In yesterday’s article, I talked about three signs of an economic crunch that might be about to unfold:
- The turning tide in housing
- The end of the easy-money era
- The death of FANGs
Taken on their own, these issues would spell a ‘red alert’ for financial analysts like me. But, troublingly enough, they’re just the tip of the iceberg.
I’m seeing a lot more trial and tribulation happening, both here in New Zealand and around the world.
Here are several more hints of economic tremors starting to be felt…
SIGN #4: Trade disruption in the US, China, and Europe
It’ll come as no surprise that the so-called ‘trade war’ between the US and China is taking a toll. As the number one and two economic powerhouses in the world, their activity tends to direct how most of the rest of the world reacts.
With the eurozone being perhaps the only exception.
But with Brexit looming, and an utter lack of certainty, the business world has put on the brakes. The stagnating mega-economy teeters on the edge of negative growth at 0.2% in Q4 of 2018.
Between the three – US, China, and the Eurozone – they stand to lose out a trillion as the current situations play out.
Those ripples could turn into tsunamis throughout the rest of the global economy sphere.
‘But the sputtering Chinese-driven train appears to have pulled into the station. Growth targets have been slashed. Exports have fallen. Debt levels are rising.’
—The Washington Post
‘The global economy’s in its weakest shape since the financial crisis a decade ago.’
SIGN #5: Dissipating confidence and morose market sentiment
Despite the mainstream’s best efforts, people are losing faith in the financial system.
Or more accurately, losing hope that the financial system can sustain its rock-star results.
Top executives at UBS, FedEx, BMW, and others recently revealed that they’re not looking forward to the bleak future ahead. In fact, the turbulence may have already begun…as the companies that these execs represent saw ‘one of the worst first-quarter environments in recent history’ in the beginning of 2019.
A leading sentiment indicator, the German ZEW, paints a picture that major exporters have lost hope throughout the past year:
Westpac Bank senior economist Satish Ranchhod recently echoed the same feeling to the NZ Herald:
‘The number of households reporting that they are better off financially now compared to a year ago has been dropping steadily since mid-2017. Similarly, the number of households who expect to be better off this time next year has fallen to its lowest level since 2008, when the initial impacts of the Global Financial Crisis were just starting to be felt.’
SIGN #6: The longest expansion in history
Robert Shiller is a Nobel Prize-winning economist, a professor at Yale, and a leading commentator on global economics. He’s also one of the top minds in the world of economic cycles.
He’s about as close as we get to a financial fortune teller.
And he recently went out on Bloomberg and CBNC to proclaim that the end of days is nigh. That by basic calculations, the current economic expansion is due for a flip right about now.
The bull run has simply gone on too long…and history indicates a recession is soon to follow.
Between 1991 and 2001, the US went through 120 months without a recession. Then the dotcom bubble popped. It was the longest bull market in modern history.
In June of 2019, we’re due to break that record.
Shiller then says, ‘If history repeats, we’re in for a good chance of another recession.’
Because the truth is, economics has a proven history of cycles. Ups and downs. Booms and busts.
And if you look at recorded history, as Shiller has done, then overlay it on today’s trends, you’ll quickly see that a long downward line tends to follow peaks like this one.
‘Market strategists and economists are advising clients on how to invest at a late stage in the economic cycle as recession concerns loom.’
SIGN #7: The inverted yield curve
Few indicators matter more to financial folk than the yield curve. Specifically, they’re looking at short-term and long-term debt instruments with the US Treasury. The yield curve is basically a line that tells investors how much interest they can expect depending on the length of time.
An inverted curve means that investors are scared of the near future of the economy…so they’re piling money into short-term Treasuries since they’re backed by the US government.
It’s a fear indicator.
And in early March of 2019, the yield curve inverted. When this happens, it is often followed by recession.
‘An inverted U.S. Treasury yield curve is widely thought to signal an impending economic downturn. Every recession since World War II has been preceded by an inverted yield curve.’
Bad news and more bad news
It’s hard to deny it: all the signs of a potential downturn are there. We’ve had a fantastic bull run, but it’s almost certainly running out of steam.
A recession is on the cards. It’s not a question of ‘if’. It’s simply a question of ‘when’.
In Part Three of this series tomorrow, I’ll wrap up by giving you a vital rundown of the four final signs that you need to watch out for.
Editor, Money Morning New Zealand