When I started my career, I used to hear more experienced people often say “You haven’t even seen a cycle yet.” It was said like it was a badge of honor. It was said as if those with a few more years in the industry had run a marathon or had been to war. I guess hazing the younger generations is considered a right of passage in many cultures. Those folks probably had it said to them so they are passing it on to the younger ones who may one day pass the torch to the next generation.
It would be nice to think we are in a normal economic cycle, that we have seen some strong growth but we all know it can’t last forever and that some moderate belt tightening is ahead. It would be great if that hazing ritual I described just meant a few companies going bust and some moderate layoffs at larger firms. However economics isn’t known as the dismal science for nothing and there are a lot of factors that make this boom and the downturn that may be soon coming, a little different.
Interest Rates
The first factor is interest rates. Despite what views you may hold on the current occupant of the White House, I think many of us were rooting for the economy. My hope was that a strong enough recovery from the Great Recession would offer the opportunity to eventually push interest rates back towards a more normal historical level.
These were for my own selfish reasons as well as to balance the global economy. Fixed income has been yielding so little for so long, there hasn’t been much choice but to plow savings into the stock market or into housing. The tech rally and the housing recovery have essentially been on the back of the negative real yields in cash that we have seen for the past 10 years. I was looking forward to things like a better return on the cash I held in savings accounts and allocating more funds towards bonds as the yields became more attractive.
However a look at the Fed Funds Rate, the rate that banks lend reserve balances to each other overnight and an important benchmark interest rate for all interest rates in the economy, shows that it has barely had time to pick its face up off of the floor during the current recovery.
Source: Macrotrends.net
As you can see on the chart above, with the tightening that has been happening as of late, the Fed has only been able to push the Fed Funds Rate up to an average of 2.40% in 2019. This compares to the last cycle where the rate peaked at an annual average of 5.02% in 2007.
This gives the Fed much less firepower to fight the next recession and yields will have few places to go but down as investors seek the safe havens of government securities. In fact, as I pointed out in my Instagram post today, some rates are even back to yielding negative returns.
In fact, as Bloomberg points out, there are now over $10 trillion in securities that have negative yields. This means institutional investors are happy to lose a little bit of money in government bonds rather than put their money to risk elsewhere. It’s a worrying sign for savers and investors.
The fact that these negative yielding securities have increased in volume 75% since October of last year also suggests that many think the early year rally is a bit of a fluke and that we could be in for some equity market volatility in the coming year.
The Fed has also signaled that rate hikes may be on hold for some time given the slower momentum in the economy in the 4th quarter.
The Inverted Yield Curve
The financial press is really freaking out over another factor that is worrying a lot of people and that is that the 10 year treasury yield has dropped lower than the 3 month T-Bill yield. The so called negative yield spread has signaled that a recession is near for the past few recessions and is further evidence that there is a slowdown approaching.
The above is just the spread of the 10 year treasury over the 3-month T-Bill, if you are wondering what the actual inverted treasury yield curve looks like, as of March 22, it looks like the below.
The below chart published by The Economist last year shows how the last 3 recessions have been predicted by the yield curve.
The National Debt
As I pointed out in my post on the national debt and as can be seen below, the national debt is close to its WWII all time high. Since we are not in an all out fight for our existence or economic well being, this leaves the government ill prepared to take on even more debt to tackle the spending that may be needed to counteract a downturn.
Source: Economics Help
As I also pointed out in that post, we are in a unique situation where both parties of congress as well as the public seems to be quite ambivalent about the current level of debt.
When a recession happens, government revenues fall. This makes sense because people lose their jobs so there are less salaries to tax, business don’t make as much so there are less corporate profits to tax, business May not make as many sales so there are less transactions to tax. When you combine this with the spending needed on things such as food stamps, unemployment and more people on medicaid, it puts a strain on both the income and the spending of the federal government, which naturally drives deficits higher, all things being equal.
Given the volatile political climate as well, there will be pressure on the left to raise taxes while there will be pressure on the right to cut spending to counteract this part of the cycle. Neither of which will lessen the impact of the downturn. Who wins the next presidential election and what type of Congress is in power may we’ll determine what type of response the government has.
Don’t Fear!
On a macro level, yes things could get bad. Having been inspired lately by some of the tech entrepreneurs I have been reading and listening to like Gary Vaynerchuk though, on a micro level we have never had more opportunity.
If the hundreds of videos of Gary that are on YouTube, there are tons of great quotables. One that recently spoke to me was to put what we can do now into historical context. He mentioned that back when our parents worked, you got up, went to work, went home and that was it. Now, through sites like Fiverr you can go and earn money working from the internet right when you get home. You don’t even have to have a crazy technical skill. I was inspired by a story I read last year about an unemployed 25 year old who started editing people’s writings on the site and had turned that into a business that had earned her $150 thousand in 6 months.
Is it easy or rewarding work at first? No. The story of that particular woman talked about how she was earning $5 per editing gig and eventually started to charge a premium as her reputation grew and she expanded her service offering. As they say the journey of 1,000 miles starts with a single step. Rather than finding yourself prone to the whims of the world economy, the time to build up your own personal brand and business is staring back at you from your phone everyday. There has never been such an easy time to make money if you are connected to the internet and willing to work for it.
In that sense, don’t fear, interest rates, the national debt or the yield curve. We are all part of the economy and have the power to change what is around us through our efforts and actions. Take advantage of what is in front of all of us now and change your future by changing your actions and behavior now.
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