Last September, Investment Watch reported that “75 percent of the ultrarich forecast a U.S. recession in two years (Sept. 19, 2018).”
The ultrarich are markedly aware that when the yield spread between short and long dated Treasuries turns negative (also known as inversion) it is a harbinger of a forthcoming recession.
Five out of five times since 1978 when the yield curve inverted within 22 months there was a recession.
I first warned about the yield curve on July 17, 2018 (U-B letter, “Inversion is the key to watching bull market”).
On March 22, the 10-year minus 3-month Treasury spread turned negative and for this part of the yield curve inversion occurred.
The average time for a recession after inversion is 16 months. Meaning, there could be a recession within 16 months, which is right in line with what the ultrarich were forecasting last September.
You can confirm or dismiss my analysis by going to the Federal Reserve economic data center (FRED0 and search the 10-year minus the 3-month Treasury. You can study the chart and draw your own conclusions.
The ultrarich are also aware of the fact that capitalism in America is no longer laissez-faire. Since going off the gold standard in 1971, the Federal Reserve has attempted to control the business cycle more than ever.
Every single recession since 1955 has been preceded by a rate-hike period orchestrated by the Fed. And every expansion since 1955 has been preceded by a rate-cutting period, again, orchestrated by the Fed. (To confirm this, search “effective funds rate.”)
The Federal Reserve controls the business cycle, not the so-called free market.
This is why old-timers like me have been hearing “Don’t fight the Fed” (Martin Zweig, “Winning on Wall Street,” 1986) for a long time.
Investors should also not fight the Treasury spread, which is correlated to the Fed’s monetary policies.
Every maturity from 1-month to 10-year Treasuries have inverted with the Fed Funds rate. The 20-year Treasury is only 5 bps from inverting.
Since a significant part of the yield curve has inverted, investors should take note and judiciously adjust their asset allocation.
Perhaps they should not even think of cash, stocks and bonds, but consider hard versus paper assets.
And for those investors who believe the Fed will ensure a so-called “soft landing” for the economy, may I suggest praying a lot.