What are the odds of a recession? (...they’re high)

Good afternoon, traders.

In case you haven’t noticed, people are starting to get a little worried about the economy. And I suppose that makes sense when:

^{The opinions and perspectives presented in this article belong solely to the author. This is not financial advice. See full disclaimer below.}

So today we’re gonna investigate the possibility of a recession.

Crypto bros begin to purchase Maseratis after Bitcoin rallies to $75k.

“We aren’t at the point where we can start buying Lambos with vanity plates reading 'BTC-GOD' yet, but we’re getting there,” said a crypto bro interviewed.

xAI is reportedly hiring Wall Street bankers to improve Grok’s financial modeling skills.

“There is nobody better to teach AI how the financial system works than 24-year-old analysts at middle market investment banks,” said a company executive.

Meta is reportedly weighing a decision to cut 20,000 jobs after realizing the hundreds of millions they paid to AI researchers last year have only boosted the number of Llama (their AI model) users from 5 to 6.

Unlike most of our “favorite” politicians, we’re going to break down what a recession is before talking about it.

A recession is when the economy contracts in size, characterized by falling GDP for two consecutive quarters. Typically, these happen every 6-10 years. Unless it’s the year 2020, when everyone lost their job and couldn’t afford groceries, while simultaneously, the stock market was booming and even a lame duck like IBM was up 50%. 

As you can see, recession indicators that worked for thousands of years have been thrown out of whack because of consolidated wealth. You used to be able to look out your window and see that every kid on the block had a paper route and a lemonade stand because his dad lost his job at the Ford factory. 

But now, everyone on your block is running lemonade stands, but there’s that one nice neighborhood in town where the doctors and lawyers live, and they all own Nvidia/Microsoft stock. So even though there are no jobs, their specific block is up $50M in the last 30 days. On paper, 80% of the town is on food stamps, but 20% of the town is up 50%, so technically the median household income hasn’t changed. 

With that out of the way, let’s look a bit deeper into past times of economic uncertainty. 

The last time there was a “recession” was in 2020, and it was the result of a mysterious virus that may or may not have come from China. From February to March 2020, the global stock market plummeted 33%. This makes sense when you realize everyone was home, out of a job, and thought the world was literally going to end. 

But then, after one of the fastest crashes in history, the market rebounded faster than you did to your first ex. By February 2021, the stock market had gone up 115% from its pre-crash peak. PRE-CRASH. If you went off of just the stock market, the recession lasted only 3 months. 

So how did we fix this problem? Well, the whole world came together and worked towards a solution that prioritized human life and economic output.

Kidding, we fixed the economy by setting the print speed at the Federal Reserve to 3000%.

But 12 years before the wacky COVID crash, there was a real recession that was so bad, multiple blockbuster movies were made about it. You guessed right, we’re gonna talk about 2008. 

In the early 2000s, a bunch of Wall Street bankers set up a house of cards based on nonsense called “Credit Default Swaps.” Essentially, they extended absurd lines of credit to people with no money who wanted to purchase homes, packaged their mortgages together to make the odds of default look lower on paper, and sold these swaps to their friends.

As it would turn out, propping up the U.S. economy on incredibly risky mortgage bonds and rating them as “safe” was a bad idea.

Imagine if I were selling you an apple. If the apple I was selling was covered in bruises and had worms in it, you wouldn’t buy it. But what if I bundled 500 identically gross apples in a box labeled “crisp Granny Smith apples?” You could probably sell them in a week. But once an autistic guy named Michael Burry opens the lid of the box, he would quickly realize these are not 500 crisp Granny Smith apples, but instead are garbage. 

But unfortunately, everyone in 2008 owned these gross apples. So when the charade was up, there were no more buyers for bad apples, and your grandfather had to sell his boat. That about sums up the 2008 financial crisis. 

Nowadays, people are worried about a recession, but for different reasons. GDP growth is slow and driven primarily by VCs who can’t stop giving money to nerds in Silicon Valley. Unemployment and inflation are both going up, and the oil futures market could either tank or spike 70%, depending on what Trump’s next post on Truth Social is.

Then there’s the ongoing crisis in Iran and the Middle East, which politicians and billionaires want us to think won’t impact the economy. But if history has taught us anything, the Middle East can throw a wrench into any economic environment (remember G.W. Bush’s presidency?).

The weird part is that politicians are telling us that economically, America has never been better. But they’re telling us this while Microsoft is actively trying to fire 50% of its labor force and replace them with AI agents.

Meanwhile, private companies like OpenAI and Anthropic are raising billions of dollars on a 100+ billion-dollar valuation, but are only making a couple of billion dollars a year. The only way they can make more money is by sucking up electricity and the labor force. So if their companies go according to plan, it will cost $9,000/month to light your 1-bedroom apartment, and you won’t have a job. 

The good news is that even if that doesn’t happen and these AI companies' plans fail, that means that when they go public, they will be massively overvalued and their stocks will crash, and in turn, everyone in the market will panic-sell, causing a recession. 

To make matters worse, just 10 companies account for 38% of the S&P 500 index. So if either Zuckerberg, Musk, or Jensen Huang says something racist, all of us would go bankrupt. 

Follow Jack Kuveke at Jabroni Capital
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