Last year’s 20% decline in the stock market into Christmas was a giant warning sign that the expansionary economic cycle that began when the stock market bottomed in 2009 was coming to an end.
As the stock market dropped last year the bond market yield curve for the 3-month and 10-year Treasury bond headed to inversion and even became inverted as the stock market rebounded.
Back in January many stock market bulls said that this move in the Treasury bond market was just an anomaly and the inversion would end, but they were wrong and it did not end as you can see from this chart.
What this chart measures is the spread between the 3-month Treasury bond and the 10-year bond. It goes negative when the rate of interest you can get from buying a 3-month bond becomes bigger than a 10-year bond.
Here are yields as of Friday’s close from a screenshot of the Treasury Department’s website:
As you can see right now the rate of interest on a 3-month Treasury bond is larger than that of a pays 10-year bond.
Normally you get more interest the longer you lend your money out so what gives here?
The bond market traders are forecasting lower rates to come and that’s why the short-term rates are higher than the long term rates now.
This is what causes yield curve inversions and because rates tend to fall during times of coming economic weakness inversions become forecasting tools for coming recessions.
This is why the inversion that began in January provoked stock market TV commentators into claiming it was just a temporary anomaly. They knew if it was real it would eventually prove to be a big risk to the stock market and if they pointed it out they would come under attack by American investors who don’t want to hear it and would smear them as “fake news.”
They were wrong as the inversion continued and the Federal Reserve lowered interest rates last month.
Years of social media use though have programmed so many people to only want to hear what they want to hear and become triggered at any information that tells them something new. For instance look at this screen shot of people on Facebook lashing out at a post I made about gold breaking out last month:
The Robinhood brokerage company still shows that only a few thousand people are in gold ETF’s that have accounts with them while half a million people own dope stock ACB and hundreds of thousands own TSLA and AAPL.
However, the the TV commentators were right earlier this year in saying that this 3-month and 10-year inversion had given false signals in the past and is not a perfect timing tool.
That’s why I didn’t say it was predicting a recession, but instead that it was showing that changes in interest rate policy were coming despite the stock market rally.
The reality is that the yield curve of the 2-year and 10-year bond is a much more accurate forecasting tool for the economy. Every single recession since World War II has been preceded with such an inversion occurring in the two year and ten year bonds.
In fact every time the 2-year and 10-year Treasury bond yield curve inverted a recession began six to twelve months later.
This yield curve is not inverted yet, but is now inches away and will probably be inverted now before November if not before Labor Day.
You can see how quickly the two and ten year yield curve has collapsed in the above chart and it is basically telling us that a recession is going to start in 2020. There is no coincidence that the recent breakout in gold and silver prices has coincided with this move in this yield curve, because historically they go up in times of interest rates cuts and an easing cycle on the part of the Federal Reserve.
The July interest rate cut by the Fed is going to be the first of many easy money moves to come. In June I did a post ahead of that meeting showing how yield curve inversions boost the price of gold.
Mining stocks have rallied since then and last week the price of silver went above $17.00 for the first time this year. My top stock pick for August – Aftermath Silver – is starting to get on fire and made a new 52-week high last week.
The markets are changing. The idea of just turning on the TV and hearing another buy call on Apple and throwing your money into and getting rich are over. Apple was the story of 2012 and 2014, but is not the story of 2019. No one cares about Iphones anymore and people who talk to Siri too much become demented.
New sectors emerge as stock market leaders when the financial cycle shifts and these changes are only now starting to happen.
We’re on top of it in my private Power Investor group. If there ever was a right time for you to join now is it. To begin go here: