We can’t predict the markets with any absolute certainty, and we certainly can’t predict the timing of events. Still, there are signals we can pay attention to that indicate a possible recession in the near future. Here are 10 reasons that a recession is likely close at hand.
- The yields on long-term U.S. government debt are near all-time lows. The 10-year yield is around 1.5%. Bond investors are indicating fear, as they lock in long-term rates, even at low levels.
- The yields on short-term U.S. government debt have gone up, even if slightly. Although these rates are still low, they are no longer right near zero. When you couple this with the fact that long-term rates are falling (see point number 1), there is a flattening yield curve, which is a classic indicator of a recession.
- All three major U.S. stock indices recently hit all-time highs on the same day. This was the first time this happened since 1999, which was right before the tech bubble came crashing down.
- The last two major recessions happened right before or right after a presidential election. Both Bush and Obama entered office with a recessionary economy. While this by itself does not guarantee a recession, it seems to be the trend of one president leaving a mess for the next.
- The Federal Reserve has only hiked its key interest rate once since setting its target near zero in late 2008. When the Fed hiked the federal funds rate by a quarter of a percent in December 2015, stocks went down in January, temporarily providing some fear for stock investors.
- The Fed now comes up with a new excuse every time it fails to raise its target interest rate, despite continually promising to raise it in the future. Is there something these Fed officials know that they aren’t telling us? Why are they so scared to raise the federal funds rate from historic lows, when the economy has supposedly recovered?
- Despite low interest rates, banks have piled up massive amounts of excess reserves. While this has helped keep a lid on price inflation, it is telling that the banks would prefer to collect 0.5% (previously 0.25%) interest from the Fed on their reserves rather than lend out the money.
- The misallocations that resulted in the recession in 2008 were never allowed to be cleared out. The financial institutions were bailed out, along with the car companies. This just prolongs the inevitable, unless the Fed and government plan to bail out these companies forever. Since General Motors and Chrysler were bailed out, it just means that they were allowed to continue making the same mistakes. This is a massive misallocation of resources.
- Since the fall of 2008, the Fed has approximately quintupled the adjusted monetary base from about $800 billion to $4 trillion. This money creation produces a massive misallocation of resources. So while the misallocations were never fully allowed to correct from the last recession, this massive monetary inflation has only made things worse.
- Since the huge monetary inflation from 2008 to 2014 (see above), the Fed has actually maintained a tight monetary policy. The Fed ended QE3 in October 2014. The Fed pumped up its asset bubbles with its so-called quantitative easing programs, but now we have had almost two years of relatively tight money. The Austrian Business Cycle Theory tells us that this tightening is going to lead to an inevitable bust.
So while we can’t guarantee a recession is going to happen in the near future, there are many reasons that it looks likely. You should prepare yourself accordingly.