Many experts and analysts make many negative predictions for the US economy in the election year. Recession or no recession? What is the impact of the interest rate cut?... All will have a significant impact on investors' profits in the second half of 2024.
The following are notes from BeInCrypto about these analyzes and predictions.
Also Read: Why is a severe economic recession often difficult to recognize?
#first. The FED lowering interest rates has not been a good sign in the past for the US economy
At the time of writing, the CME FedWatch tool said there was a 95.3% chance that interest rates would remain unchanged at the FOMC meeting at the end of July. But for a decision at the FOMC meeting in September, there was a 95.3% chance. The FED will cut interest rates for the first time after a chain of 11 increases since March 2022.
For Peter Berezin (@PeterBerezinBCA) – chief researcher at BCA Research, who used to work for Goldman Sachs and the IMF – that is not a very positive sign.
Observations on recessions and FED interest rate cuts. Source: BCA Research.BCA Research's report says that "Recessions often begin not long after the Fed begins cutting interest rates." The chart from the above report shows that recessionary periods of serious crises in the US economy often appear after a long process of raising interest rates, keeping them unchanged and then cutting them.
According to this logic, if next September the FED starts cutting interest rates, it is likely that a recession will also begin a few months later. Critics argue that recessions cause retrenchment, not the other way around, and that recessions can be smelled ahead of time.
To support his recession view, Peter Berezin adds data on layoff rates. The layoff rate increased in 2024, and an increase in the rate always accompanies a recession.
#2. The yield curve has been inverted for a record 747 days
@KobeissiLetter's observation about the most commonly used and historically most reliable indicator of a recession, which is the inverted yield curve.
An inverted yield curve is a phenomenon in the financial markets when the yields on short-term bonds are higher than the yields on long-term bonds. This is an anomaly because typically, investors require a higher yield on long-term investments to compensate for higher risk and future uncertainty.
The yield curve inverts between 2-year and 10-year yields.The meaning of an inverted yield curve is often seen as a warning sign of an upcoming economic recession. This stems from the notion that when investors expect economic weakness in the future, they will look to safer assets, such as long-term bonds, increasing the price of these bonds and decreasing them. their profits. At the same time, demand for short-term bonds decreased, leading to an increase in their yields.
The chart above shows that, in previous economic cycles, every time the yield curve steepened rapidly and crossed zero, a recession occurred within months. @KobeissiLetter's observation shows that the difference between 2-year and 10-year Treasury Bonds has been negative since July 6, 2022. In other words, the yield curve has been inverted for a record 747 days.
Guilherme Tavares - CEO of i3 Investment - also shares the same opinion and believes that the 10-year yield will decrease and this time will be no different from the past, a recession will occur soon.
#3. “America is about to go bankrupt” – Elon Musk
“America is about to go bankrupt” is the most recent Chia from billionaire Elon Musk when citing US public debt data.
Economist EJ Antoni said interest on federal debt is equal to 76% of Americans' total personal income taxes in six months. This is the Treasury's largest source of revenue, but three-quarters of it is only used to pay interest. The economist also said the cost of servicing the federal debt has increased 33% in a year and is expected to get worse in the near future.
If the government uses a large portion of personal income tax to pay interest on public debt, there may be a number of negative consequences such as: reducing resources for public services, increasing the tax burden on people, Reduce public investment, reduce investor confidence and cause negative fluctuations in the financial market...
Also Read: Many warning signs that a recession could come when the market is most optimistic
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