
A Facebook meme
One of the first rules of managing your money is never to give, or to accept, advice about money. I’m not giving any advice in this post. But I am suggesting that now is a good time to take a good hard look — according to one’s own lights — at the state of the U.S. (and the global) economy.
Yesterday, the yield curve on U.S. treasury bonds (2-year notes vs. 5-year notes) inverted for the first time since 2007. We all know what happened in 2008. An inverted yield curve, of all economic indicators, has proven to be as reliable a predictor of economic downturns as exists.
Here are some articles:
Bloomberg: The U.S. Yield Curve Just Inverted. That’s Huge.
Reuters: Dollar drops as U.S. Treasury yield curve inversion sparks recession fears
Forbes: The Yield Curve Just Inverted — Sort Of — And That Is A Sell Signal For Stocks
Am I blaming Trump? Not necessarily. Just as Trump gets zero credit for the past few years of economic growth, he may not get the blame for the next recession. Economic cycles and their causes don’t usually have a great deal to do with who is in the White House. But how a country responds to an economic downturn, though, is very important. Trump has plenty of room to screw up on that.
Back in the 1990s, as I got old enough to get serious about money and retirement, I did my best to study up on economics, investing, and economic cycles. I watched very carefully as the Dot-Com boom of the late 1990s turned into the enormous bubble burst of 2001. And as the housing and mortgage bubble grew during the Bush-Cheney years, I watched with horror (because I was very close to retirement). That bubble burst in 2008. But I landed on my feet without losing a nickel of my retirement money, because I knew the bust was coming.
During periods of economic growth, risk is less risky. Lots of people make money. But when an economic downturn is looming, it’s time to go defensive. Going defensive means taking a look at your investments. Is your money in the right places? Going defensive means taking a hard look at the economy, trying to figure out where the trouble spots are, and trying to figure out one’s vulnerabilities.
When big players in the stock market (often called “strong hands”) realize that the market is unsustainable and is going down, there is a huge retail effort to transfer stocks to “weak hands.” Weak hands are then forced to sell in a panic and absorb most of the losses. That’s why professional investing advice is often so corrupt. There is a famous (and possibly apocryphal) story about J.P. Morgan, who said that he knew it was time to sell his stocks when his shoeshine boy started talking about buying stocks. It’s true that the stock market is not the economy. But the economy and the stock market do tend to run on parallel tracks.
We all need our own crystal balls, because everyone’s situation is different. I’ll have more posts in the future on economic conditions. But, for the moment, I have only one point to make. That is that the warning lights are flashing that the time has come to go defensive. Thanks to globalization, we’re all in pretty much the same boat these days. Readers in Europe have plenty to think about, too, such as Brexit in the U.K., or the recent outbreak of economic discontent in France, which has forced President Macron to reverse course on fuel taxes.
As for me, I’m going to plant an extra-big garden next spring.
Update: Just after I posted this, the Dow Jones Industrial Average was down almost 800 points. The media are focused on a connection to American trade with China. But I suspect that it has much more to do with investors spooked by the yield curve, as large institutions unload stocks and go defensive. The Dow may well regain most of these losses tomorrow morning, as often happens. But this kind of churning in the stock market is typical of what occurs at this point in the economic cycle.
Update 2: This advertisement appeared in my Facebook feed a day after I wrote this post. This kind of deceit is typical at this point in the economic cycle. As “strong hands” work to sell off their holdings for as high a price as possible, retail efforts intensify to sell stocks to “weak hands,” who are not aware of where we are in the economic cycle and are left holding the bag. Notice that this ad is targeted at older people, and that Facebook knows my age.
Update 3: Here is what Fox watchers are being told:
