The business cycle hasn’t been repealed, but the current one is playing out like none in living memory. “I’m a believer in business cycles and monetary cycles. This will be the most telegraphed, anticipated and expected recession in history,” said Permanent Portfolio president and portfolio manager Michael Cuggino. “The surprise factor will be lower.”
Of course, there will be another recession. But what if the current expansion has a long way to run. A yield-curve inversion prompted lots of hand-wringing in late March, but a three-day inversion doesn’t qualify as a recession signal. Moreover, virtually all the historical evidence on yield curve inversions is based on very different interest rate environments that markets have experienced in the last decade.
“There is nothing in the current economic data that indicates a recession is pending or imminent,” Cuggino said. “If you get a yield curve that is flat but not inverted, it’s not necessarily recessionary.”
In fact, if a recession were likely, one would expect to see yields on questionable junk bonds rising. That's not happening.
Some experts believe that the yield curve in the U.S. could be distorted by the level of global interest rates and, as Cuggino noted, the relative strength of U.S. assets. In recent days, 10-year German bunds have sold at negative rates and this has to have increased demand for 10-year Treasurys, which closed Tuesday yielding 2.42 percent.
In recent days, German yields have fallen below those in Japan for the first time in thee years. Whether an investor is looking for yield or capital appreciation, U.S. Treasurys are among the most attractive sovereign bonds in the world.
Global growth is anemic, Cuggino observed. European nations, particularly Germany and Italy, may well be in their own recessions. With France plagued by yellow jackets and England flummoxed by Brexit, it’s an open question how long those two countries can keep growing.
America is performing a lot better. But even that’s relative. Everyone expects the first quarter to be weak after the fourth-quarter stock market correction and government shutdown in January. But soft first quarters have become commonplace in the last decade. Some people are expecting a slowdown from 2.9 percent to 3.0 percent GDP growth to continue this year, but consumer spending could pick up sharply in the second quarter.
Some, like Allianz Life’s chief economic advisor Mohammed El-Erian, believe the U.S. can grow at 2.5 percent this year. Some of the stimulative effects of Trump's tax cuts are fading, but he noted that increased government spending can pick up the slack.
Other crosscurrents are likely to influence the second quarter. Cuggino noted that upper-middle-class folks with lots of disposable income in high-tax states are likely to face higher tax bills. How this impacts overall consumer spending remains to be seen.