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I Can Tell You Exactly When the Next Recession BeginsBy
Friday, May 27, 2011
I can tell you when the next recession will begin...
As we were creating my latest product, True Wealth Systems, we discovered an incredibly simple indicator that has correctly predicted 10 out of the last nine recessions over the last half-century.
(I say "10 out of the last nine" because it once predicted a recession that didn't come – and that was over 40 years ago.)
Take a look:
 I have two good pieces of news for you today...
The first piece of good news is: As you can see from the chart, this indicator typically gives us plenty of lead time before a recession begins, and it's not signaling now.
The second piece of good news is: Right now, this signal is a LONG WAY from signaling a new recession...
Let me explain what our simple indicator is... You might laugh, it's so simple. But simple is part of what we want to do in True Wealth Systems... There's elegance in the simplicity. And when it's simple, it's easy to understand why it works... and why it may continue to work.
Our simple indicator signals when short-term interest rates rise above long-term interest rates. That's it. (Specifically, it's when the interest rates on one-year Treasurys go higher than 10-year Treasurys.)
This is an unnatural situation – an artificial one. Why? Naturally, you should demand more interest for a longer-term loan.
But you see, the government controls short-term interest rates. And when it wants to "put the brakes on the economy," it raises short-term interest rates. When it raises short-term interest rates so high that one-year rates rise above 10-year rates, the government has gone too far.
The economy can't handle that unnatural situation. But it takes a while to filter through. And a year later (or so), a recession begins.
Right now, based on this indicator, we're in no danger of recession.
On the contrary, based on this indicator, we're at risk of "bubbles" in the economy. The government has created the opposite unnatural situation... It has cut short-term interest rates to essentially zero, and it has promised to keep them there for "the foreseeable future."
It takes a while for the effects to filter into the economy... But a year from now, the economy could be soaring because of this unnatural situation. This is what the government wants. Then, eventually, it will want to put the brakes on... And the cycle will repeat.
It is safe to say our recession indicator won't signal for well over a year – more likely years from now. And after the signal, it then takes roughly a year for the recession to kick in.
In short, you've likely got years of boom ahead of you... Our True Wealth Systems indicator says recession is years away.
(We've also developed a totally different True Wealth Systems indicator that pinpoints the end of a recession before anyone else knows it's happened. But that's a story for another day...)
You can pile many other factors in of course... The economy is certainly a complicated beast.
But again, we like to keep it simple. Our extremely simple True Wealth Systems recession indicator has successfully predicted 10 out of the last nine recessions.
Right now, it's saying there's no recession on the horizon... Boom is more likely than recession. And its track record makes it worth paying attention to!
Good investing,
Steve
Further Reading:
Steve has shared several True Wealth Systems lessons over the past few weeks. Take a look:
"In most cases simple trend-following systems have proven to make money better than just about anything else."
"Our True Wealth Systems historical databases prove these stocks experience incredible booms and busts. If you can catch a boom, you can make some serious profits."
"When the gold bull market really hits a bubble, these things will likely go nuts, especially the smaller ones."
Market NotesTHIS KIND OF TRADE CAN DRIVE YOU TO DRINK Today's chart is a reminder of why one of the world's most popular trades can drive you nuts...
Folks love to predict where interest rates are going. Real estate agents always predict higher rates and remind you to "lock in a low rate now." Speculators study all kinds of government reports to guess where interest rates are going. And many folks believe Uncle Sam's creditors will demand higher rates to compensate them for loaning to a risky borrower.
We track interest rates with the benchmark 10-year Treasury note. It's the most widely followed interest rate in the world. It's commonly cited when folks talk about the interest rate Uncle Sam pays when borrowing money. Below is an eight-year chart of this rate. As you can see, back in 2003, this rate was around 3.25% (32.5 on the chart). Today, after years of sideways "slopping and chopping," this rate is around... 3.25%.
If you forced us to pick a side, we'd say, "Yes... Uncle Sam's balance sheet is a mess... our creditors will eventually demand higher rates of interest to compensate them for loaning to such a sorry sap." But must also look at our chart and say, "It's tough to make money trading interest rates."
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