Learn Liberty VIDEO of the Week: "Recessions, Individuals and The Government"

In the face of a recession, is it better for individuals to act in accordance with their needs or for governments to make decisions for all? #LearnLibertyClassic
Posted by Learn Liberty on Sunday, December 13, 2015

The "Inverted Yield Curve": A Perfect Track Record Predicting U.S. Recessions...

A Perfect Track Record For Forecasting U.S. Recessions 

There are very few market indicators that can predict recessions without sending out false positives. 

The Yield Curve is one of them. 

Recently, LPL Financial's Jeffrey Kleintop noted that the yield curve inverted just prior to every U.S. recession in the past 50 years. 

"That is 7 out of 7 times — a perfect forecasting track record," he reiterated. 

The yield curve is INVERTED when short-term interest rates (e.g. the 3-year Treasury) are HIGHER than long-term interest rates (e.g. the 10-year Treasury yield). 

"The yield curve inversion usually takes place about 12 months before the start of the recession, but the lead time ranges from about 5 to 16 months," wrote Kleintop in a recent note.

"The peak in the stock market comes around the time of the yield curve inversion, ahead of the recession and accompanying downturn in corporate profits." 

The Federal Reserve has been signaling that tighter monetary policy is on its way, which means short-term interest rates should move higher. Is this something we should be worried about? Kleintop offered some context:

"How far the Fed must push up short-term rates before the yield curve inverts by 0.5% depends on where long-term rates are. Even if long-term rates stay at the very low yield of 2.6% seen in mid-June 2014, to invert the yield curve by 0.5% the Fed would need to hike short-term rates from around zero to more than 3%. Based on the latest survey of current Fed members that vote on rate hikes, they do not expect to raise rates above 3% until sometime in 2017, at the earliest..."

Lots of economic and market factors drive what happens with interest rates. So the shape of the yield curve is definitely worth paying attention to. 

"The facts suggest the best indicator for the start of a bear market may still be a long way from signaling a cause for concern," he said.

Upward Sloping Treasury Yield Curve is a Bullish Omen for the Stock Market & the U.S. Economy

Recessions rarely occur when the yield curve is sloping upward.

Jobs Finally Return to Peak, But Quality Is a Far Cry from What It Was in 2008...

2nd Quarter GDP Growth An Anemic 1.3% & Durable Goods Orders Plunge -13.2%...

Big Recessions Have Always Led To Big Recoveries...Until This Time...

If Bush Tax Cuts Expire, Recession Likely In 2013...

Quote of The Day: Recession On The Horizon?...

“When underlying growth slows to this degree, a recession always follows. Basically, growth has flatlined."

Lakshman Achuthan, co-founder of the Economic Cycle Research Institute

Intrade Risk of U.S. Recession Falls To Only 25%, Down From 50% Last Fall...

Chart of The Day: Rising Rail Carloads Indicate A Reduced Risk of Recession...

A Recession Occurs Once Every 6 Years, On Average...

The U.S. has survived 13 recessions during the past 75 years, an average of one every 5.8 years. 


Source: National Bureau of Economic Research

Bond Yields Suggest 60% Chance of Recession...

The bond market indicator that has predicted every U.S. recession since 1970 shows that the economy has about a 60% chance of contracting within 12 months.

Short-term rates have been higher than longer-term yields, or inverted, before each of the 7 recessions since 1970.

“The adjusted curve is giving a powerful signal for an upcoming U.S. recession,” said Ruslan Bikbov, a fixed-income strategist in New York at Bank of America, one of the 22 primary dealers of U.S. government securities that trade with the Fed.

“If that happens, the Fed’s target rate could remain near zero beyond 2014,” more than a year longer than the central bank has indicated, he said in an interview on October 3rd.

Global Recession Ahead? Crude Oil Says, "Not Yet!"...

When global markets collapsed in 2008, crude oil plunged for 7 consecutive months, crumbling from $147 per barrel in July 2008 and bottoming near $35 a barrel in February 2009. (See monthly crude oil chart above.)

Fast forward to September 2011 where we see crude oil trading near $90 a barrel. 

Bottom Line: 

If a severe global recession takes hold, expect crude oil, a harbinger for global growth, to plunge. So far, that hasn't happened, a positive for the global economy and global financial markets.

Keep a watchful eye on crude oil and copper for warning signs of a global recession.

U.S. Economy is Slowing, Just As In 2008, But...

the jury is still out on whether another recession is in the offing...

