2024: Will We Make It? Currently on track for major market and financial system crisis events to break out in September/October [Opinion]

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Not Since Since 1981 and 1929, The Yield Curve Is Now in the Deepest Inversion

The alarming depth of the current yield curve inversion is signaling a potential major economic downturn, even a severe crisis. The degree of inversion is measured by the difference between long-term and short-term yields, usually the gap between 10-year and 3-month Treasury yields. The inversion is currently the most significant in over 40 years, with an average gap of -1.67 in June, a negative value unseen since 1981. Historical data shows such drastic inversions have always been followed by economic recessions, even going back 50 years. The only instance of a larger inversion occurred in the late 1920s, preceding the Great Depression. While some might question the absence of mass unemployment and recession despite the severe yield curve inversion, it’s important to remember the lag between an inversion and the onset of recession. For instance, recessions started 13 and 16 months after the yield curve inversions of 1989 and 2006 respectively. While the curve inverted again in November 2022, we are only seven months into it. Experience suggests we might have to wait at least another six months before the catastrophic economic effects fully emerge.

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The Total Amount of Corporate Debt Defaults in the US This Year Has Already Exceeded Last Year’s

Higher borrowing rates and stringent lending standards in 2023 have caused a 53% YoY increase in US corporate loan defaults, according to Moody’s. The Fed’s aggressive monetary policies, coupled with reluctance from banks to issue new loans, are driving companies into bankruptcy. Experts warn of a potential recession as the Fed continues to raise rates amidst economic uncertainty. The cost of debt has also soared to 9-13%, further hampering debt repayments. Bank of America predicts nearly $1 trillion in corporate debt defaults in the event of a full-blown recession. Sectors like business services, healthcare, and retail face the brunt, with record corporate defaults expected this year. Moody’s projects the global corporate default rate to potentially reach 4.7% by year-end, and worst-case scenarios hint at a rate of 13.7%, surpassing the 2008 financial crisis levels.

The Leading Economic Index Declined in June for the 15th Month in a Row, Longest Down Since 2007–08

The U.S. economy, while currently still growing, shows alarming signs of a looming recession. The leading economic index, a measure of ten key indicators, declined by 0.7% in June. This represents the 15th consecutive month of shrinkage, a recession red flag reminiscent of the Great Recession in 2007-2008. Furthermore, seven of the ten indicators tracked by the Conference Board have shown a downward trend, suggesting a broad-based economic slowdown. This continued contraction is worrying many economists, leading to an increased prediction of a recession within the next year. The potential downturn is driven by factors such as escalating prices, tighter monetary policy, increasingly difficult-to-acquire credit, and reduced government spending. The Federal Reserve’s sharp uptick in borrowing costs, aimed at countering inflation, is an additional headwind for the economy. The Conference Board is forecasting a recession from Q3 2023 to Q1 2024. Although the current growth rate is higher than expected, the sustained decline in leading indicators and anticipated monetary tightening signal an upcoming slowdown. This forecasted recession, accompanied by lower government spending, tight monetary policy, and credit challenges, presents a gloomy outlook for the near future.

The Stock-Market Mania Reminds Me of the Dot-Com and Housing Bubbles: David Rosenberg

David Rosenberg, veteran economist and president of Rosenberg Research, draws chilling parallels between today’s frenzied stock market and the investment manias leading up to devastating financial crashes like those of 1929, the early 2000s, and 2008. In a recent research note, he points out the dangerous similarities between investors’ current unflinching confidence and the misguided optimism from past catastrophic periods. This includes Irving Fisher’s 1929 proclamation of a ‘permanently high plateau’ for stocks and Abby Joseph Cohen’s erroneous prediction of ‘profit expansion’ ahead of the tech bubble burst. According to Rosenberg, today’s surge in the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average is fueled by a fear of missing out (FOMO), similar to past speculative manias. He suggests the current market ‘balloon’ is filled with hot air and warns it’s uncertain when it will burst and fundamentals will regain their rightful place. He also paints a bleak picture of the US economic outlook. American consumers, already stretched thin by spending their pandemic savings and leaning heavily on credit cards amid skyrocketing inflation and interest rates, are nearing a financial breaking point.

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Existing Home Sales Resume Slide, Down 15 of the Last 17 Months

The US existing-home sales have been on a consistent decline since February 2022, with only slight upticks in May and February, according to data from the National Association of Realtors (NAR). June 2023 saw a further 3.3% drop in sales to a seasonally adjusted annual rate of 4.16 million, a significant 18.9% decrease from the previous year. Despite the median existing-home sales price for June reaching $410,200, the second-highest ever recorded since NAR began tracking in January 1999, sales have not recovered. Inventory of unsold homes remained static at 1.08 million, equivalent to a mere 3.1 months’ supply at the current sales pace. First-time buyers, a vital component of the housing market, were accountable for only 27% of sales in June, a decrease from 28% in May and 30% in June 2022. Furthermore, all-cash sales rose to 26% of transactions, indicating a decrease in traditional financing. The slump in home sales mirrors the scenario of the mid-1990s and appears to be directly linked to higher mortgage interest rates. Many homeowners are unwilling to exchange their sub-3% mortgages for ones at 7.0%, essentially trapping them in their current properties. This drop in transactions is anticipated to persist as the Federal Reserve seems determined to maintain higher interest rates to prevent further inflation. The downturn will likely have cascading effects on related sectors, such as appliances, furniture, and landscaping, which typically benefit from home sales. Adding to the gloom, a considerable percentage of Americans are facing financial stress, with 70% financially stressed and 58% living paycheck to paycheck. While home prices haven’t crashed, the precipitous decline in transactions signals a prolonged weak economy.

China’s property sector crisis escalated again on Friday with a sharp fall in the shares and bonds of one of the country’s biggest developers, Country Garden.