Incoming recession and Stock Market crash?

in steemleo •  2 months ago 

This is mainly a thinking out loud type of post. The global economy is feeling like it is heading for a significant downturn I think, with Wall Street stock last night dropping 2.5% and Australia's market following suit today. Stocks have been flying high for a while, and a correction is probably due. But the Macro-economic outlook seems very shaky to me at the moment.

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Source: Pixabay

I was reading this article from CCN about "Yield Curve Inversion." Sounds really boring, but basically a fairly reliable indicator of a coming recession is when the yield on long term treasury bonds (10 year bonds) is lower than short term bonds (2 years). The theory being that when investors are nervous, and heading to find a safe haven, they buy up long term bonds - pushing the price up and thus yield down.

Last Time

The last time the yield curve inverted like this was in August 2007, and 2008 was a very tough time for investors. September and October are when most good stock market crashes occur, and 08 was no exception. The GFC kicked in full force, and stocks lost 50% from 2007 to 2009 roughly.

Economists often give the spread between the 10-year and the 2-year special attention because inversions of that part of the curve have preceded every recession over the past 50 years.

CNBC has also reported on this occurance with this article. The following quote from the article spells it out pretty clearly:

“I have to yield to the historical evidence and note that the phrase ‘this time is different’ usually doesn’t work,” said Arthur Bass, managing director of fixed income financing, futures, and rates at Wedbush Securities.

“It’s a very unusual time period: We haven’t had tariff issues like we’re dealing with currently in about 80 years,” he continued. “It’s about dealing with negative rates in most of the European countries and Japan. Again, I have respect for the inverted yield curve as a signal that recession is ahead.”

Another interesting thing to note is that the same Yield Curve Inversion has happened in the UK.

12 months away.

All of these articles tend to indicate that a recession follows a "Yield Curve Inversion" occurrence around 12 months later. That is a pretty awesome early indicator, and plenty of warning to give time to move to defensive positions. Will a recession happen this time around? Who knows for sure, but history often repeats itself, and an indicator that has been 100% accurate for the last 50 years is a pretty good guide.

Other Macro concerns.

We all know about government debt levels, "Quantitative Easing", Trade and Tariff wars developing and so on. The China-US trade war will impact on the global economy, Brexit is still going to have many uncertain outcomes, and there are so many other warning signs around the world.

Is crypto a safe haven?

There is a definite argument to be made that cryptocurrency (particularly Bitcoin) is transforming into a "safe-haven" investment in times of fiat economy downturns. The currency is mathematically reliable, with no government looking to the next election pumping out inflationary "new money" supply. How safe crypto becomes will possibly depend on how hard the fiat bankers and governments try to limit its growth. However, we have seen that the less people can rely on their local fiat currency and economy (think Venezuela) the more they turn to Crypto.

Where am I headed with this post?

Not really sure, just thinking through a few things out loud. If you have any opinions or other comments about the state of the global economy, feel free to discuss in the comments. I guess, personally, my fiat investments are all in my superannuation retirement fund, and I can't swap them to crypto or metals. I am currently mainly in high growth investments, and will look over the coming months to move to defensive options and safer assets.


None of this is investment advice and I have no qualifications to give investment advice - DYOR.


Thanks for reading, please feel free to share your thoughts in the comments.

John.

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Lot's of things pointing towards a recession like the new car sales in Australia having been falling for many months now as just one sample. I am also a bit surprised the world economy has not officially turned into a recession yet. They just keep trying to kick that can further down the road I think it must be getting close to falling of the edge though.

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Yes, heaps of signs on the horizon, just a matter of when, not if, I think. Hopefully it'll help crypto out...

Yes hopefully crypto will benefit.

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When you move to defensive investments, where do you go?

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Hi @improv, I think I'll make a follow up post with what I am planning to do. Short version is gradually increase cash and fixed interest, reduce holdings in "higher risk" companies and move to "safer" options - companies with low debt levels and lots of free cash flow usually ride out recessions best. Also consumer staples type companies usually hold up (people still gotta eat during a recession).

I'll work on a follow up post tomorrow

All the signs are there but central bankers and governments can keep the party going for a while longer by cutting interest rates back to 0.

That doesn't solve the trade war stupidity and a recession is imminent if it keeps up.

Yup, governments only look as far as the next election, don't care about the long term impacts of what they are doing. Trade war is a factor, no doubt, and will be a big catalyst for a slowdown I think. I also would not be surprised to see another GFC style crash, with more banks wiped out through dodgy practices. Sadly, its always the average Joe that suffers more than the big end of town.

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