Bear Markets Not Accompanied by Recessions Are Less Severe...

A Failsafe Way To Know If A Recession Is Really On Its Way...

The telltale sign of an impending recession is an inversion (short-term rates are HIGHER than long-term rates) of the 30-year yield vs. the 10-year yield spread.

Historically, the stock market and the economy remain healthy as long as the yield curve is STEEP and NOT inverted.

However, when the yield curve becomes inverted, as it was in 2000 - 2001 and 2007 - 2008 (note the yellow shaded area on graph), the economy and the stock market typically take a bear-market beating within 6 months of the inversion.
 
Normally, 30-year bonds yield more than 10-year bonds as a function of people wanting to get paid for not being in riskier assets. But when the 30-year yield collapses below the 10-year yield, watch out!

While 30-year yields have been coming down, and the spread is narrowing, we're nowhere near inversion at present.

Why This Is More Than Just Your Garden-Variety Recession...

An economy that 33 months after a recession begins, with zero policy rates, a stuffed central bank sheet, and a 10% deficit-to-GDP ratio, is still in need of government help for its sustenance suggest that this isn't your garden-variety recession.

Moreover you know it’s a more than just a typical recession when, 33 months after the onset of recession...

·         Wages & salaries are still down -3.7% from the prior peak;

·         Corporate profits are still down -20% from the peak;

·         Real GDP is still down -1.3% from the peak;

·         Industrial production is still down -7.2% from the peak;

·         Employment is still down -5.5% from the peak;

·         Retail sales are still down -4.5% from the peak;

·         Manufacturing orders are still down -22.1% from the peak;

·         Manufacturing shipments are still down -12.5% from the peak;

·         Exports are still down -9.2% from the peak;

·         Housing starts are still down -63.5% from the peak;

·         New home sales are still down -68.9% from the peak;

·         Existing home sales are still down -41.2% from the peak;

·         Non-residential construction is down -35.7% from the peak.

Unfortunately, in a normal recession-recovery cycle, practically all these indicators are making new highs at this juncture of the business cycle.

Why A Double Dip Recession Cannot Be Ruled Out...

Claus Vogt, an analyst for Money and Markets noted when the Economic Research Institute’s (ECRI) Weekly Indicator crossed a point that almost guarantees a recession.

On July 14 the index’s growth rate was -8.3%. In the week ending July 30 the index declined even further to -10.3% growth rates. The year over year percentage of growth crossed the zero mark in May, and has not seen positive growth since.

The ECRI Weekly Indicator has NEVER fallen this low and avoided recession.

Issues that signal the likelihood of recession, according to Vogt include:

1. The end of the recent recession was bought with heavy reliance on government stimulus which is now over 80% spent.

2. Despite heavy government spending and debt the rebound is one of the weakest recession rebounds ever.

3. Credit is still tight.

4. Unemployment is still at astronomical levels and is deteriorating again

 

Foreclosures to Persist

According to authors at the Federal Reserve Bank of Cleveland, the nation’s high foreclosure rate is likely to persist.

The Fed article looks at the changes in foreclosure and unemployment rates across states, noting the differences in the timing of the movements.

The conjecture that the high foreclosure rate will persist is based in part on the observation that states that experienced boom-bust housing cycles in the past (Texas, Oklahoma, Massachusetts and California) had elevated foreclosure starts for years after the peak in foreclosure starts and inventory.

These previous boom-bust cycles “were small in comparison to the current cycle,” the article said.  

While the recession has left deep scars in the housing and labor markets — with the unemployment rate doubling and the foreclosure start rate roughly tripling — the timing of the movements differs over the cycle, according to the abstract, written by Timothy Dunne, a vice president at the Federal Reserve Bank of Cleveland, and Kyle Fee, a research assistant.

How The Recession Has Changed America's Spending - Forbes.com

Americans were becoming frugal before the economy's decline, but the recession has accelerated this trend.

 The biggest news out of the Pew study was that "more than half of the adults in U.S. labor force (55%) have experienced some work-related hardship--be it a spell of unemployment, a cut in pay, a reduction in hours or an involuntary move to part-time work.
 
In addition, the bursting of the pre-recession housing and stock market bubbles has shrunk the wealth of the average American household by an estimated -20%, the deepest such decline in the post-World War II era, according to government data."
 
Read the entire article here...

Forbes.com - John Zogby - How The Recession Has Changed America's Spending