The Case for Utmost Discretion

Good evening,

I am not an economist or an economic adviser at any professional level.
That being said.
I would like to make the case for discretion in this economy.

From the outside the U.S. economy looks stable and powerful. We are bombarded daily with news at just how good everything is going.

However, I believe that these reports are based on erroneous information and do not give Americans or investors abroad an accurate picture of reality.

I am going to lay out a way for you to establish your own educated opinion based on just a few broad overarching trends in the economy.
THE DOW JONES INDUSTRIAL AVERAGE, From Trading Economics

Starting at 1990.

First, and probably the most abstract of all.
THE VOLATILITY INDEX, S&P TICKER VIX From Trading Economics

Starting at 1990.
The Volatility Index is basically supposed to be a measure of near-term volatility in the markets. The lower the better or at least it should be anyway...
I have outlined in red the volatility in the lead up to the dot com bubble inflation and eventual bursting around 2002-2004. In green is the lead up to the 2007-2008 financial crisis. In blue is the lead up to the 201.....

Second,
THE US TREASURY YIELD CURVE, From Bloomberg

The Yield Curve very simply is just mapping the interest rate percent on U.S. Treasury Bonds.

Mainly what we are concerned with on this graph is that the spread between the 2 month and 10 year bond yields is getting closer or flattening. Eventually it may(will) invert.

As laymen, not economists we don't need to care how exactly this is a bad thing, we just have to look at the overarching trend. Which is that every time the yield curve has inverted there has been a serious financial downturn.

This graph is a few months old, the spread between the 10 year and 30 year bond is now .261 % down from around .42 % at the time of the graph.

Third,
THE U.S. FEDERAL FUNDS RATE, From Trading Economics

Starting in 1990.
Basically, this is the interest rate the Federal Reserve sets for banks to loan each other money.

In a real free market this rate would be set by the banks independently and would reflect the real value of the supply and demand of liquid cash to loan out. The more supply of money for loans the lower the interest rate, the more demand for credit the higher the interest rate.

In the 90s leading up to the dot com bubble credit was cheap relative to historical norms so the fed started raising rates. In the early 2000s as the air began escaping the bubble, the fed lowered rates in hopes of stabilizing the markets. As we can see it worked and the equity markets again grew to new heights.

Americans went into record breaking debt but as long as interest was low maintaining that debt was quite cheap. Again looking to stabilize the economy and return to more realistic normal rates the Fed started edging up rates in the mid 2000s, this adversely effected the markets. Adjustable rate loans began adjusting up according to the new higher interest rates and people could no longer afford to service their debts, the economy that was built on cheap credit once again fell through.

In the late 2000s the Fed lowered rates effectively to 0%, loans were once again cheap. Americans have taken advantage of this temporary fact and have been using the last 8 years to load up on record shattering amounts of debt buying things they can't truly afford.

The Fed began raising interest rates yet again in the late 2010s.

Can the average American afford higher interest rates on debt he can barely afford now?

Can the U.S. Government afford higher interest rate payments on its debt?

There are many other indicators and trends that back up what I have posted here, some even more concrete than these.

However for your average layman who wants a big picture to look at, these are my top three charts.

This may seem all doom and gloom, but to be certain, there is hope but that is for another post.

This has gone long enough, soon I will go into where I think all this is heading and what you can do to prepare to not only get by but to profit off of the coming downturn.

Thanks,
Respectfully,
Matthew Donelan