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Category: Chart of the Week

New York Federal Reserve Model Indicating Recession Next Year

The New York Federal Reserve says the U.S. could be headed for a recession next year.  That is based on a model it created using the spread between yields on 10-year and 3-month Treasuries to forecast economic conditions one year ahead. The latest model shows a 33% probability of recession next year. That is very worrisome because, as the chart shows, this model has historically been highly accurate in predicting economic downturns.

New York Federal Reserve Model Indicating Recession Next Year
New York Federal Reserve Model Indicating Recession Next Year

Record Amount of Negative-Yielding Debt Signaling Expansion of Global Slowdown

The market value of negative yielding debt globally hit a record $12.5 trillion this past week spurred by investor anxiety over clear signs of a weakening global economy, persistently low inflation, China-US trade tensions and geopolitics, particularly in the Middle East. Why is this so worrisome? A rush into negative yielding bonds historically has occurred right before and during economic bad times. Recent signs of an expanding global slowdown have once again driven investors to rush into the safest assets available, such as government bonds, increasing the number of bonds with negative yields. In other words, in exchange for weathering what they see are economic bad times ahead,  investors are willing to buy bonds that will return less than they paid if they hold the bonds to maturity.

Record Amount of Negative-Yielding Debt Signaling Expansion of Global Slowdown
Record Amount of Negative-Yielding Debt Signaling Expansion of Global Slowdown

Huge Margin Debt Hangs Over the Stock Market Like the Sword of Damocles

As the chart below shows, investors have racked up huge margin debt in the hopes of increasing performance in a rising market. But that huge debt overhanging the stock market by a thread like the sword of Damocles means greater risk on the downside. That’s because the heavy use of margin, which often occurs at the end of a bull run, exacerbates the downturn when investors are forced to sell shares to avoid or satisfy margin calls.

Huge Margin Debt Hangs Over the Stock Market Like the Sword of Damocles
Huge Margin Debt Hangs Over the Stock Market Like the Sword of Damocles

Why Should We Worry About the Longest US Economic Expansion Ever? Well,  Sh*it Happens!

In July the U. S. economic expansion which began in June 2009, will set the record at 121 months as the longest in memory (see chart), beating out the 10-year, 120-month expansion which ended in March 2009. Should we be worried?  Recessions tend to start not when economies are weak but at peaks when things seem to be going great, when people become too optimistic and tend to take greater risks.  Take the last great expansion throughout the 1990s propelled by computers, the internet and high-tech growth in general. That ended after the high-tech stock market bubble when overly optimistic investors propelled stocks to record highs.   So what could happen this time? Could it be tariff wars? Tremendous debt at financial institutions such as is happening at Deutsch Bank? Or some other unforeseen geopolitical event? Historically, bad things tend to happen at times of extreme optimism. Put another way, sh*t happens!

Why Should We Worry About the Longest US Economic Expansion Ever? Well,  Sh*it Happens
Why Should We Worry About the Longest US Economic Expansion Ever? Well,  Sh*it Happens

 

Why the Recent High in The Consumer Confidence Index is Scary

The Consumer Confidence Index hit another new high this month, the highest in 19 years. While one would think this is a positive, it’s actually as scary as it gets. Why?   That’s because consumers typically react to what’s in the rear-view mirror. They tend to be oblivious to what lies ahead. And this herd mentality usually gets it wrong.

To put this in historical perspective, consumers are the most bullish they’ve been about the economy in two decades, since the top of the stock market internet bubble in 2000. One year later the U.S. was in a recession and the stock market was in a serious decline.  Be wary when everyone is singing the same tune.

Why the Recent High in The Consumer Confidence Index is Scary
Why the Recent High in The Consumer Confidence Index is Scary

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