In today’s Exponential Investor:

  • Google knows more than the Office for National Statistics
  • “The longest ever recession”
  • Enduring inflation plus a recession equals stagflation

The UK officially entered a recession this week.

However, I suspect that’s only news to politicians.

That’s part of the problem with the statistics used to tell us we are in a slump. Two consecutive quarters of negative gross domestic product (i.e. six months in a row in which the nation’s income falls) is a lagging indicator.

Almost everyone else is keenly aware the UK is in a recession.

Don’t get me wrong, GDP is a useful tool, but it trails behind real-time events. People like you and I feel the impact first… and it takes a lot longer for that impact to trickle up into the data.

In fact, Google Trends is a better real-time indicator than the Office for National Statistics (ONS).

As the ONS was readying itself to confirm what everyone else long suspected, more people in the UK were Googling Elon Musk (red line) than the word recession (blue line):

Google knew the UK was in a recession before the ONS

Source: Google Trends

Searches for Elon Musk peaked in April (right around the time Musk made his offer to buy Twitter) and interest in a recession for those in the UK peaked way back in June this year. Right around the time the cost of living morphed into the cost-of-living crisis.

Yet Musk’s latest rogue behaviour is of more interest to those in the UK than what the Bank of England is calling the “longest recession since reliable records began in the 1920s”.

To be fair, the data that sent the UK into a recession wasn’t as bad as it could have been. The economy only contracted 0.2% in the three months to 29 September. Economists were bracing for 0.5%. The biggest falls came from the services, construction, and manufacturing sectors.

These declines are the taste of things to come, our central bankers tell us. The current recession won’t be the deepest on record (the biggest fall in GDP), but it’s going to run through 2023 and into the start of 2024.

One estimate says it will cost the UK 500,000 jobs and that inflation will remain stubbornly high, but then come down.

But you should take these predictions with a grain of salt…

Fairy tales and bedtime stories for adults

As I scrolled through Twitter at the weekend, I stumbled across a chart that friend and fellow gold analyst Jan Nieuwenhuijs used in his most recent article:

Source: Apollo Global Management via John Cochrane; Gainesville Coins

If you’re up for a deep dive into the gold market, you can read Jan’s article here.

Now, this chart is showing you US inflation data, so my first instinct was to see if I could find a comparable one for the UK.

I found this:

Source: Bloomberg

Even though both the Unites States and UK are different economies, with different leaders and different problems, both charts reveal the same thing: central bankers haven’t got a clue where the economy is headed.

And, more to the point, the calls they do make have been spectacularly wrong.

Yet, despite missing how high inflation has climbed in the past year, central bankers are still putting out unrealistic forecasts on when inflation will decline.

Absurdly, both the Federal Reserve (top chart) and the Bank of England (bottom chart) seem to believe that the inflation rate will dramatically decline to 2% and under within 12 months of peaking.

How?

Will the Bank of England and Fed push a button?

Will the Inflation Fairy wave her wand and *poof* it’s gone again?

Are central banks seriously deluded enough to think that just by jacking up interest rates they bring down the worst inflation of the past 20 years…

… which, by the way, is the only blunt tool they have.

Given that both central banks have miscalled, miscalculated and underestimated the ferocity of inflation, there’s no way it will magically return to pre-pandemic levels. Like my wrinkle-free face, those days are gone.

The problem with inflation, however, is that this bout isn’t just caused by central-bank largess. There are structural changes within the economy that are changing how we do business.

Back to the future

Out of a recession or inflation, which is worse? A world of prolonged high prices or a recession where some businesses close up?

A recession generally only impacts a small part of the economy, notably the people who lose their jobs.

Inflation, on the other hand, affects most people.

However, a combination of the two – persistent inflation and a recession – called stagflation, impacts everyone.

First seen in the 1970s, stagflation is considered the worst-case scenario by governments because it comes with high inflation and high unemployment rates, and economic growth either stalls or goes backwards.  

While stagflation is rare, the UK could be on the verge of experiencing it again.

And, if this the case, investors need to be nimble and think outside of the box when it comes to investing.

Stagflation doesn’t impact all sectors equally – you just need to know where to look.

More on Thursday.

Until next time,

Shae Russell
Co-editor, Exponential Investor

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It is now taking on new investors, as we prepare to meet the possible worst-case scenario of stagflation once again.

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