Gold Bulls Are Impatient: Will They See A Recession In 2020?

One year ago, we wrote that "we do not expect a recession next year or even in 2020". We were right: the U.S. economy did not slide into a recession in 2019. But will it happen this year? After all, the current economic expansion lasts 127 months. We know that expansions do not die of old age, but we also know that the next economic crisis will one day arrive, sooner or later. Twelve months ago, we were skeptical about a downturn in 2020, as "the lack of clear typical warning signs that preceded the past recessions put the 'recession in 2020' narrative into question".

However, we were quickly forced to change our stance and turn more cautious. In March 2019, the yield curve has inverted for the first time since 2007, while in May, the spread between long-term and short-term Treasuries went much deeper into negative territory. As the chart below shows, the yield curve ceased to be negative in October, but this does not negate the recessionary signal sent earlier. The milk has been spilled. When the genie flies out of the bottle, you can't just push it back.

(Click on image to enlarge)

Chart 1: Spread between 10-Year Treasury Constant Maturity and 2-Year Treasury Constant Maturity (red line, in %) and spread between 10-Year Treasury Constant Maturity and 3-Month Treasury Constant Maturity (blue line, in %) from January 2019 to December 2019.

Actually, just as important as when the yield curve inverts is when it becomes positive again. Historically speaking, the reinversion of the yield curve signaled the eased upward pressure on short-term interest rates due to the bankruptcies of the companies that needed funds most desperately. Based on data from the last two recessions, the next economic crisis should appear within four to six months from turning positive, i.e., between February and April 2020. However, this time, the yield curve become positive again because the Fed worried about potential economic problems and cut interest rates in advance. So, this time, recession could arrive later that the yield curve suggests.

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