 Good day, fellow investors! Yesterday we discussed how one of the reasons why the stock market is so volatile now is that we might be closed to the end of the current economic cycle. And that is something huge, because the end of the cycle means there will be a recession soon. And the recession is not good for stocks. So let's dig into economic data to see how the economy is doing, whether there will be a recession or not, see what are the risks of the current economic cycle turning into a recession and see what does that mean for stocks and what are the likely scenarios. Let's go! Let's start with economic news. The economic news is relatively good. Jobless claims have reached the lowest level in history, very very good, because more employment, more spending, more purchasing, more taxes, more everything, good good numbers. The unemployment rate is expected to fall even further which means more jobs and even a stronger economy. And inflation is slowly reaching the Fed's target of 2% which shows healthy demand for goods and services. To sum it all up, even the Fed has increased their economic growth projections. Things haven't been this good in the past eight years. Why is the market jittery and why is the market nervous? Let's see further. To explain why the market is nervous, you have to see things from a long-term investing perspective, from a cyclical investing perspective. Each economy, whatever economy you look at, is cyclical. That's human nature, that's the nature of the economies we are creating because each transaction that we make is the economy. So we are the economy and we are cyclical. And after eight years of economic growth it might be a good time for the economy to consolidate, slow down, eradicate the weeds, let the good businesses prosper and continue higher after deleveraging and making the growth more sustainable. However, nobody likes that and it would definitely hit stocks. So there are three major components of economic growth. Productivity, the short-term debt cycle and the long-term debt cycle. Today I'll focus on the short-term debt cycle first, mention the long-term to show what can happen and we will touch on productivity some other time as the credit is the most important thing now from a shorter term perspective. If an economy is driven by credit the more credit there is the better the economy will do, the more there will be spending, the more production, the more hiring, the more employment and the credit cycle revs up and things are good. However, at some point that going up reverts and starts going down. If we look at total US consumer credit it is up 45% in the last 10 years. So consumer credit is up 45% since the terrible 2008 and we all know how terrible was 2008 and 2009 and how worried was the financial system for consumer credit and all other credits and now consumer credit is 45% higher. From a long-term perspective this is unsustainable and this also shows that the economy has been driven by credit. So 45% credit growth is much bigger than what the economy grew in the last eight years. If we go back to the unemployment chart we can see that the current unemployment level isn't far from what it was in 2008. This means the following at some point people will reach their credit maximum, higher interest rates will increase debt payments and defaults, demand for cars, trips, pools, houses will drop, a recession is inevitable. The question is only when. So the recession is inevitable. Ray Dalio said and I would say that the probability of a recession in prior to the next presidential election would be relatively high. What would I say? I don't know 70% or something like that and that's huge and that's something the market might start to price in and if the market really starts to price in that probability of a recession you will see it drop to levels of I don't know 1500, 2000, 1500 points etc. That's a very very big possibility. Let's see the long-term credit cycle. This is the long-term consumer credit line and you can see that it is 10 times higher now than it was 45 years ago. This simply means that whatever happened in the last 45 years is thanks to lower interest rates and higher consumer credit. So the good scenario in this case is one where we have a normal small recession, two quarters, three quarters and then a lot of companies go bankrupt but there is enough movement, there is enough productivity to stimulate further growth, growth new companies, changing in models etc. and the economy continues to grow. The bad scenario is one that says okay this piling up of debt over the last 75 years the long-term credit cycle is over and then we might see another 1930s great depression scenario. So those are two possibilities that one should keep in mind and hedge yourself accordingly especially now that hedging yourself isn't that expensive because nobody expects a great depression scenario. What does this mean for stocks? Well the first scenario recession would mean valuations drop, bad businesses are going bankrupt or are being re-bought or whatever. Good businesses drop in valuations, represent great buying opportunities and then you invest and you make a lot of money in the next leg up and that's what everybody expects. So that's the let's say short-term easy recession scenario. However if there is the long-term recession scenario the long-term credit cycle reverts and as everybody has reached their debt ceilings then we are in trouble. Let me show you what I mean by showing your chart. This is the interest on US debt as a percentage of federal revenue. Now it is around what 7, 6, 7% but if we see higher interest rates if we see a slower economic growth projections from the Wall Street Journal are that interest payments of federal revenue will be above 20% in the next what 10 years. That is huge and that would put a huge burden on the US economy, on the US government, on US deficits, on whatever and if this has to be deleveraged from a long-term credit cycle then the whole world is in for a big big depression. I think we are in for a wild ride over the next 10 years and what to do? There are various scenarios. Small recession, big recession, the market continues to go on like it is for the next five years. All possibilities. What is the best thing to do? Always look for low-risk, high-potential return investments or hedges for each of those scenarios. Growth companies that okay those will survive if there is a recession and then they have give you a lot of upside if there is no recession. If there is the Great Depression, stagflation, hard assets, precious metals, hedges with a part of your portfolio that can really reward you exponentially but there is limited risk if the hedges don't work. There is a normal recession then you buy good businesses with good yields, good business modes that will do fine whatever happens. So when you invest, when you position your portfolio, when you diversify, think in those categories. There are more sophisticated ways by those go beyond this video. Thank you for watching and looking forward to your comments. I'll see you in the next video.