%, 50% of their total stock market value in cash. These stocks are not going bankrupt.
On top of that, they are growing their sales by 20%, 30%, 40% or even more. Yet, these so-called wiseguys out there, macro traders who know everything say, “No, no, no. Our data says these are supposed to go down if interest rates go up. We are going to short them and stay short.”
In my opinion, this is one of the greatest opportunities in market history. If you look at these companies, you see Palantir is telling you they are going to grow at 25% to 30% for the foreseeable future. You can look at company after company telling you they only have growth ahead.
This is going to reverse. It’s going to be historic. It’s going to be huge. They will write articles about this. “How could the experts have gotten this so wrong?” Folks, you know the experts have gotten pretty much everything wrong over the last 10 years. Name one thing they got right.
The experts weren’t right in 2008. They are telling you that high interest rates are bad for our stocks. Meanwhile, our stocks have cash, have amazing businesses that are transforming the world, they trade at dirt-cheap prices and they have growth. That growth is accumulating.
I would say be strong hands. Be BOP. Our time is coming. Our win is going to be huge. You will be able to say you were one of the big winners. We are going to be so proud. We are going to win and it’s going to be awesome. That’s what I would say.
The turn is coming. It’s going to be big. We’re going to win and win big.
What Megatrend Should We Be Focused on?
Amber: I love that, Paul. We are looking forward to the turn. My last question to you, I know you are following future-forward megatrends. What megatrend today do you think we should be focused on where housing is concerned, a possible modest recession and supply chain?
Paul: The one thing I didn’t say is a modest recession is good for us. It means the Federal Reserve, which the market has priced as raising rates 11 times — they’re not going to make it. It’s not going to raise rates 11 times. It’s impossible with an economy growing at 1% or even -1%.
They’re not going to do it. If I were to guess, we’re going to have maybe three interest rate rises on the low side. Maybe five on the high side, which is half of what is already priced in the market. People anticipating weakness in a recession is good for our stocks.
The underlying theory as to why all these wiseguys have gone and shorted our stocks is that rising interest rates and high interest rates are bad for growth stocks. Obviously lowering and low interest rates would then be good. So you would have them come to cover their shorts and bid them higher.
That would just be the first wave of buying. Then everyone would now start to buy the stocks. They will start telling you what we are telling you today. Tomorrow’s headlines right now. These stocks are cheap, they have a ton of cash and they are growing gangbusters.
People will say, “I can’t believe these stocks got this cheap.” For that, you have to have the conviction. What’s the one sector I would focus on? I would say if I keep looking at what’s going on, the greatest excess of pessimism, which is where you want to buy, has to be in fintech.
Stocks like Coinbase, Robinhood, PayPal, Square, Affirm. They have been smashed. People like Warren Buffett and Charlie Munger are taking shots at them and saying all kinds of things. I am going to say that’s the place I would be. I would make sure I own those.
Have a basket of those. Don’t just pick one. There is going to be a rip-roaring reply that’s going to rocket these stocks up. That’s my one sector if I’m put under the gun.
Amber: That’s good to hear. Thank you, Paul, for answering these questions. I call them dinner table questions.
Paul: Dinner table is what matters. This is where the big decisions of life are made. People will sit there and focus on all the supposedly smart money. Folks, it’s all your decisions they are trying to work out. What you are thinking and doing matters. Be strong hands.
Our time is coming. We are going to win big. Be BOP.
Amber: We are BOP with you. Thank you for joining me on this Market Talk. We appreciate you.
Paul: Thanks Amber.
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Until next time, everyone, take care. Bye bye.
Editor, Profits Unlimited