Monday, July 11, 2016

Recession Coming??

Hello all,

I will start this post by saying that it is extremely hard, perhaps impossible, to claim when a recession is going to occur exactly.

That said, there are many indicators that would suggest we (as in, we the United States) are perhaps approaching a recession.

Let me lay out a few reasons below why I think we perhaps have a recession coming our way in the near future (and to add some 'umph' to this post...let's say within the next six months).  Readers, hold me to it.

1) Yield curves.  From the Wall Street Journal this past Wednesday: "Flattest yield curve in eight years erodes margins..."  Perhaps you missed that, but this is a real problem.  When the difference between the 2yr and 10yr treasury yields gets lower and lower, I would say a recession is more probable.  Consider the graph below, and note the gray is a recession.

So you can see that when the yield curve becomes inverted (...I was inverted...Top Gun anyone?), it suggests that there IS NO CONFIDENCE IN THE FUTURE and history indicates that there usually is a recession.

2) The 10yr Treasury yield was 1.367% on Tuesday.  Can we pause for a second and ponder HOW LOW THAT REALLY IS.  You mean to tell me that I am willing to accept a measly 1.367% return FOR 10 YEARS!..who would do that?  Inflation alone makes that investment SIGNIFICANTLY negative.  These yields, in my opinion suggests no confidence in the future as everyone looks to shorten up their bond durations.  And what ammunition does the Fed have left? They can't drive rates much lower.

3) Long, long, long, long bull market.  Check out this stat: It's been 2,700ish days since the bull market was born from the ashes of the Great Recession in 2009.  That is THE SECOND LONGEST BULL MARKET EVER.  Hmmm? Will it last?  Maybe, but I know I am not personally 'unloading the truck' to buy more equities right now.

*Stats from April 2016
4) This one may derail my post, but what about lumping together: Political unrest, two very questionable/unliked presidential candidates, ISIS, Brexit, negative yields in Japan, in Europe, a very evident Chinese slowdown, and almost ALL BIG BANKS losing a lot this year (and by a lot I mean to the tune of nearly half a trillion dollars).  Is there enough uncertainty with all of these that they could finally tip the scales and end this bull market?  Perhaps.

Let me just add one final note on 'negative yields' which I will write an article about in the future.  From the WSJ several days ago: "investors are so desperate for safety that they are willing to buy bonds for more than they would get back at maturity."  Wow.

But hey, don't take my word for it: "Billionaire investor Sam Zell, who correctly called the top of the last commercial real-estate cycle, is predicting global problems will likely push the U.S. into a recession in the next year." ~WSJ, April 2016.

What are your thoughts?

Passive Income Dude


  1. I can't imagine a scenario where I bought any kind of negative yielding income investment. I mean you could always put it in a safe somewhere. Maybe that would be a good move during times of deflation or something as well. It's just hard to imagine.

    P.S. - Love the Top Gun reference!

  2. Captain Dividend,

    I know! It is getting crazy but for us individual investors/savers we should be ok. It is the institutions that are in trouble.

    I plan to write an article on negative yields in the next few days so be sure to check back. Thanks for commenting!