For the last 50 years this indicator led to a United States Recession. Are you ready to stay alive for the next 2008?
A secret is being held by main stream economist, news organizations and media outlets. The alarms ring silent noises. Secretly policy makers stress over ways to pacify a soon to be desperate American public.
The hallways are hushed by news anchors and people do not dare speak the word.
This time there is no federal savior to alleviate the stress with zero percent interest rates. This time there is no bank to blame. This time a stock market free fall cannot be protected by stimulus. This time we are engaged in a trade war.
A recession has occurred seven out of seven times in the past fifty years when this indicator alarm rang. Are you listening?
THE YIELD CURVE
The United States Treasury Interest Rates have been inverted for ninety days. A yield curve is a line chart of interest rates for government bonds, with interest rates on the left axis and maturities on bottom axis. Normally the curve slopes upward. The increase demonstrates the additional yield investors typically demand in exchange for a longer time to maturity.
It makes sense to offer investors more money for longer lock up times. Common sense dictates more money for greater time lock ups. What happens when common sense fails? What happens when the opposite occurs?
Recently, investors buying longer term Treasury securities produced an inversion of the curve. The inversion is occurring in the 3-month Treasury bill and the 10-year Treasury note.
The chart below shows the shape of the yield curve at two points as of July 1 2019.
RECESSIONS AND THEIR OCCURRENCES
History repeats. Scholars note with high accuracy the consistent patterns emerging in economic cycles.
From the late 1970s, there have been five episodes of a yield curve inversion. Each one of the five episodes had a recession occur within nine (9) to eighteen (18) months.
A longer history of data is required so I am also incorporating the chart to features the 10-year Treasury yield and the 2-year Treasury yield. Most professional traders today reference the 3-month to 10-year measurement.
According to the Federal Reserve Bank of New York, there was a 27% probability of a U.S. recession in the next 12 months, based only on Treasury spreads reported on March 28, 2019. Understanding the other factors such as the bull run extending past ten years (never occurred in history of stock market), stagnant wage growth (federal minimum wage has not increased since July 2009), and the onset of excessive tariffs being applied in trade wars (with China and India) we stand at a cross road. Many other factors influence this including a 90 day persistence of yield curve inversion.
Below is a chart of the US Treasury spreads provided by the Federal Reserve Bank of St. Louis.
History illustrates a yield curve inversion lasting for a quarter precedes an economic recession 100% of the time. Guess what?
The 100% occurrence signal for an impending recession happened on 30 June 2019.
In the past seven instances, an inversion sustained for nearly a full quarter was a reliable signal indicator for recession. In all seven instances a recession happened within 18 months.
IMPACTS OF A RECESSION
Let’s start off with a reputable name. A respected organization that is known for analyzing the market is what we will reference. In one sentence I summarize Guggeneim’s opinion as reported by Sunny Oh on April 2019,
“Guggenheim expects the S&P 500 to sink by 40–50% as economic recession takes hold as early as 2020”.
According to the ICI Researchable Report in 2016 approximately 6.9 trillion dollars of American wealth was held in Individual Retirement Accounts (IRA).
Approximately 16.6% of all United States Households before retirement age withdrew from IRAs to support basic necessities in a contracting stock market during the last 2008 recession. The age groups that withdrew were 52–61 (7.6%), 24–56 (6.1%), and a smaller margin composing pre-24.
The affects of removing IRA balances at premature ages is detrimental to long term financial planning. Equally detrimental is the IRAs inability to provide financial support in retirement ages when activities like this occur. On average the employment rate reached as high as 14.1% during the last recession according the Bureau of Labor Statistics (BLS). The number of 14.1% counts unemployed, underemployed, and those that stop seeking work. Unemployment does not count people who “quit” searching for job because they cannot find one. According to the BLS report, the number of underemployed individuals in the US economy rose from 7.2 million during the fourth quarter of 2008 to 9.2 million in the same period a year later. On an overall basis, the agency estimated that there were 28.9 million underutilized and un-utilized (or discouraged workers who had stopped looking for work) in November 2009, the highest that figure had been since 1981–1982.
While most people are attempting to soften the sentiment of the next recession a few things can be expected.
