Global Opportunities Beyond the Radar

This Rare Recession Indicator is Flashing Amber

Bond indices

Today, our compasses point north.

They place it somewhere near northern Canada, and the south somewhere near Antarctica.

But this hasn’t always been the case.

You see, there was a time, long ago, when compasses pointed south.

Let me explain.

The earth is surrounded by a magnetic field. It is kind of a bubble, encircling the planet, that protects us from cosmic radiation. Without it, life on our planet would be impossible.

Yet every once in a while, this magnetic field reverses. That is, the north becomes the south and vice versa. This is something called ‘geomagnetic reversal’.

Geomagnetic reversal may be new for our modern civilisation, but it is a common experience for the Earth. The south and north magnetic poles have swapped around on average every 200,000 to 300,000 years in its history.

Why does this happen? Well, nobody really knows for sure.

The last time it happened was 780,000 years ago. So, you could say that we are well overdue for a magnetic pole flip.

While there is no way to really know when the next one will happen, scientists are predicting it could happen soon.

What will happen the next time the poles reverse?

Well, it all depends on who you ask.

Some assure us that the change in the magnetic field is a completely normal event. That the most that could happen is that we have more than two poles for a while, until the poles flip.

Yet others think we could be facing a disaster. They warn that the effects could range anywhere from bringing satellites down to higher cancer rates because of having less protection from radiation or even apocalypse.

Of course, we won’t know who is right until it happens.

Yet once this happens, one thing is for sure. Compasses around the world will be pointing south instead of north.

My point is that seemingly unnatural things, like the north and the south poles flipping, do happen…even if they don’t really make sense.

What’s another example?

Well, the interest rate yield curve inverting could be another one.

The yield curve basically shows the interest rates for short-term bonds against long-term bonds.

Are bond markets pointing to a recession?

If you are not familiar with bonds, they are basically a loan agreement. Usually the longer the term of the debt, the higher the yield since the risk is higher.

Yet sometimes, this curve inverts. That is, you receive more money for committing your investment to a shorter period than a longer period, which makes no sense because investing in the long term is more risky.

The most watched curve is the two-year to 10-year yield. Why? Because its inversion has come before recessions in the past.

Well, as Yahoo Finance reports, this indicator is starting to flash amber. For the first time in 10 years, the three-year treasury note is paying more than the five-year.

The bond market is beginning to sound the alarm of a recession, with an inversion in U.S. Treasury yields occurring on Monday for the first time since 2007.

The yield on the 5-year Treasury note fell below the yield on the 3-year note, meaning that investors were being paid more to hold U.S. government debt maturing in three years than comparable bonds maturing in five years. It’s not the major curve inversion that investors watch for — the 2-year note holding a higher yield than the 10-year note, which has preceded every U.S. recession since World War II — but it portends that the market is headed in that direction, analysts told Yahoo Finance.[…]

The yield curve inverted between the 2- and 10-year yield before the recessions of 1981, 1991, 2000 and 2008. It has preceded all nine U.S. recessions since 1955, with a lag time ranging from six months to two years.

Analysts have pointed out that although many associate a yield curve inversion with recession, the phenomenon is a reflection of the kind of economic conditions that predict a market bust rather than being the cause of them.

An inverted yield curve is a sign investors think the government is less likely to pay back debt it owes in two years than what it owes in a decade — or in this case, the government is less likely to pay in three years than it is in five. Market analysts have pointed to everything from the increase in U.S. debt to cyclical factors like the market running out of steam as reasons for a downturn.

How precise is this tool? Well, it all depends on who you ask. Even at the US Federal Reserve they disagree on it.

But investors are starting to have doubts about the short-term outlook…

…and it could mean that a recession is coming…soon.

When? We are not sure, but we think it’s time to get prepared.

Get rid of risky assets…buy some precious metals…and hold some cash.


Selva Freigedo

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