One of the things you've heard me say many times on the show, if you've been watching
or listening for any period of time, is that right?
We are just genuinely really bad at predicting recessions.
Some people have been predicting a recession for the last five years.
Some have been saying it's six months away, others it's 12 months away.
Others, it's 18 months away and were really just terrible at predicting when the next
recession is going to be.
But one of the things we do know is that we are one day closer today than we were yesterday
to the next recession.
That's just sort of a reality.
Unless you believe that something so fundamental has changed that there will never be a recession
again, and if you're making that case well, I, I'd love to hear why that's what you believe.
Number two, we do know that there are certain signals that we can look at that will tell
us whether we are imminently closer to a recession.
We're still not very good at predicting the future state of the economy at any particular
point in time, but we actually increasingly have indicators that suggest we are getting
closer and closer to the next recession.
The latest being that the yield curve has inverted.
If you have no idea what that means, fear not.
I am going to explain it to you hopefully in terms that will make it clear to everybody
even if this is not in your educational or or personal interest background, so don't
worry about that.
But before we get to that, some of the other signals we've seen recently that are of concern,
there's one that doesn't get a lot of attention, but it is important, which is that the number
of people, the percentage of people who are 90 days or more behind on car payments has
been going up, up, up, and this is really important because it seems sort of innocuous
and as esoteric in some way.
90 plus days behind on car payments.
What does that tell us about the state of the economy?
Car payments and car loans.
Tell us a lot about the degree of financial stress on people because to fall 30 days behind
on a car payment because you had an unexpected expense, uh, okay, to fall 60 days behind.
Okay.
But when people become 90 or more days behind on car payments, cars that they presumably
need to get to work and earn money that they need to get their kids to school or whatever
else the case may be, that starts to be a red flag about the personal financial situation
of many, many people in the United States.
That's been a red flag.
Number two, the stock market eroticism as a result of Donald Trump's trade war, including
basically market's being back down to where we were a year and a half ago, does not bode
particularly well for the future of the economy.
And then now yesterday, the yield curve has inverted.
What does that mean and why do we care if you don't understand it?
It's hard to see it as a red alert.
So let's try to dig into it so we can all understand what I'm talking about in general
in the world of money.
In order to potentially earn a higher and higher return, you either need to accept more
risk the risk of losing money or tie up your money for longer periods of time.
So if you look at cds, a certificate of deposit you can get with a bank or financial institution.
If you're willing to lock your money up for a year, you say, take my money, I can't touch
it for a year, you might be offered a 2% return on your CD.
These are hypothetical numbers by the way, but if you're willing to say, I will lock
my money up for two years, you can in principle earn a higher return.
Maybe it's a 3% return instead of a 2% return because you're giving up access to the money
for a longer period of time.
This is the way things typically work.
Because if you were able to earn 2% on a one year or a two year CD, most people would pick
the one year CD because it's a shorter lockup period.
So along the same lines, normally when you look at the 10 year us treasury bond, the
interest rate yield on that is higher than the yield on the two year us treasury bond.
Basically for the same reasons that I just discussed.
There's now been an inversion of the yield curve where the 10 year us treasury bond briefly,
and this fluctuates all the time, had a lower yield than the two year bond.
This is a marker with a very strong correlation to recessions.
If you look at the last seven recessions, going back to 1969, all seven were proceeded
by the 10 year bond yield, uh, dropping below the two year bond yield.
And as you might remember, the Fed recently lowered rates with the idea in part of keeping
the 10 year bond yielding more than the two year us treasury bond.
But the continued chaos with the Chinese trade war that Donald Trump is waging and other
things have been an opposing force.
And indeed the 10 year yield has dropped below the two year yields.
So why does this matter so much?
The 10 year treasury bond is considered a very reliable, safe haven for investor money.
The 10 year bond, if you believe in the general future, stability of the economy is a very
safe place to put money.
When the 10 year bond yields less than the two year bond, it signals that there is a
very negative outlook about the future of the economy in the next few years.
Why?
Because investors are so scared about the two year outlook that they prefer to take
the guaranteed return on the 10 year, even if it's less to such a degree that it ends
up a bidding down the yield because it is seen as safer and more favorable for traders
and for markets and for the economy, and it effectively creates a feedback loop where
because of the lower yield banks become less willing to lend money, which further causes
an economic slow down and like much of this stuff, these feedback loops go on and on and
on and who knows where they stopped.
So understand a few things.
Number one, none of this changes that the economy doesn't work for tens of millions
of people.
In the United States, maybe even hundreds of millions.
That's understood.
I'm still a social democrat.
I'm not jumping into finance bro mode or anything like that.
Uh, that's one thing to understand.
Number two, we are always heading to the next recession.
The question is when and number three, increasingly the indicators say that it's going to be soon
and we actually know of specific Trump policy that's pushing us closer.
Think back to 2012 before the 2012 election.
Obama versus Romney, they both made claims about the economy.
The reality was that indicators, we're pretty good at the time and the economy was likely
to remain pretty good no matter who was elected president in 2012 I said it at the time it
remained true.
We now actually have White House policy that is specifically precipitating the next recession
led by the disastrous trade war and we are starting to see more and more indicators of
that.
I want to hear from you, let me know what you think.
Uh, and we will certainly do a followup and continue to keep an eye on that yield curve.