Ivy league professors don’t know what they’re talking about.
I’d even go so far as to call them fools.
At least that’s the impression you get if you read the stuff they were saying back in January 2006.
I recently uncovered an article posted by one of these Ivy League types, and I wish everyone could read it because it’s so relevant to our situation today.
The story goes something like this…
It was the start of 2006, and, a few days before, the yield curve had inverted for the first time in five years.
This gave shudders to investors, who knew all too well what usually follows this event.
Seeking guidance, they turned to one professor for his educated opinion…
“Don’t worry about the inverted yield curve,” he said. “No one knows what it means anyway. Sometimes it predicts a recession, but sometimes it doesn’t.”
The guy went on to point out that all forecasts were pointing to a robust U.S. economy and that (brace yourself for this one) there was no financial excess in the markets.
Clearly, he was optimistic.
And why not. The market has been on a steady upward trajectory for years.
Yet, barely a year later, financial excess would push the entire world deep into recession.
Which brings me to Friday’s yield curve inversion… and the inevitable question it begs:
Are we about to enter a recession?
Is The Yield Curve Right This Time Around?
Sure, it’s easy for me now to mock those who couldn’t see what was coming back in 2006. However, the truth is, the yield curve is only one part of the story… only one indication that there is significant short-term risk in the markets.
To get a full picture, investors must also consider other factors, including the underlying reasons for the increased risk, the degree of financial excess, and liquidity levels.
Let me start with the current degree of financial excess, as it poses the greatest risk.
I’m speaking in particular of financial excess in the form of corporate debt-to-GDP. At almost 50%, it stands higher right now than ever before in recent history. Should the economy slow significantly, many of these highly leveraged corporations will begin to default on their debts. This will send shockwaves throughout the economy.
Meantime, liquidity levels, one of the best predictors of stock market success, are increasing.
The European Central Bank recently announced it would keep interest rates at 0% for at least another year. Moreover, it will launch TLTRO-II, which is nothing but quantitative easing in disguise.
China is another major economic power likewise increasing liquidity. In the past two months, Beijing has introduced new tax cuts, launched infrastructure projects, and reduced bank reserve requirements.
Finally, recent comments from Chairman Powell concerning Federal Reserve policy convinced me he is prepared to do anything to protect the economy and keep the stock market from declining… including cutting interest rates.
These measures alone should prove enough to spur GDP growth… at least in the mid- to long-term.
However, in the short-term, the underlying reason why the yield curve is inverting remains… and it’s serious.
I am talking about the global slowdown.
The Biggest Threat To Global Economies—And How To Prepare For It
Why is global growth slowing? Two reasons—the U.S.-China trade war and Brexit. Both issues are weighing heavy on businesses and, consequently, the economy.
If either of these situations end with a negative outcome, I’m afraid the yield curve inversion could again prove right and foretell a global recession.
However, I think the chances of that are small.
First, the trade rift between Washington and Beijing has only one sensible outcome—a two-sided agreement to lift the tariffs. Both sides have too much to lose not to find a resolution to their trade differences.
And we all know how much of a hero Donald Trump would look if he secures a deal and “saves” the U.S. economy. Not to mention, it would all but guarantee him a win in the upcoming elections.
Meantime, across the Pond, the number of Brits supporting the Brexit separation are fewer every day. By now, everyone but the most stubborn few has realized that an exit would tank the U.K. economy and shake the country at its core. All that is left is for the opposition to remove Prime Minister May from office and call for another referendum.
Nonetheless, just as our Ivy League professor couldn’t predict the future in 2006, I can’t either. Politicians are fickle, and trusting their promises is a fool’s lullaby.
Therefore, you should always look at stocks that can grow in any market. Those that in five years will be in a better position than they are today, no matter what the politicians decide to get up to.
That’s precisely what I do with my True Retirement Wealth.
In this month’s issue, for example, I tell subscribers about two companies that in five years will dominate the artificial intelligence market.