One is that recessions and market crashes, while there is a positive correlation, do not always happen at the same time or for the same reason. This means that one does not necessarily result in the other.
Two is that over the past five decades, we’ve had 7 recessions here in the US. In each of them, they were preceded by what is known as a “yield curve inversion”.
What is a ‘yield curve inversion’ and how can you tell?
The term ‘yield’ refers typically to interest rates associated with debt instruments, or bonds. I offer you the use of my money and you in turn agree to pay me a fee, or interest rate (yield) for the use of my money. That rate is described in the bond, making it a function of the language in the bond itself.
Typically, the person willing to lend their money to the bond issuer is going to charge a higher fee for the use of their money if they are not going to get their principal back for an extended time. If the promise to return the principal is relatively short, then the lender is willing to accept a smaller fee, or lower interest rate, for the use of their money.
That results in numbers that fit on a chart that show points over time where long term bond interest rates are generally higher than short term bond interest rates. In cases where there is a ‘yield curve inversion’, long term interest rates fall below short term interest rates.
We are experiencing one of those inversions now, which if history is any guide, strongly suggests we can expect a recession soon.
Three, the trucking industry which can be described as the arterial system for the national economy, is experiencing a slowdown. Less stuff is being shipped, presumably because less stuff is being manufactured and/or being purchased, either by the end consumers or the folks either making stuff or doing something with that same stuff in the middle.
Some are saying it’s the quietest it’s been in the last 20 years. This while we are currently about to record the longest period without a recession since anyone has kept records about recessions.
Question #1 is ‘will there be another recession?’ and in my opinion, the answer is “Yes”. If that’s true, the next two questions become ‘when will it happen?’ and ‘how deep will it be?’.
Frankly I have no idea, just that in my judgement, it’s likely to happen in the next 12 months. Plan wisely my friend…
Tony Kendzior \ July 2, 2019