On Friday, the “yield curve” officially inverted. This economic indicator has a PERFECT RECORD of predicting impending recessions for at least the past century. When the yield curve inverted on Friday, the stock market, and your 401k, got shredded!
WHAT IS AN INVERTED YIELD CURVE?
Normally, interest rates (or yields) on long term debt (i.e. 10-year bonds) are higher than interest rates on short term debt (i.e. 1-year bills). This makes sense because holding debt for a longer period is riskier than holding it for a shorter period. Therefore, lenders request a higher yield to offset the risk.
When the curve inverts, the opposite is true. Short term yields are higher than long term yields.
WHAT CAUSES THE YIELD CURVE TO INVERT?
As the economy improves, the Federal Reserve pushes up short term rates, as they have done for the past 2 years. This action brings short term rates closer to that of the longer term rates. Then, as the economy slows down, investors will sell risky assets like stocks, and buy bonds, usually the 10-year Treasury bond. This bond buying pushes the yield on the longer term bonds lower. Eventually, the long term rates move lower than short term rates.
The key here is investor fear! If investors were not afraid, they would not be buying bonds. The fear is driven by real underlying economic reasons. Because of this, a yield curve inversion has been a 100% perfect indicator of impending recessions.
GERMAN INTEREST RATES GO NEGATIVE!
European fears are greater than those in the United States. So much so that German interest rates this week turned NEGATIVE! Imagine for a moment, lending your government money, and paying them to borrow it! Say what?
Yes, German investors are so nervous right now about the European economy, they are actually paying the government to borrow their money! This condition, known as a liquidity trap, is a prelude to economic depression. The better thing to do is withdraw cash from the banks, and stick it under the mattress! Or better yet, buy gold and silver.
When there is no yield for investors, there is no investment. And when there is no investment, there is no economic growth!
THESE ARE DANGEROUS TIMES
I have been saying for many months that all paper-based markets have hit the “dangerous level”. Stocks, bonds, derivatives, and highly leveraged real estate have all hit extreme levels. Debt is out of control in all segments of the economic system, including government, business, and individual. And for the first time in history, the condition is worldwide!
The excessive printing of money, since the United States left the gold standard in 1971, is now going to come home to roost. A nation cannot simply print its way to prosperity.
When this next recession hits, the Government/Federal Reserve printing presses will be activated yet again. This time though, the economy will continue to spiral down in an inflationary depression.
The protection against inflation is to own real assets, like gold, silver, or real estate, free & clear. Even if it is necessary to shrink one’s lifestyle for the interim, that is a better option than default and repossession.
By mid-2019, we are all likely to know someone who has lost a job due to the economic slowdown underway. Right now, it’s a “rolling” recession. By later this year, it will be steamrolling over most sectors of the economy.