The mainstream press continues to repeat that an inverted yield curve has been a reliable indicator of a recession and that the U.S. is headed for one.
So what is the inverted yield curve and is the U.S. economy headed for a hard landing that affects the market and your 401K?
The short answer is an inverted yield curve is when short-term interest rates become higher than long-term interest rates, which tends to signal that bond investors have less confidence in the longer-term outlook for the economy.
The yield curve is normal when short-term treasury bonds have lower yields than long-term treasuries.
The calls for a recession intensified recently as the 10-year/3-month spread inverted last month.
Historically, we see that recessions do often follow an inverted yield curve by a lag of about 14 months.
So is a near-term recession in the cards here in the U.S.? The kind that sends stocks lower? No, I don't believe the U.S. is headed for a hard landing that sends stocks lower. A recession is possible but not the kind that sends the stock market crashing.
Why? Because every problem the U.S. stock market and economic indicators identify will be met with central bank liquidity that kicks the can a little further down the road.
White House Advisor Larry Kudlow is already calling for an immediate rate cut. Ditto for Federal Reserve board nominee Stephen Moore.
Federal Reserve Chairman Jerome Powell recently did one of the most aggressive policy reversals I've ever seen when he not only announced that there would be no further rate hikes in 2019, but there is only one planned for 2020.
Not only is there only one rate hike planned for 2020 - spoiler alert: it's not going to happen - but the Fed also announced that it is tapering its Quantitive Tightening (QT) program from $50 billion per month to $15 billion per month in May. Come September, all balance sheet tightening will end.
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The 2020 rate hike won't happen because global growth is slowing and there's one thing all central bankers fear: deflation.
There's also the matter of the upcoming election. The Fed won't be raising in 2020, it'll be cutting.
So why the drastic pivot? In December of 2018, retail sales had the biggest decline since 2009.
Manufacturing, led by autos, dropped -0.9% in January. The PMI indicator recently hit a 21-month low.
Also consider the effectiveness - or ineffectiveness - of artificially propping up the economy through low rates.
In 2007, just before the last major recession, the Fed rate was at 5.25%. It was 6.5% right before the 2000 recession, and according to Jack Rasmus of Counterpunch, 8% just before the 1991 recession.
Today we have a Fed funds rate of just 2.375% and even that has led to market jitters. Remember the fit the market had after a quarter-rate hike?
Expect a rate cut in the second half of this year or the first half of 2020. Eventually, you can expect negative interest rates in the U.S.
The dollar initially sold off on the Fed pivot but rebounded well as investors realized what I've been saying for years: we are the cleanest dirty shirt in the central bank laundry basket.
This is why it's so critical that the gold price is able to rally alongside the dollar. Only then will we break $1,400/oz. and be off to the races.
We aren't there yet but we are getting closer.
In the meantime, expect Dow 30,000, expect low interest rates, expect volatility from overseas to drive the dollar higher, and in the second half of this year expect a gold rally that ignites the next sustainable gold bull market.
To your wealth,
Gerardo Del RealEditor, Junior Mining Monthly and Junior Mining Trader.
For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.