The talking heads on financial media are busy dissecting the Barr report on the Mueller report. I get that lack of any smoking gun covered with Trump’s fingerprints is headline politics. But why ignore the yield curve inversion?
I’m sure you don’t need me to tell you that this is a very big deal—but it’s worth considering the implications.
This is not an “off and on” or “sometimes” thing. Every time this has happened in the last 50 years, a recession has followed. Granted, it can take up to 24 months—but other times it’s more immediate. And we know the Fed and many investors watch this metric.
These facts makes it interesting that the mainstream media are downplaying this important financial news. It doesn’t take a conspiracy to explain, however. I’ve noticed that most mainstream financial pundits, whether right or left leaning, have a bias in favor of the bulls.
If the only purpose is making money, it shouldn’t matter if markets go up or down. One can profit from shorting a falling market, just as one can profit from going long a market that’s rising. But time and again, we see Wall Street rallies described as good news and retreats as bad news. A rally is not “good news for those long,” and “bad news for those short.” It’s simply good news. As if the only way to make money were on the long side.
I can understand this bias. Market analysts know that most investors prefer to go long. People who own stocks crave good news for their holdings. That makes it good for the media’s ratings to be cheerleaders for whatever the audience is long.
Et voilà: bias.
That this is understandable, however, doesn’t make it a good thing. In fact, it’s a very dangerous thing for financial media to be biased in favor of positive interpretations, analysis, outlooks, and commentary. Such a bias will mislead investors.
This very misleading bias marched many investors straight to the slaughterhouse in 2008… and it looks poised to do it again.
Note: I’m not saying the next big market crash is upon us.
Making bold predictions is great for headlines, but not so great for a reliable track record.
And yet, the fact remains that the yield curve signal we got last week has not failed to precede a recession in 50 years (or more, depending on how you define things).
That by itself may not be too alarming. Recessions happen. The so-called business cycle—which is really a government intervention cycle—alternates between growth and recession. The next slowdown is overdue, but expected. Not that big a deal… except that the US and global economies are much more fragile than world leaders would have us think.
What would ordinarily be an unwelcome, but not too threatening event—the next US recession—could cause our unstable global economy to go into a 2008-style crisis.
Am I exaggerating? I don’t think so. I’ve given this a great deal of thought. The world never fully recovered from 2008. No matter how I look at it, I see great fragility in many critical parts of our massively interdependent economy. It worries me that Europe, China, and now the US are showing signs of weakness.
And I’m not alone. I suspect that despite the cheerleading from mainstream financial media, most investors are very nervous about this. That would explain the extraordinary volatility we saw last fall. As you may recall, it was sparked by relatively little actual bad news. Even this quarter, with things looking up on Wall Street, we’ve seen sudden spikes in volatility when fear suddenly grips investors.
When sentiment becomes more powerful than fundamentals, the odds of a normal correction turning into a market crash increase dramatically.
And when was Wall Street due for a correction?
Oh, that’s right: already.
So, while I’m unwilling to predict that a market crash—probably followed by a major global economic downturn—will happen this year, I do think it’s a possibility we can’t ignore.
What to do?
Exit risk assets like most mainstream stocks. I wouldn’t short the S&P 500 yet (though I have in the past), but I sure wouldn’t want to be long an overpriced market. I could always buy back in again after the danger has passed if I’m wrong.
Buy gold and silver. This is not a speculation. It’s not an investment either. It’s important to put some savings into history’s best safe-haven assets as a matter of simple prudence.
Be wary of industrial metals. These will see prices fall if there’s a major economic downturn. Even those essential to the new energy paradigm that are in short supply will likely take a hit, at least initially.
Remember that uranium is different. It would take years for the world to switch from nuclear power to other sources, and it hasn’t really started yet. And even in a recession, people will want their lights to come on at night. Uranium may be the one non-precious metal with immunity to an economic downturn.
Speculate on the best precious metals stocks. Note that I do not consider platinum and palladium companies to be precious metals plays. Also remember that silver is likely to lag gold, but is also likely to outperform gold in the next big surge in precious metals, so the right silver stocks could hit it out of the ballpark for us. But great silver plays are hard to come by.
Of course, if you want to know which stocks I think are best, you’re welcome to subscribe to The Independent Speculator. But now you know my game plan, and you’re welcome to adapt it to your own needs.
Caveat emptor,
