In summary, while I understand the argument that Zervos and Rosenberg make about our not entering a recession until there is an inverted yield curve, I do not believe it. In the past it is been easy to predict a recession because every recession since World War II was preceded by an inverted yield curve. With short-term rates artificially low, we no longer have that indicator. The US economy is close to stall speed, and a negative nudge could push us into recession, inverted yield curve or not.
The average stock market retreat in a recession is around 40%. If the Fed takes us back to zero rates and, gods forbid, possibly even negative rates, I think we will see the long bond at 2% and the 10-year below 1%. Think Japan. It’s counterintuitive in the extreme, but the world is going to be turned upside down. You are going to get a shot at the lowest mortgage rates of your life. This year? Next year? If such intricate timing makes a difference to you, you need to rethink your portfolio balance. Seriously.
Next week I will look at the forecasts that others have made and comment on them.
Back From Hong Kong
I normally put a personal note here, but the letter is already overly long, and I need to hit the send button to get this to my intrepid editors, who will be working on Sunday.
I want to thank my hosts at Bank of America Merrill Lynch in Hong Kong for being most gracious. I believe I learned a great deal more at their conference than whatever small morsels of knowledge I dished out. The dinner conversations were sparkling. I’m looking forward to some biotech startup finding a fix for jet lag, because I do enjoy getting outside the confines of my home and absorbing the knowledge and wisdom of those from other backgrounds.
Even with what is a rather sober forecast issue, I remain an unrepentant optimist about the future. You have a great week and even better new year! I look forward to exploring Economicus Terra Incognita together with you. It will be an adventure!
Your fellow explorer analyst,
John Mauldin
[email protected]