We developed the combo-chart below from data published by the St. Louis Fed (http://research.stlouisfed..org/fred2/). Both charts in the combination represent US economic history since 1962, including recessions (grey spouts). The bottom chart shows that since 1962, each US recession was preceded by the toppling of the 10-year treasury yield (blue line) by the 3-month treasury yield (green line) and by drastic falls in either housing starts (red line) and/or oil prices (black line). Please note also that right now, the green line is again toppling the blue line, while both the red and black lines are dropping sharply. Upon seeing this, you probably agree there is a high probability we will have another US recession. How soon? Based on the average time lags shown by the charts, the US recession should start by the first or second quarter of 2007.
Yet, no matter how irrefutable historical facts are, you still see a multitude of analysts and journalists arguing against them. Unfortunately, once again, they will convince many of you as thy did in Q3, 2000, when, despite a severe crash in the NASDAQ and an inverted yield curve, investors intently bid up the S&P 500 to all-time closing highs. Today, despite a severe home builder crash and an inverted yield curve, it is the Dow Jones Industrial Average that is reaching new all-time highs.
Soft-landing advocates and their followers will have you believe the recent drop in oil prices and in long-term interest rates is promoting a rebound in consumer spending, when in fact it is a continued drop in spending that is causing these variables to plunge. Oil prices at $60 are so high that their inflationary after-effects are still trickling through the economy and causing the Fed to worry about inflation. Together with a busting housing market and the delayed effects of the increase in the Fed Funds rate, high oil prices will continue to push US consumers to spend less, not more.
Lacking the simple knowledge written by history in the charts below will keep feeding new clients to the marketing machine of the world’s many financial service providers. They are in good company though, every OPEC minister who believes that by cutting oil production, he will reverse the direction of oil prices, doesn’t realize his actions guarantee a harder and longer recession.