Here it is…
The final piece of our Next U.S. Recession conversation.
If you haven’t already, please read Part 1 and Part 2 of this series, where I explain three of the four conditions that cause recessions, as well as why I believe the next one will result in a substantial market crash.
And if you’re already up to date, we can dive right in.
Recession Reason #4—Geopolitics
Geopolitics are one of the least-known recession causes.
That’s because they are rarely the sole trigger that causes one, though it does happen. More typically, they are the prelude to a recession.
In 1973, for example, they acted as both.
First, as the prelude…
At the time, the United States was dealing with a major geopolitical situation—the abandonment of the Bretton Woods system. Up until then, U.S. dollars were directly convertible to gold. However, when the system broke up, the value of the Greenback quickly deteriorated, resulting in rampant inflation.
Then, geopolitics acted as the trigger.
In October 1973, OPEC issued an oil embargo, targeting countries that supported Israel in the Yom Kippur War. Unsurprisingly, many western countries, including the United States, were on the list. This resulted in a crisis that saw the price of oil quadruple, triggering a stock market crash and a recession.
This is not a lone case. Oil prices also acted as the prelude for the 1980 and the 1990 recessions. In 1979 they rose because of the Iranian Revolution, and, in 1990, they increased as a result of the invasion of Kuwait.
And it’s not only oil prices that can have this kind of effect. Tariffs, for example, can be just as devastating for the economy. In 1930, the Smoot-Hawley Tariff Act exacerbated the Great Depression. And the U.S.-Japan tariff war contributed to the Black Monday crash of 1987.
The point is, politicians wield immense power over the economy. Especially when they use protectionist policies or widely used resources like oil as weapons to push their agenda.
Making geopolitics are the single biggest risk to the current economic expansion.
Verdict: We are once again facing a situation where geopolitics could act as both the prelude and the trigger for a recession.
The U.S.-China trade war has been an ongoing concern for the global economy for nearly two years.
Even more concerning is the fact that the two sides aren’t getting any closer to reaching an agreement.
While the situation hasn’t quite pushed the world into a recession, it has significantly slowed the global economy. Even the massive monetary stimulus major central banks launched last year wasn’t enough to reverse it.
We are now hanging by a thread.
If the U.S.-China trade negotiations fall apart, they will trigger a worldwide recession.
And, due to the systemic risk stemming from high levels of corporate debt, it promises to be a severe one.
For now, I remain optimistic about the outcome. A deal simply makes too much sense for both sides.
But, then again, it wouldn’t be the first time that politicians let me down.
That’s why I keep at least 20% of my portfolio in counter-cyclical assets, such as gold. I suggest you do the same.