Can you believe this bull market’s already in its tenth year? I can’t.
And while the few on Wall Street have enjoyed a glorious market run – the rest of the country (and world) hasn’t.
And even though the mainstream financial media yaps that the bull market and economic recovery still has room to run. I don’t believe that’s true.
A crucial – yet completely overlooked – principle to understand is: always know where you are in the current cycle. . .
And I believe the U.S. is clearly in the ‘Late Stage’ of the cycle – right before a recession. . .
As I’ve written about many times before – historically, once the Federal Reserve begins tightening via rate hikes – it’s the beginning of the end for the ‘boom’.
Ludwig von Mises – the great Austrian economist – wrote in his book, A Theory of Money and Credit(1912):
“True, governments can reduce the rate of interest in the short run. They can issue additional paper money, they can open the way to credit expansion by the banks. And they can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse sooner or later and to bring about a depression.”
Putting it simply – Mises understood that when the Central Bank lowers rates (aka eases), a boom will take hold. But eventually when the Central Bank raises rates (aka tightens), the boom ends – and a recession is triggered.
I believe his words – just like before previous recessions – hold true.
That’s why It’s so important to follow Fed and fiscal policy. That’s where the liquidity comes from.
And since the Fed began tightening rather aggressively (via rate hikes and Quantitative Tightening) over the last 16 months – most of the yield curve is now flat and sections have already inverted.
Why does this matter?
I’ve written before that yield curve inversion – when short term rates are higher than longer term rates – is a historically accurate indicator that a recession is up ahead.
Giving you some perspective – inversion has occurred before the last seven straight recessions.
And by looking at the below chart – you’ll see that once 40% of the yield curve’s inverted (which it is currently) – a recession follows (like it did in 2008 and 2001). . .
Now – although I’m skeptical of predictions based on past indicators – I do believe this has merit.
That’s because the flat and inverted yield curve – brought on from the Fed forcing up short term rates while the market’s forcing down long term rates – is curtailing new lending and borrowing. On both the supply and demand side.
It dissuades banks from lending. Remember; banks must borrow short and lend long. If borrowing money costs more than what they can lend it out for, they won’t do it.
And makes it less attractive for borrowers to take out loans (because of the higher cost of interest).
We’ve already seen a sharp drop over the last few months of banks willing to lend to consumers.
And without lending, there’s no loan growth or increase in the money supply (aka M2). This is another indicator of a declining economy.
So – with the Fed tightening, yields inverting, and a decline in bank lending – it looks like the good days for the economy is over for this cycle.
New research from Fidelity Asset Allocation backs this thesis as well. The U.S. (and basically the entire world) is in the downward part of the cycle – aka the ‘Late Stage’.
The ‘Late Stage’ of the cycle is when things begin peaking off – when there’s more working against the markets and economy than for.
Unless the Fed reverses their current tightening into easing (cutting rates plus money printing). Or the U.S. Government embarks on a fiscal stimulus policy (huge government spending projects) – I expect things will continue contracting.
Next stop? Recession.