YOU WON’T HAVE A GOOD PAYING JOB
The next recession will spike gig jobs, temporary contracting jobs, and independent contractors. As companies feel revenue dips staying above water will be a constant cycle. In 2008 the housing crisis fueled massive losses for the banks. These banks restricted lending to conventionally qualified borrowers. Fields such as construction, real estate, and automobiles slowed. 100% commission jobs will be the norm. This time the banks will have money but they won’t want to lose it. Business lending will grind to a halt.
ROBOTS WILL BECOME A DEFACTO JOB REPLACEMENT TOOL
As companies struggle to maintain decent earnings per share, alphas, and other growth metrics new factors will creep in. Robotic workers exist as a new possibility for skilled and unskilled labor. In order to deal with cheaper commodity prices and the demand for lower costs of goods companies will eliminate the highest cost — labor.
Artificial Intelligence and robotic capabilities have undergone 20 years of technological improvement. The ability to accelerate deployment of robots to perform tasks in jobs exists today. This factor did not exist in 2008. The affect will be worse not better. The call for action will be price reductions with wage increases.
There is no legislation stating all robotic work forces are not allowed. Expect yesterday’s jobs to be replaced by robots.
SMALL BUSINESSES WILL EXPERIENCE AN ASTOUNDING CLOSURE RATE
Small businesses employ the bulk of America. Most businesses thrive off credit and easy money access. Merchant Cash Advances Businesses around the country currently have about 1 million open merchant cash advance accounts, according to data from the Consumer Financial Protection Bureau. While this form of funding is not as popular as other funding sources like credit cards, term loans, or factoring, it helped a significant amount of businesses gain access to the capital they need to grow or cover operational costs.
These funding sources were important to companies employing on average 6–49 jobs per business. The number of jobs affected by constraining this funding conduit will be a significant factor in our economy.
Retail businesses will experience a significant draw back in consumer spending — which will carry over its affect to other areas of the economy.
Lack of alternative funding will result in business closures that support meaningful jobs.
IRA VALUES WILL DROP
The contraction of stock market values means American retirements will be thrown aloof. With investors pulling out money at increasing rates the sell off effect will take hold. Market sentiment will drive self fulfilling prophecies. Assets such as gold and silver will sky rocket. Safety nets such as annuities and whole life policies will experience business like never before. Investor confidence will shake and stock market volatility will discourage long term investing. Low yield investing means more Americans will be ill equipped for retirement.
THE PLAN TO SURVIVE
Surviving an economic recession is about timing what you do. Preserving liquidity is the key to success. When no money is available the premiums demanded will be huge. Common sense deals will have no money options. Easy to understand transactions will be plentiful. Foreign markets will be very appealing.
The plan for employees needs to be saving preservation. Downsize immediately and hoard your paycheck. The plan for entrepreneurs needs to be liquidity and foreign market forecast. Don’t invest in expansion. Preserve profits and conduct joint venture studies in emerging markets. The plan for business people need to be joint venture partnership with pooled assets. Look to list on foreign exchanges with foreign partners willing to pay for land or contribute hard costs. Professionals need to build books of business in other markets that have growth.
The truth is often simple. Falsehood is often complex. Simply saving and holding money in tangible depreciation proof assets will create your survival. Speculation and aggressive behaviors will be the downfall of those that do not heed this advice. Plan to hold intrinsic value or plan to hold nothing. Follow me on Medium or subscribe to my newsletter to learn more insightful advice.
To your knowledge success!
About Christopher: Christopher Knight Lopez is a Professional Entrepreneur. Christopher has opened over 7 businesses in his 14-year career. Christopher’s purpose is to take advantage of various market-driven opportunities. Christopher is a certified Master Project Manager (MPM) and Accredited Financial Analyst (AFA). Christopher previously held his Series 65 securities license. Christopher also has his General Lines — Life, Accident, Health & HMO. Christopher has managed a combined 286mm USD in reported Assets Under Management & Assets Under Advisement. Christopher has work experience in 29 countries, raised over 50mm USD for various businesses, and grossed over 7.5mm in his personal career. Christopher worked in the highly technical industries of: biotechnology, finance, securities, manufacturing, real estate, and residential mortgages. Christopher is a United States Air Force Veteran. Christopher has a passion for family, competitive sports, fishing, martial arts and advocacy for entrepreneurs. Christopher provides self-help classes for up-and-coming entrepreneurs. Christopher’s passion to mentor comes from belief that entrepreneurs need guidance. The world is full of conflicting information about entrepreneur identity. See more at www.christopherklopez.com