Editor's note: Several economic warning signs have been flashing recently. And according to Mike DiBiase, a recession could be coming as soon as in the next few months. In today's Weekend Edition, we're taking a break from our usual fare to share one of Mike's excerpts, adapted from a recent issue of the Stansberry's Credit Opportunities newsletter. In it, Mike explains what we can expect from the next recession – and why we might not have long to wait...
The real economy isn't doing well...
Investors cheered when the Federal Reserve began lowering the short-term federal-funds rate last year.
But inflation is still stubbornly high. And the interest rate that matters most isn't cooperating...
The 10-year Treasury rate is the one that affects real-world interest rates the most. I'm talking about mortgage rates, credit-card interest rates, and the interest companies pay when they borrow. And its yield has increased from 3.6% to 4.3% since the Fed started cutting rates last September.
In other words, the Fed's rate cuts haven't yet changed the minds of bond investors. They still expect bad news. Consumers and businesses are still being squeezed by high interest rates and inflation. This spells major trouble for our economy.
Recently, many reliable recession indicators have flashed major warning signs. They've all said the same thing: We're headed for a recession.
And based on history, it could hit the economy in a matter of months.
Here are just a few of the better-known indicators that have sounded the alarm recently...
- Inverted yield curves
- The Sahm Rule
- The Conference Board Leading Economic Index ("LEI")
- The New York Fed's recession probability model
I'll cover each briefly today...
The 2-year/10-year yield curve is the best known of these signals. It shows the difference between the interest rate on 2-year Treasurys and 10-year Treasurys. This spread inverted in July 2022.
When the yield curve inverts, it shows that short-term rates have risen above long-term rates. That isn't normal. It signals that something is wrong in the economy.
The Fed prefers to look at the 3-month/10-year yield curve. This measure inverted in October 2022 and again last month...
As you can see in the chart above, recessions almost always follow yield-curve inversions.
An even more reliable recession indicator is the "Sahm Rule." This tracks the moving average of the unemployment rate relative to its trailing-12-month low. This indicator signals the start of a recession when the unemployment rate rises by 0.5% or more above the lowest three-month average in the previous 12 months.
Simply put, it shows when the unemployment rate is growing too quickly.
This indicator has nailed every recession since 1970. And it triggered again in July 2024. So according to this very reliable measure, we could already be in a recession. Take a look...
Next, the Conference Board LEI recession indicator has also flashed a warning. The Conference Board is a nonprofit think tank that combines several economic data measures into one index. Whenever that index falls by 4% or more in a six-month period, it signals a recession is coming.
The index triggered in December 2022 after falling 4.2% over the six-month period. And it remained below that threshold for some time. Take a look...
Finally, the New York Fed has its own indicator of trouble ahead. Its "recession probability model" soared last year to the highest levels since the 1980s.
Dating back to 1960, every time the New York Fed's probability model surpassed the 30% threshold, a recession soon followed. Take a look...
As investors, we're familiar with the reasons to fear recessions. Corporate profits shrink, and the stock and bond markets often see painful downturns. And this time, the recession is likely to be worse than normal.
History tells us the longer the yield curve is inverted, the harder the markets crash.
This time, the yield curve was inverted for more than two years (26 months) before uninverting last year. That's the longest inversion since 1929, before the Great Depression began. (It has since inverted again.)
Another reason this recession could be especially painful is that corporate and household debts are at record levels. A recession hits those with heavy debt the hardest.
On top of that, the Fed has much less power to fight back this time...
The last recession, in 2020, followed the onset of the pandemic. In response, the Fed unleashed unprecedented monetary support for the economy. But the massive stimulus had a cost. Inflation soared. And the Fed was left with far fewer bullets for next time.
So, when should you expect the next recession to begin?
One way we can guess is by looking at when the Fed started cutting interest rates.
Since 1990, we've experienced four recessions. Starting from the point that the Fed first began cutting rates, the economy usually falls into a recession around seven months later, on average. Take a look...
The Fed started cutting rates in this cycle last September. Assuming this seven-month average, the next recession would begin in April.
Of course, every recession is different. The recession in 1990 didn't start until 13 months after the Fed began cutting rates.
Still, based on history, we might not have long to wait before the next recession begins. The Fed is now forecasting that the U.S. economy will shrink nearly 3% in the first quarter. A recession is when the economy contracts in two consecutive quarters.
The next recession will very likely start this year... Make sure you're prepared.
Good investing,
Mike DiBiase
Editor's note: For one group of investors, the severe recession Mike is predicting could be the greatest moneymaking opportunity of a lifetime. So today, he's sharing our firm's No. 1 strategy for times of financial turmoil – and how it saved one subscriber from financial loss during the worst moments of the past few years... Get the full story here.
