June 22, 2022, 11:04 pm EDT
“Recession possibility” is the price to quench inflation as Fed chairman Jerome Powell mentioned today. In fact, we think the recession is not a possibility but a certainty. There is too much liquidity after decade-long zero interest rates and too much stimulus in the past two years. It is simply unavoidable to go through the unwinding process.
One easy way to understand the situation is the Fed balance sheet trend as shown in the featured picture. It was doubled from $4 trillion to $8 trillion in the past two years under Biden’s administration. Where is this money now? The stock market, the housing market, cryptocurrency, and corporate balance sheet are all parts of it.
Inflation reflects the final outcome on commodities including energy and food.
Therefore, it should be straightforward to expect a long decline in the stock market for this unwinding process. It is also called the bear market. It should be at least 1-2 years in duration. Any rebound offers opportunities to unload shares or add bearish bets to the portfolio.