Here’s the million-dollar question: Is the US-and indeed the global economy, on the brink? Is a recession inbound?
Well, given the situation and the obvious mire that prevents a direct answer to this question, the best course is to analyze real-time indicators that historically portend financial danger. Understandably, the world’s economy-perhaps made worse by political fireworks, supremacy wars, low inflation and monetary policy interference, is indeed at a ledge. But with so many “reliable” indicators lagging, analysts do have limited references to infer.
Bond Yields and the Economy
Luckily, it is still possible to “peep” into the fuzzy future using numbers-and partly sentiment. The answer could lie at treasury bills, notes and bond yields. Why? Bonds are typical safe haven assets-and they will continue to be as long as the offering government is liquid and sovereign enough to be in the position to mint legal tender.
The sovereignty aspect is a key determiner and a reason why investors trust the sovereignty and liquidity of the US government to repay loaned monies in time. Although there was a rating's deprecation in 2011 casting doubt on the US government’s abilities.Even so, with bonds and treasuries lie many questions than answers. Soured, the international market could be steadying with upbeat retail scene and the stock market trading at a near all-time high, but there is an inverted yield curve causing jitters.
Historically, an inverted yield curve has been a predictor of economic turmoil-and worse a recession. When there is an inversion, the yield of long-term notes/bonds is lower than short-term ones. In the seven instances, yields have inverted it took less than two years before a biting recession wreaked havoc. However, there is scepticism that this time this inversion is flashing false signals and there is nothing to worry about.
A Recession Code Red
Nonetheless, Campbell Harvey, a finance professor at the University of Duke, and the scholar credited for discovering this correlation, is adamant. Giving a “recession code red”, and further insisting that growth will slow as per his model’s deductions; analysts shouldn’t throw caution to the wind.
Already, the spread between the 10-year and 3-month were mostly negative in Q2 2019 safe in late July when spreads were level. Further affirming a deteriorating economy, the spreads of the primary indicator-the spread between the 10- and 2-year notes turned negative in August.
Meanwhile, and this is bad news, spreads between 3-month and the 5-year treasuries are inverted, and that has been the situation since February 2019. Cumulatively-and more so drawing conclusions from the spreads between the 2-year and the 10-year notes, there is reason stock market investors should worry.
A primary concern here is the expected scramble for long-term bonds which are traditional safe havens as aforementioned. Apprehensive of future growth, investors are flowing to long term treasuries, stoking demand and consequently pushing rates down.
Now, Is A Recession Imminent?
Making calls based on this, some would say, is scaremongering. However, at the same time, we can learn from past events. Even though that would not mean the same would be replicated in the future, it is safe to be cautiously optimistic. Campbell Harvey, a renowned expert scholar, has given a code red.
Further, in seven previous occasions, an inverted yield curve that stayed for more than a quarter preceded a recession. Perhaps is enough empirical evidence and a reason why an astounding 67 percent of CFOs expect a recession by Q3-4 2020 according to a Chief Financial Officer survey by Duke University.
All the same, there are other factors to consider before predicting doom and gloom. For once, there is a real possibility that central banks would intervene to prevent a full-blown economic cataclysm. Rates can always be slashed. The FED, after embarking on an aggressive rate hike in 2017-2018, are slashing rates.
What If Skeptics Have an Argument and The Whole Recession Talk Is Overdone?
Following suit may be the ECB. Several leading economies are following the FED’s cue. India, China and even Thailand recently cut interest rates as fundamental factors negatively weigh in on their economies.
Moreover, there is a room for confidence. Like all indicators, yields inverting can print false signals meaning they are not perfect. That’s not forgetting that inflation catalyzing quantitative easing that can be spread over several years. This is where central banks set aside funds to gradually buy government bonds subsequently injecting liquidity into the market.
When central banks do this, the reliability of the Yield curve as a real-time indicator, albeit the high level of correlation between periods of yield inversions and economic slowdown, is affected.
The answer to this largely depends on the risk-averseness of an individual investor or an institution. Remember, a global recession is not a certainty regardless of the appetite for treasury bonds and notes. If anything, this artificial demand could be from Europe and parts of Asia where yields are already in negative territory. Therefore, while there is fear (herd mentality or the fear of the unknown?), personal research could help diffuse this tension. For those who don’t have the time, securing the services of an investment advisor could come in handy.
Good news is, there are numerous advisors in this burgeoning space. Statistics indicate that the industry has registered a 4.8 percent year-on-year growth since 2014, and worth over $60.4 billion in the US alone. Then again, it’s an open sector not short of specialist firms. Marshal Lion Group, for example, can come in handy for European residents looking to diversify into products based on loans and forecasted interest revenues. Alternatively, there are several savings products that can further shield an investor during stressful bear markets.
Opening the door to the public, Apis Management and Loan Doctor are partnering and rolling out a 6 percent APY 1-month HCF Savings Note. In a recent press release, Loan Doctor somehow guaranteed that “the HCF Savings Note would continue to earn interest every month, preserving capital and generating income”, which is perfect for savvy investors seeking to avoid a possible stock market meltdown in late 2020.
Meanwhile, there is an option of channelling capital to trusted safe-haven assets like Gold, Silver or even Bitcoin. Gold-and surprisingly Silver, has been on a run-in with the yellow metal surging a remarkable 20 percent year-to-date. Likewise, Silver has been outperforming the stock market. That’s not forgetting emerging assets as Bitcoin that is increasingly drawing the attention of retailers, governments and cautious institutions. Note the correlation below:Nonetheless, the competition for gold is stiff.
According to the latest world index, China and Russia are ramping up their supplies but it is the US that has more reserves than the first three countries combined. Evidently, the demand-supply dynamics of this precious metal can be a reliable indicator. Positively correlated with the Volatility or the Fear Index, is it too late to buy gold?
Gold Price Analysis
Therefore, If Caution Prevails, Then What Can Investors Do to Cushion Themselves Against Unforeseeable Risks?
From the chart, gold prices are trending at a 7-year high. Changing hands at around $1,500 per ounce at the time of press, it is likely that prices will dip before resuming the main trend in days ago. Already, there is a divergence.
With increasing trading volumes, gold prices are printing lower lows relative to the upper Bollinger Bands. This suggests that gold may slow down and retest the main support line at $1,380 before Q2-3 bull trend resumes. Coincidentally, the $1380 level is at the 38.2 and 50 percent Fibonacci retracement level based on year-to-date swing high low.
Building from the above, there is room for more downsides meaning the precious metal is currently temporarily over-valued and shrewd investors can wait, buying at lower prices sometimes in Q4 2019.
Disclaimer: The views and opinions expressed are those of the author and is not investment advice. Trading of any form involves risk. Do your research.