“Recession Looming?”

Stocks rebounded strongly last week with the Standard and Poor’s 500 rallying 2.79% and the Dow Jones Industrial Average advancing 3.02%.

Gold took a breather after a strong move up; the yellow metal fell .52%.

Silver advanced 5.37%, moving up nearly $1 per ounce.  I believe this move in silver may be confirming my thought from earlier this summer that it is likely the asset class with the most appreciation potential.

Despite the recent, strong move in the price of precious metals, I continue to be bullish on metals moving ahead if one’s time frame is a few years or more.

The 30-Year US Treasury yield closed the week below 2% as bonds continued to rally decisively.

While the entire yield curve is not inverted, meaning shorter term debt is yielding higher interest rates than longer term debt, most of it is.

Take a look at the screenshot from the US Treasury Department’s website (Illustration One).

Notice that during the month of August, the yield on the 30-Year Treasury Bond fell from 2.44% at the beginning of the month to finish the month at 1.96%.  That’s a decline in yield of nearly one half of one percent, or a move of 19.67%.  That means bonds rallied approximately that percentage.

The other important thing to note is that the yield on a 1-month Treasury bill stands at 2.10% while the yield on the 30-Year is 1.96%.

An inverted yield curve is historically speaking a reliable recession forecaster. 

There are other signs the world and US economies are weakening.

Wealthy individuals are cutting back on spending.  A CNBC article (Source:  https://www.cnbc.com/2019/08/28/the-rich-arent-spending-signaling-a-possible-recession-ahead.html) reported (emphasis added):

The rich have cut their spending on everything from homes to jewelry, sparking fears of a trickle-down recession that starts at the top.

From real estate and retail stores to classic cars and art, the weakest segment of the American economy right now is the very top. While the middle class and broader consumer sections continue to spend, economists say the sudden pullback among the wealthy could cascade down to the rest of the economy and create a further drag on growth.

Luxury real estate is having its worst year since the financial crisis, with pricey markets like Manhattan seeing six straight quarters of sales declines. According to Redfin, sales of homes priced at $1.5 million or more fell 5% in the U.S. in the second quarter. Unsold mansions and penthouses are piling up across the country, especially in ritzy resort towns, with a nearly three-year supply of luxury listings in Aspen, Colorado, and the Hamptons in New York.

Retailers to the 1% are faring the worst, with famed Barney’s filing for bankruptcy and Nordstrom posting three consecutive quarterly declines in revenue. Meanwhile, Wal-Mart and Target, which cater to the everyday consumer, are reporting stronger-than-expected traffic and growth.

At this month’s massive Pebble Beach car auctions, known for smashing price records, the most expensive cars faltered on the auction block. Less than half of the cars offered for $1 million or more were able to sell. But cars priced at under $75,000 sold quickly — many for far more than their estimates.

Digging into this story a bit further, one finds that lower-income consumers may be funding much of their spending via credit cards.  This from “Inside ARM” (Source:  https://www.insidearm.com/news/00045388-debt-collection-and-modern-communication-/) (emphasis added):

Overall, the Bureau notes that the credit card market continues to grow. Outstanding balances continued to grow, ending 2018 “nominally above” pre-recession levels. The total credit line across all consumer credit cards was $4.3 trillion in 2018.

This statistics could be bad news for a consumer spending dependent US economy.

According to a recent article on “The Balance” (Source:  https://www.thebalance.com/consumer-spending-trends-and-current-statistics-3305916), consumer spending accounts for 68% of the Gross Domestic Product of the United States.  This from the article:

Consumer spending was at a rate of $14.24 trillion as of the first quarter of 2019. The Bureau of Economic Analysis reports consumer spending at an annualized rate. That’s so it can compare it to gross domestic product, which was $21.060 trillion. Consumer spending made up 68% of the U.S. economy. 

Two-thirds of consumer spending is on services, such as housing and health care. Almost one-quarter is spent on non-durable goods, such as clothing and groceries. The rest is spent on durable goods, such as automobiles and appliances. The Personal Consumption Expenditures Report lists more sub-categories on what consumers spend. 

Consumer spending increased by 0.9% in Q1 2019. Strong consumer spending is the main reason the GDP growth rate has been within the 2% to 3% healthy range since the Great Recession.

There is more evidence that consumers are spending via debt accumulation.  Here is a piece from “The Motley Fool” (Source:  https://www.fool.com/investing/2019/02/13/us-debt-rate-auto-loan-delinquencies-record.aspx) (emphasis added):

The Federal Reserve Bank of New York just put out its latest quarterly report on U.S. household debt and found that Americans collectively owe about $13.54 trillion, an amount that has risen for 18 consecutive quarters and is 21% higher than the $12.7 trillion owed in 2008 during the height of the Great Recession.

Among the more troubling facts from the report is the record 7 million Americans who are 90 days or more behind on their auto loan payments. It’s a signal, economists say, that Americans are struggling to pay bills despite other indications of a strong economy and low unemployment. Approximately 6.5% of all auto finance loans are 90-plus days past due.

Student loan debt edged higher, hitting $1.46 trillion in the fourth quarter, and serious delinquency rates in the category continue to be much higher than any other debt type.

When delinquency rates rise, it signals that debt levels may be approaching their limit. 

As we learned at the onset of The Great Recession, when debt levels reach their limit, consumer spending soon falls since much of consumer spending is debt-driven.

2020 is shaping up to be a very interesting year.

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