The recovery from the Financial Crisis has been impressive and prolonged. However, a combination of factors is causing headwinds that the US economy may not be able to overcome. While pundits in the media, social and print, argue both sides of the issue, the bond market is betting heavily on an economic downturn. Are you ready for the 2020 recession? Here we will look at why next year is likely when the economic “ax” will fall and then what you can do to protect your investment portfolio.
Will There Be a Recession Starting in 2020?
The trade dispute with China has gone from being a protracted trade war to likely being a permanent trade war. The Trump tax cut was a bust for investment and hiring. And, on top of that, the national debt is soaring even higher as the promised economic benefits of more jobs, more income, and more taxes have not come to pass! But, analysis may be wrong and, maybe, we can just close our eyes and hope for the best. Right? Wrong!
The New York Times has a good article that looks at how the recession of 2020 could happen.
The chances that the nation will fall into recession have increased sharply in the last two weeks.That is the unmistakable message that global investors in the bond market are sending. Longer-term interest rates have plunged since the end of July – a shift that historically tends to predict slower growth, interest rate cuts from the Federal Reserve, and a heightened risk that the economy slips into outright contraction.
They refer to the chances of a “self-inflicted” recession with these causes:
- Business uncertainty tied to how Trump is playing the trade war game
- Softening of business spending as the tax cut windfall is wearing off
- Central banks across the globe with limited ability to respond to a financial crisis
- Populist turning inward in many major economies
An interesting observation they make is that previous recessions have followed the collapse of incorrect and irrational beliefs:
- 2001- The internet would lead to perpetual growth with a new kind of stock market.
- 2007- The housing market would never collapse in all parts of the country at once.
To their observations we add the 1929 crash which was preceded by the belief that a brand new world of wealth was in store and that one only needed to “play the market” to become rich. (For more on this topic take a look at our article about intrinsic stock value.)
Another is the lack of leadership that led the United Kingdom into the Brexit mess.
And, we add the ambitions of the Chinese Communist Party in believing that the rest of the world would passively stand by while they targeted all of the high-tech sectors for dominance over the coming decades. Their apparent short-sightedness is based on the desire of a small group of oligarchs to maintain their authority, power, and personal wealth above all.
Lastly, we believe that Donald Trump may be an effective rabble-rouser and outright demagogue who can get votes, command the attention of the media, and perhaps even get re-elected. But, we also believe that he simply does not have the horsepower for this job. The most effective ways to maintain peace and prosperity in the post-WWII era have been with coalition building, confidence building, and maintaining the strong historical alliances that were so painstakingly built in the aftermath of the last World War. Trump’s willful destruction of our alliances may, in the end, be that which causes the most damage.
What Does Money Say about a 2020 Recession?
Pundits can write what they want but, to our way of thinking, the best evidence is in what people are doing with their money. And, that is where an inverted yield curve and decreased corporate investing and putting money into stock buybacks are the canaries in the coal mine that have stopped singing and are warning us to get out now.
How Do You Get Ready for the 2020 Recession?
With the trade war being a major issue in a coming recession, many investors will look for stocks that are not affected by problems with China or elsewhere. As interest rates go down, utility stocks go up in value as their dividends do not necessarily fall with interest rates. A while back we wrote about how to invest without losing any money. This article focused on a buy and hold strategy for Treasuries, AAA and AA bonds, ladders of CDs at your bank. This is likely what many investors are doing now as they lock in today’s rates before the Fed is forced to cut rates again to fight the 2020 recession. The last part of that formula was to look for stocks that will weather the storm, will become bargains as the market crashes, and will turn into excellent long term investments. That may be the best strategy for getting ready for the 2020 recession. If you want to look for an example of someone getting ready to buy value investments when the market falls, look at our article about the silent warning for investors in which we note that Warren Buffett is accumulating an impressive hoard of cash. Many believe that he simply does not need any stocks that meet his criteria for value and price. We believe that he is also getting ready for the next recession and market correction or crash.