How Close Is A Recession? Probably About 18 Months – 2 Years

Sorry we haven’t posted in a while. In all seriousness, there really hasn’t been much news in the markets. Yes, it’s reaching all time highs, but that’s just as planned for the end stages of the bull market. Expect more volatility, use caution when adding large chunks of money to your positions, but don’t expect the “crash” any time soon. In other words, don’t let any kind of news scare you off. This market has room to run.

How do we know? Well, we previously posted a bit about inverted yield curves here:

Yield Curves and Recessions

It’s one of those super nerdy economic indicators that bores people to tears. All you need to know is this: when the yield curves invert, a recession is typically 12-18 months away. A yield curve inverts when the markets and the Federal Reserve seem to disagree about the direction in the economy. The most popular indicator of a coming recession is the 10 year yield – the 2 year yield. Don’t worry about what that means exactly, you JUST need to know where to look for the number and what it means. The other most common indicator is the 10 year – 3 month. The 10 year – 3 month spread number is typically warning sign one before the 10 year – 2 year. ONCE AGAIN, do  NOT worry if you don’t know what this means exactly. We’re going to show you where to find a chart to cheat and know what the big heads of finance know.

10 year – 3 month Yield Spread = Warning Sign #1

10 year – 2 year Yield Spread = Warning Sign #2

When you load those charts, you just need to see if the blue line has crossed below the 0 line (black) at the bottom. You don’t need to understand the mechanics, you are just looking for it to dip below 0. Here is a snapshot of where the 2 warning signs stand today:

10y3yspread 7.25.19

As you can see, the blue line just crossed below 0. And you see those 3 shaded areas that come before? Those are recessions. Notice a pattern between the blue line dipping below 0 and those 3 shaded areas? This indicator has worked 100% of the time since the spread has been tracked around 1982. So that’s warning sign one and will show up before our next warning sign.

10y2yspread7.25.19

Notice that this one hasn’t crossed below 0. But you also notice, those 3 grey shaded areas have the same pattern seen with the 10 year – 3 year chart.

Ok, here is where our estimation of a recession comes in… When the 10 year – 2 year chart crosses below 0, a recession typically takes 12-18 months to show up. Right now, the first warning sign (10y-3m) has fired off, but we haven’t yet dipped below 0 on the famous signal (10y-2y). That gives us a bit more time, but we need to keep an eye out.

So consider this: the big crashes happen around the time a recession is imminent, but if you hear the talking heads on the news site this nerdy signal as if a crash is going to happen tomorrow…well, they’re talking out of their asses. We have time. Hold your positions in this bull market and if you want to check on this signal from time to time, have at it.

Cliff’s Notes:

If the blue line on this chart, crosses below the black 0 line. We probably have 12- 18 months before an actual recession. It’s close, and a warning sign has already fired off, but we’re not there yet.

Related note:

Check out this post if you want to a way to predict where interest rates are going next.

The New Gold Bull Market Has Begun

This morning, the Fed stated that it was keeping interest rates the same, but was open to cutting rates in the near future “should it be needed” to aid the slightly wounded economy*. We’re not going to go into more detail on what they said exactly because, frankly, it bores the ever-living sh*t out of us. But you can read that stuff if you’re on the toilet here…

Fed Holds Rates Steady, Hints at Future Cuts if Outlook Doesn’t Improve

Here’s what the stock market liked from the Fed

The Fed just defied Trump’s wishes for a rate cut but signaled that one could come soon

What you do need to know, is that interest rate cuts means gold goes up. Why? Well, in a nutshell, for interest rates to go down the Federal Reserve has to “print money” to buy up treasuries and cause the yield to go down. Prices of bonds/treasuries work in a seesaw motion against the yields they have. (Lesson for another time) Printing money means more money in circulation, which means “theoretically” more inflation, and gold is supposed to be an inflation hedge.  It’s all very boring. Gold went up nearly 3% on the Fed news, but here’s what’s important about gold’s recent price action. Gold spiked up in MULTIPLE currencies, not just the US dollar and has been on a steady move up in all of the big 5 currencies for the last month. The big 5 currencies are the US Dollar, Great Britain Pound, Swiss Franc, Canadian Dollar, and the Japanese Yen. Gold is officially having a bull moment when it moves up in ALL 5 currencies. This metric is used so that it can be established that gold is not just being used as a hedge for one currency while not affecting anybody else in the globe.

Gold prices6.19.19

 

Notice how the Japanese Yen price of gold has gone up the least amount in the last month and it’s still up over 2.5%. When we add up the last month’s price action, 1, along with the 3% spike today in all currencies, 2, then note that the high of today for spot gold in the US dollar is $1,394 and that is the highest level gold has reached in over 5 years (in the US of course) …we’ve got a pretty damn good case that the bull market in gold we’ve been waiting for is here.

There IS a major caveat to this article. We may be a bit premature. We need to see gold break the $1,400 level and stay there to really know that the new bull is here, but our money is on exactly that happening in the next week or 2. Our preferred place to look at the spot price of gold is Kitco.

 

 

 

 

*The main thing hurting the economy at the moment is the trade war. Trump wants the rates cut to theoretically unf*ck problems he caused in the first place.