Recession
Indicator
One Shoe has Dropped
This is a brief update on money supply growth trends in the most important currency areas outside the US (namely the euro area, Japan and China)as announced in in our recent update on US money supply growth (see “Federal Punch Bowl Removal Agency” for the details).
The liquidity drought is not confined to the US – it is fair to say that it is a global phenomenon, even though money supply growth rates in the euro area and Japan superficially still look fairly brisk. However, they are in the process of slowing down quite rapidly from much higher levels – and this trend seems set to continue.
We say this for two reasons: for one thing, the Fed is reactive and when it moves from a tightening to a neutral or an easing bias, it usually indicates that the economy has deteriorated to the point where it can be expected to fall off a cliff shortly.
In short, the environment continues to become ever more challenging for stocks and bonds. The recent increase in market volatility is unlikely to remain an exception and should actually be seen as a serious warning sign.
Note that credit spreads have recently begun to break out across a broad range of rating categories as well.
Recession Indicators
- DYI’s Recession warning checklist:
- Two year Treasury notes invert ten year Treasury Bonds.
- Widening credit spread…Comparing yields between the 5 year Treasury note and Vanguard’s High-Yield Corporate Bond Fund.
- Falling stock prices…S&P 500 fifty day moving average below the two hundred day moving average.
- Falling Home Builders Index…The indexes fifty day average below its respective two hundred day average.
- Purchases Managers Index: PMI below 50
DYI: When all five indicators are present recession is imminent – within 90 days – or already present but not recognized by the majority of the investment community.
So far only credit spreads have widened indicating only one of DYI's recession indicators. However as of 12/09/18 the difference between the 2 and 10 year bond remains positive but has narrowed to a scant 13 basis points (0.13) difference in yield. Has not inverted but is very close another rate increase by the Fed would probably create an inversion of yields. The remaining indicators remain positive. I'll be on the outlook for any changes positive or negative.
DYI
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