An Economic Slowdown Seems Inevitable

The 10-year Treasury note wasted no time diving to its lowest level since 2016, following a report today from the Institute for Supply Management (ISM) indicating an August contraction in the U.S. manufacturing sector, for the first time since early 2016. After reviewing the report, Ian Lyngen, Head of Rates Research at BMO Capital Markets wrote, “If there was any question whether or not the trade war was hurting manufacturing sentiment today’s release cleared that up with the insightful observation that ‘Comments from the panel reflect a notable decrease in business confidence.’” And further that, “The logic holds that if inventories are building faster than new orders are coming in, there is a problem on the horizon.” Yield curve inversions occurred several times during August, which many economists and investors believe to be an ominous precursor to a coming recession, within six to twelve months.

Going into the Labor Day Weekend, Treasury yields were already under pressure ahead of the ISM report and new tariffs on imported Chinese goods scheduled to begin over the holiday weekend ensured a continuation of the growing trade war, while also weighing heavily on the global growth outlook. Meanwhile, the 30-year Treasury bond yield fell to an all-time low of 1.91% last Wednesday and in spite of President Trump’s very vocal distain for dollar strength at this time, it just hit a two-year high. A weaker currency makes exports cheaper and more competitive in the global economy and higher earnings make stocks more attractive, which leads to greater investment in countries with weaker currencies.

President Trump is blaming these economic conditions on the Fed, but regardless of fault, a growing trade war with China, growing U.S. national debt levels, and a growing ineffectiveness of the Fed and other central banks is undoubtedly forcing them to keep interest rates low and print money to buy financial assets, in order to continue propping up markets, while making huge fiscal deficits affordable. But this process creates an even greater potential for all forms of economic volatility and an even greater potential for a sudden and precipitous stock market fall. Due to the availability of cheap Fed money, corporate debt has practically doubled since 2007 and even worse, the amount of negative-yielding corporate debt recently passed $1 trillion in market value. Even the Fed realizes this, but with little left in the economic quiver, there’s little to be done until the national debt is brought under control and begins to reduce rather than grow.

Physical precious metal prices have been on a serious upswing recently. Just back in June, David Sneddon, the Global Head of Technical Analysis at Credit Suisse, sent a memo to their clients suggesting that, “…given the magnitude of the base (for gold), which has taken six years to form, we suspect we could even see a retest of the $1,921 record high.” Gold saw a 7% rise in June prior to release of the memo, but since June 24, 2019, when the memo was sent to Credit Suisse clients, the metal has increased from $1,399/oz. to $1,546, another 10½ % with no signs of letting up. On September 3, 2018, the DJIA closed at 26,027 and today it closed at 26,118 a 1-year increase of .00035%. On September 3, 2018, gold closed at $1,201/oz and today it closed at $1,546/oz. a 1-year increase of 28.73%. With defense in mind and prices rising or not, it’s still a great time to reinforce physical precious metal holdings.