Yield Curve Says Recession Is Nearing for the U.S. Economy
There’s a recession looming for the U.S. economy. Be very careful. Don’t expect 2020 to be as rosy as 2019.
You see, the mainstream media and politicians will tell you everything is great and you don’t really need to worry about the economy. But I can’t stress this enough: don’t get lured by the false optimism.
Economic indicators are popping left, right, and center, and they say a recession is becoming inevitable for the U.S. economy.
For instance, look at the chart below. It plots the difference between the yields on 10-year U.S. bonds and three-month U.S. Treasuries. Economists refer to it as the yield curve.
This difference has been a very powerful signal. Whenever it reaches negative territory, it’s deemed, “inverted,” and one of the surest signs that a recession is fast approaching.
Chart courtesy of StockCharts.com
In late 2000 and early 2001, the yield curve was inverted. A few quarters later, economic slowdown prevailed. Fast forward to 2006 and mid-2007, and the yield curve became inverted again. A severe recession followed just a few quarters later.
If there was a scale of how precise the yield curve has been as an indicator of economic slowdowns, it would get a very high score. We are talking precision of between 70% and 90%.
Here’s the kicker: the yield curve is inverted again. In early 2019, we saw the difference between the yields on 10-year U.S. bonds and three-month U.S. Treasuries drop below zero. Then, that difference bounced a bit.
Now it’s back below zero again.
This shouldn’t be taken lightly whatsoever. In fact, it wouldn’t be wrong to say that this indicator should be on every investor’s watchlist.
Why Should You Care If a Recession Is Fast Approaching?
Dear reader, there are at least four things you should know in case the U.S. economy faces hardships in the coming quarters (in no particular order):
- The Federal Reserve doesn’t have any tools left to fight an economic slowdown. Interest rates are already too low to be able to make a meaningful impact by lowering them further. Will the Fed drop the rates below zero? Will the negative interest rate policy (NIRP) get triggered in the next recession?
- The U.S. government is running a budget deficit of close to $1.0 trillion these days. It’s happening when the economy is relatively fine. If a recession happens, the government could be forced to spend a lot more, so the budget deficit could soar immensely. This could hurt the U.S. dollar and U.S. credit ratings.
- There’s a lot more consumer debt out there. Americans have borrowed a lot of money during the economic recovery that began after 2009. In the next recession, if we see job losses, will people be able to pay their debts? We could see defaults on consumer loans.
- How will the stock market perform? We have seen an immense run in stocks over the past decade. Know that the stock market moves ahead of economic data. If we assume that a recession is coming, key stock indices could be in the midst of forming a top.