Good morning. Here’s your Early Warning for Thursday, 08 February 2018.
Market volatility this week is leading quite a few economists and investors to weigh in on chance of further volatility and recession. Yesterday afternoon, Doubleline Capital’s Jeffrey Gundlach tweeted, “Low yields/low vol paradigm went on so long and became so heavily invested in that now the unwind will be turbulent and not just a few days.” Gundlach joins Society General, Goldman, and JPMorgan Chase analysts who have issued similar warnings about the coming volatility.
Meanwhile, an S&P Global Ratings analyst is warning an estimated 37 percent of corporations have debt-to-earnings ratios that exceed 5x. That’s up from 32 percent in 2007. “When debt is this steep and default rates are low, something’s gotta give,” wrote the S&P analyst. [source] In fact, global debt-to-GDP is up some 30-50% since the last financial crisis in 2007, which fueled largely by debt defaults.
Yesterday I had a chance meeting with a financial planner. He started asking me about my financial goals, and I told him that my main concern was this next recession. He told me that he’s tracking the likelihood at his office (part of a major U.S. wealth management firm) and that his concern is that when the federal funds (interest) rate goes higher than the 10-year Treasury yield, a recession follows in about 18 months.
As of today, the federal funds rate is around 1.4 percent. The 10-year is at 2.8 percent. A new Federal Reserve chairman was sworn in on Monday and is committed to raising interest rates, with a target of three percent. Meanwhile, bond traders are warning that 10-year yields are not going to hold at this rate.
In yesterday’s meeting, the financial planner told me that the next recession is going to hit rural areas particularly hard, and that the result would be an influx of people to cities in search of jobs. Now that’s likely to be regionally-dependent, but it’s something to consider as we get closer to 2020. Until then, we have some time to get prepared and build strong, resilient communities. I believe that begins with community watch programs, and I’ll make that a focus of some training material this year.