Are We Talking Ourselves Into Recession?
Recently, the "R" word has been in the headlines quite a bit. As with every headline, there's a "devil's advocate" position, and recently, one expert warned that if we keep talking about recession, that could CAUSE a recession!
Yes, fear is a dangerous thing. Fear in the markets can be a catastrophic thing. Self-fulfilling prophecy can be very real, too. But in this case, and the case for recession, those thinking our thoughts are driving the economy are missing the key data that showed us that recession was on it's way more than a year ago.
Look, our markets have been in bull mode for far too long. It's been a good run, but like every great party, eventually the carriage turns into a pumpkin and it's time to go home.
In this case, here is your damn near infallible evidence that recession is coming:
The inverted yield curve
With yield curves inverting, the financial markets begin to make no sense. Risky adjustable rate market products become more expensive than lower fixed rates. This yield curve inversion happens nearly every time an economy enters recession.
Our jobs market is at all time highs, and unemployment at lows we haven't seen in a long, long time. That's a good thing, right? Well, in the case of jobs and how they tie into the economy, literally EVERY recession is preceded by a period of extremely low unemployment (our current market), a small spike in job cuts (you've seen the headlines of layoffs correct?), and then a ripple effect that drastically spikes unemployment as we head into recession. It's happening, whether you like it or not. Layoffs are happening.
The Fed cutting rates is a signal that they see the economy slowing. The one major economic principle that is without fail is "don't fight the Fed". They think there's a higher likelihood of recession than they've thought in the past 11 years at nearly a 35% chance of recession in the next 12 months. Keep in mind, the Fed is just slightly conservative - in the MIDDLE OF THE GREAT RECESSION, the Fed thought there was about a 25% likelihood of recession. The Fed wears beer goggles when it looks at the economy, but they're more worried than usual, and every time they're this worried, a recession follows. Don't fight the fed.
We live in a global economy. It's no longer coming, it's here. Recessions will no longer be local as economies and international markets are so intertwined. So what's happening around the world? Well, the Euro zone is operating at a positive GDP of .2% - SO close to negative. China just reported it's slowest quarterly growth since 1990 (DID YOU KNOW? 1990 was 29 years ago! Feel old? Me too.).
On top of slowing global economies, government bond yields around the world are negative - advanced economies like Switzerland, Germany, France, Sweden, and Japan are ALL operating with negative government bond yields. The UK, probably the closest economy to ours in how it operates, is operating at a return of about .4. The USA? We're at 1.57 - substantially overpriced, and ripe for a fall to get more in line with the rest of the world. Keep in mind, our yields shouldn't turn negative and we have an added bonus because of the strength of our currency, but when we're a full 1%+ above the rest of the world's advanced economies, something's gotta give.
Look, we're headed for recession. Whether we talk about it or not. Whether our heads are in the sand or not. But recession brings about an awful lot of winners. The winners are those who know it's coming, who prepare for it, and take action before it arrives. The people hit hardest are the ones blindsided.
So prepare, get educated, make the moves you need to make, and above all else, ignore the devil's advocates that believe a little more positive thinking would completely rewrite the laws of economics. They're idiots, and their message is dangerous. Recession is on the way. Get ready.