Eq: Total Market

(New York)

On paper, the odds of a recession have never looked very high. It is only human instinct that makes many believe that is where we may be headed. However, that is starting to change. Since the Financial Crisis, the odds of a recession in the next 12 months held very low, around 5%. However, they have just jumped to 16% according to a popular recession calculator from BBVA. The last time the figure was higher was during the last recession. The two big factors boosting the odds are the US’ flattening yield curve as well as the threat of a trade war, which is hard for anyone to gauge. According to an economist at BAML, “Our calculations suggest that a major trade war would lead to a significant reduction in growth … A decline in confidence and supply chain disruptions could amplify the trade shock, leading to an outright recession”.

FINSUM: The models seem to be starting to catch up to what many innately know—that the economy and markets have been running hot and storm clouds are on the horizon.


All our readers will be aware of the intensifying trade war between the US and China. And while the US seems to have a strong position on trade (with less to lose than its partners), that is not the whole picture. The reality is that the US makes up much of what it loses on trade through massive overseas investment Dollars that flow into US assets. While much of the public’s awareness of this centers on Treasury bonds, one other big area of foreign participation is in MBS, or mortgage bonds. What is much less known is that more recently, foreign buyers, including China, have been much bigger consumers of US mortgage agency bonds (e.g. Fannie and Freddie).

FINSUM: China has the power to simply turn off the spigot on the mortgage market, which could lead to a surge in interest rates and a resulting collapse in prices. That would put US politicians in more hot water than tariffs ever could.

(New York)

Don’t be fooled by the “prophets of boom”, or the many Wall Street and economic leaders who are saying that the US economy is in great shape and will deliver strong growth for years to come. One well known strategist, David Rosenberg, who called the Great Recession before the Crisis, says that a recession is imminent and will arrive within the next 12 months. Rosenberg believes the January 26th high for the S&P 500 will be the peak of this bull market, and that it will ultimately be the Fed that sparks the recession. “Cycles die, and you know how they die? … Because the Fed puts a bullet in its forehead”.

FINSUM: There are a lot of late cycle indicators flashing in the US economy right now. A recession in the next year does seem plausible, if not overly likely.

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