The US 10-year bond less than the 2-year bond very briefly at the end of August went into an inverted yield curve which our models picked up as capital pouring into the US from Europe. Economists warn of recession when they see this for capital is trying to park during a crisis.
What they were wrong about was the fact that the pressure was coming from Europe – not domestically. They used that to write headlines saying Trump was wrong and a recession was coming. The world economy is heading into recession but it will be far worse outside the USA. That is being born out before our eyes with manufacturing imploding in Germany.
The yield-curve has turned mildly positive again. The capital flows have illustrated an unusual concentration of dollar hoarding in Europe which seems to be most concentrated in Germany. Europe has insane politicians pushing the Global Warming agenda, restricting flights, and even in Sweden, people have stayed home rather than fly somewhere for a vacation as the socialists have made it shameful to fly hurting the climate. Then add BREXIT and the refusal to negotiate on the part of Brussels when the UK is the biggest European market for German cars. Add the climate change regulation on cars in Europe and the Diesel crisis, and you have to wonder how Europe can survive economically in the years ahead.
The negative interest rates are simply a gross tax on savings and not an income tax. They have the same impact as Elizabeth Warren’s Wealth Tax. It is simply a tax on your money irrespective of profits. To impose this for so long a time has destroyed not only the European bond market, but it has caused dollar hoarding with about 70% of paper dollars being stashed away outside of the United States. Then you have Europe stepping up enforcing taxation and the net disposable income in Europe is in massive decline. As I have said before, this policy of negative interest rates has wiped out pension funds and retirement savings. This has contributed to the sharp decline in consumer demand and has, in turn, propelled deflation. Keep in mind that this is Keynesian economics gone wrong. From their view, by artificially taking rates negative, they would force banks to lend and people to spend. When Christine Lagarde comes on board November 1st, 2019, the fear is that she will take this failed policy and then try to force it to work with even more Draconian measures. She has been a big proponent to eliminate currency in hopes of preventing hoarding to force people to put their money back in the bank where it will be taxed with negative interest rates.
Here is what it all adds up to:
People will NEVER borrow in a recession and they will NEVER spend when they are uncertain about the future. To me, these are simple fundamentals and the morons imposing these policies are experimenting with the economy with no idea of the damage European politicians have caused.
What President Trump has accomplished in the last 3 years is the result of knowing how a business runs in various changing economic cycles. He knows precisely how the USA should be run in this global expanding deflationary environment while “enticing” their money to the safety of the US Dollar based stock market. This is either pure economic brilliance or the President is inspired by God. I chose to believe God guides it all. Either way, the effects of this German/Europe contraction and China following will be a continuous Flow of Capital to the safety of the US Markets. In addition, plenty of Domestic (IRA, SEP, and Tax-Deferred Money) money will enter the safety of the US Indexes as well between now and April of 2020.
Stay tuned. A fun ride is coming soon to a theatre near you.
InterAnalyst has been serving over 500,000 investors globally since 1990. Authoring hundreds of financial articles, publications, and thousands of buy and sell trading charts.