“If we want to light the way to another period of a very strong labor market, we have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.” – Jerome Powell 

“We certainly haven’t given up the idea that we can have a relatively modest increase in unemployment. Nonetheless, we need to complete this task.” – Jerome Powell (September 2022)[2]

“Coming out of the pandemic, [mortgage] rates were very low, people wanted to buy houses, they wanted to get out of the cities and buy houses in the suburbs because of COVID. So you really had a housing bubble, you had housing prices going up [at] very unsustainable levels and overheating and that kind of thing. So, now the housing market will go through the other side of that and hopefully come out in a better place between supply and demand.” – Jerome Powell [3]

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said at Jackson Hole in August 2022. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” – Jerome Powell [4]

The U.S. did have two back to back negative quarterly GDP results in 2022 before rebounding for a positive GDP due primarily to the high price received from energy exports. Whether experts or the government will agree that we had a recession or are in one now their is a very high probability that the U.S. will see a recession in 2023 based on many factors.

High interest rates, high bond yields, high inflation, increasing lay offs, and decreasing corporate sales and profits all lead to a recession. Less discretionary spending money for consumers creates a chain reaction in the economy decreasing the velocity of money into discretionary spending channels as it’s depleted into the first level of consumer needs like energy bills, food, and rent or mortgages. Corporate profit margins are also depleted by high labor costs, wholesale costs of goods, materials, and energy bills leaving little money for capital expenditure for upgrading equipment and facilities along with company growth.

These are all heavy factors weighing on the economy that present us with a high probability of a recession along with the past GDP and job data presenting us with the same high probability.

This high probability recession will likely be occurring while the effects of inflation are still going on, so how people invest needs to take an inflationary environment into account as well.

CNBC interviewer: “How will this all play out and what’s the best advice you have for individual investors to optimally deal with the negative impact of inflation other than owning quality equities?”

Charlie Munger’s response: “It may be that you have to choose the least bad of a bunch of options that frequently happens in human decision making. The Mungers have Berkshire stock Costco stock Chinese stocks a little bit of Daily Journal stock and a bunch of apartment houses. Do I think that’s perfect? No. Do I think it’s okay? Yes. The great lesson from the Mungers is you don’t need all this damn diversification. You’re lucky if you’ve got four good assets. If you’re trying to do better than average you’re lucky if you have four things to buy. To ask for 20 is really asking for egg in your beer, Very few people can have enough brains to get 20 good investments.”

Munger’s advice is to concentrate your capital into just a few of your very best investment ideas. He doesn’t wait for macroeconomic conditions to reallocate his capital, he builds his investments with everything in mind to start with. His small portfolio is already optimized for inflation, recession, and a good economy as well.

By Steve Burns

After a lifelong fascination with financial markets, Steve began investing in 1993 and trading his accounts in 1995. It was love at first trade. After more than 30 successful years in the markets, Steve now dedicates his time to helping traders improve their psychology and profitability. New Trader U offers an extensive blog resource with more than 4,000 original articles, online courses, and best-selling books covering various topics.