Will fighting inflation bring us to recession?

April CPI numbers showed inflation has continued to be very high, well above the target of a 2.0% average landing at 8.3%. Both the Bank of Canada and the US Federal Reserve have made it clear that they do plan on fighting inflation with rate hikes. At this point, they are moving gradually but the move has been persistent and may continue to be so. In so doing, penny stock traders have noticed sounds of alarm coming from various corners of Wall Street and Bay Street saying recession is likely.

Blue: Canada CPI (Median) | Orange: US CPI (Median)

This hasn’t stopped numerous Wall Street and Bay Street analysts from predicting a recession as being inevitable. The controversial Elon Musk himself believes that we are “probably in a recession”. Is he simply saying what others think but don’t want to say out loud?

Elon Musk said  that the US economy was “probably” in a recession — a judgment at odds with economists and available data — and cautioned companies to watch costs and cash flows.

“These things pass and then there will be boom times again,” Musk told the All-In Summit in Miami Beach, according to a live-streamed video of his remarks posted by a Twitter user. “It’ll probably be some tough-going for, I don’t know, a year, maybe 12-18 months.”

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Musk suggested that recessions aren’t necessarily a bad thing, adding that he’s been through a few of them in his time at public companies.

“What tends to happen is, if you have a boom that goes on for too long, you get misallocation of capital — it starts raining money on fools, basically,” he said.

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“The honest reason for inflation is that the government printed a zillion amount of more money than it had,” Musk said, adding that countries including Venezuela had already been down the same path. “This is not like, you know, super complicated.”

Other analysts also believe we may hit recession as a result of this as well. Jamie Dimon, CEO of JPM has told us to brace ourselves for an “economic hurricane“:

Jamie Dimon is no meteorologist, but the JPMorgan Chase CEO is predicting an economic “hurricane” caused by the war in Ukraine, rising inflation pressures and interest rate hikes from the Federal Reserve.

“Right now it’s kind of sunny, things are doing fine. Everyone thinks the Fed can handle this,” Dimon said at a Bernstein conference. “That hurricane is right out there down the road coming our way.”

Finally, there are camps that believes the rise in interest rates will not be high enough to combat inflation and that the rise in interest rates will have such a negative impact (i.e. the recession predictions as mentioned above), that the Central Banks will have no choice but to cower and bring rates back down to zero. Such a scenario will bring us back to the original problem of elevated inflation.

What will inevitably transpire is anyone’s guess. However there are 2 camps that are predicting the inflation genie is out and may not be contained. 1 says we can’t raise rates high enough, and the other says raising rates will have an undesired effect and we’ll inevitably go back to low/zero rates which will continue to propel inflation upwards. The only outlier is the camp that believes we may fall into recession, although there are those in said camp who believe stagflation may be the result:

The Federal Reserve and other central banks, blindsided by raging inflation, are scrambling to catch up by aggressively raising interest rates. They hope to cool growth enough to tame inflation without causing a recession.

It’s a notoriously difficult task. The widespread fear, reflected in shrunken stock prices, is that the Fed will end up botching it and will clobber the economy without delivering a knockout blow to inflation.

This month, former Fed Chair Ben Bernanke told The New York Times that “inflation’s still too high but coming down. So there should be a period in the next year or two where growth is low, unemployment is at least up a little bit and inflation is still high.”

And then Bernanke summed up his thoughts: “You could call that stagflation.”

This is a tough call. Will we suffer a recession or will we suffer inflation? The track record appears to show Central Banks are not shy to bring rates back to zero. That’s a realistic perspective. In so doing, commodities as always will rise. Particularly inflation hedges like precious metals: Gold and Silver. Both metals stand to gain substantially in the latter scenario. Certain cryptocurrencies may gain as well, however that is not a subject we cover (yet).

How to play this:

While there may be a plethora of ways to play this, a great way is to buy junior gold mining companies. Finding said companies alone isn’t enough, given the plethora of options. It’s important to find a low priced gold penny stock that has strong potential and simulates a leveraged play in the Gold space, perfect to hedge against recession (which will inevitably result in lower rates). Given the numerous factors including the industry, geology and location to name a few of the more basic ingredients required, our pick of Etruscus Resources (CSE:ETR). Etruscus is in our mind the lowest cost and best opportunity available right now.

This company is also a prime acquisitions target. Neighboring properties have strategic investors and have resulted in them having market capitalizations of $1.19 billion (NFG) or $516 million (SKE). ETR is the lower market cap relative to peers in a similar stage, and the company has an ongoing program with cash in hand. At current prices, ETR is trading at 1,400% discount to our estimated price of $1.50, making it one of the most compelling investments that we are covering.

See our full report here: https://www.tsxvresearch.com/research/etruscus-etr/