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Recession Nearing: U.S. Dollar and Stock Market on the Line Lombardi Letter 2019-08-14 02:17:37 recession us economy Odds of a recession continue to increase. Investors should keep a close watch on the yield curve. That statistic says that late 2019 and early 2020 could be bad for the U.S. economy. U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2019/08/Recession-Nearing-U.S.-Dollar-and-Stock-Market-on-the-Line-150x150.jpg

Recession Nearing: U.S. Dollar and Stock Market on the Line

U.S. Economy - By |
Recession Nearing U.S. Dollar and Stock Market on the Line

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One Chart Says U.S. Economy Headed for Recession

If you have bought into the idea that all is well for the U.S. economy, you might want to pause and reflect. A recession could be here soon. And this time around, a recession could last a very long time and have severe consequences.

The end of 2019 and early 2020 could be a very bad time for the U.S. economy. You see, one of the surest indicators of an upcoming recession is flashing a warning sign.

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Look at the chart below. It plots the difference between the yields on three-month U.S. Treasuries and 10-Year U.S. Treasuries. In economic terms, this chart shows the yield curve.

Chart courtesy of Stockcharts.com

Economists follow this kind of chart very closely. Whenever yields on three-month U.S. Treasuries and 10-Year U.S. Treasuries drop below zero, the yield curve is referred to as being “inverted.” You do not want to see this; if the yield curve is inverted, it means a recession could be ahead soon.

Mind you, this shouldn’t be new for long-term readers. It has been mentioned here a few times.

Sadly, the yield curve has been inverted for a few months now. The last two times the yield curve was inverted for a few months, a recession followed. We saw this happen in 2000 and then again in 2007.

Why Worry About a Coming Recession?

Dear reader, as I said earlier, the next recession could be an economic problem that turns into an outright economic collapse.

Know this: going into the next slowdown, the average American is not in good financial shape. Americans have taken on too much debt, their wages haven’t really grown much, and their savings are minimal.

American consumers have been one of the biggest forces behind every recovery the U.S. economy has seen after an economic slowdown. If there’s a recession, will they be able to give the economy a boost? I don’t think so.

What’s Ahead?

Before anything happens, it will not be surprising to see the Federal Reserve and the U.S. government react very quickly to a recession.

At the moment, the Federal Reserve expects growth in the U.S. economy, but it has already slashed interest rates once recently. If the economic data starts to turn bad, the Federal Reserve could go all in. To me, it will not be shocking to see the Fed bring down interest rates to zero (or even below zero) and start printing money.

As for the U.S. government, it’s already spending immense amounts of money. The U.S. budget deficit in the first nine months of fiscal-year 2019 has amounted to $747.1 billion. In fiscal-year 2018, the budget deficit was $779.0 billion. (Source: “Monthly Treasury Statement,” U.S. Department of the Treasury, last accessed August 9, 2019.)

It looks like the U.S. government is on track to incur a bigger deficit this year than last year.

In the case of a recession, the U.S. government could end up spending much more. I expect the budget deficit to surge to over $1.0 trillion very quickly.

With all this, don’t for a second think everything will go smoothly. Low interest rates and a huge budget deficit could lead to a massive decline in the U.S. dollar, increased uncertainty, and a stock market crash.

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