“Jonathan has advised us for 5 years and always provided consistent, truly independent thinking with emphasis on capital preservation”

Tim Bacon (CEO, Colville Estate) and Marylyn Bacon (Kent) (2011)

Slower growth in 2016 and possible Recession

Posted by jdavis on December 30, 2015

GLOBAL MARKETS (not us) suggest a slowing US economy in 2016 and possible Recession.

We KNOW already that GDP growth was materially higher in December 2014 than now.  The trend is down. Simply by extrapolating, we can expect sub 1% growth next year and maybe Recession.

I would refer you to The Big Picture for evidence of slowing economic activity.


The chart I show you here is not of economic statistics, which can be manipulated.  The following is about interest rates, as determined by the thousands upon thousands of global participants i.e. effectively impossible to manipulate.


Yield (Interest Rate) Curve

The normal curve of interest rates is a chart which shows Percent on the Y axis and Time on the X axis.

In a normal economic environment, we expect higher inflation in the future than today, and so we expect higher interest rates when we borrow for the long term than the short term (Bank Base) rate.

Like this example of a Normal Yield Curve:

 So, here we see a large differential between long term government borrowing rates and short term rates.

But if the differential were to fall so, for example, the long term rate was just 3% - as the market expects low inflation in the long term - and the short term rate is, say, 2%, then the curve would be much flatter.  Like this:

What will have happened is that the Central Bank has raised (short term) rates and the market has reduced long term rates.

Now, the differential today in the US between 10 year rates (at c 2.3%) and 2 year rates (c 1.1%) is of course, c 1.2%, as shown here:

Please see how 2 year rates have risen, materially, over the last 2 years, while longer term rates (10 years) are much less changed over this period.  Thus, the difference between long term rates and short term rates has much reduced and a flattening yield curve is happening.

The differential has been down at this level three times over the last 5 years.  It broke this level in 2008.  What happened after that?  Recession.  The one they call The Great Recession as it was the biggest economic and financial bust in history.

If it breaks below the 1.2 level it is because the market expects even lower inflation in the long term, even though short term rates may well have risen.

If it breaks below 1.2 (and it's only a tad above now!) the market will be expecting a Recession.

At this point, it has peeked below.  So this is conjecture for now.  However, the signs are that it will break this time.  The signs are that the MULTI TRILLION $ fund managers are close to expecting a Recession. 

And what can Policymakers do if (when) we have a Recession?  (At some point we will have one.)

I'll tell you what they cannot do.  They cannot slash interest rates.  They're already near rock bottom! 

Might that turn a Recession, Depressionary?

Is your portfolio Recession/Depression proofed?  Should you be talking to us?



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