Exactly 10 years ago, we were months way from a world-shaking financial crisis.
By late 2006, we had an inverted yield curve steep to be a high-probability indicator of recession. I estimated at that time that the losses would be $400 billion at a minimum. Yet, most of my readers and fellow analysts told me I was way too bearish.
Turned out the losses topped well over $2 trillion and triggered the financial crisis and Great Recession.
Conditions in the financial markets needed only a spark from the subprime crisis to start a firestorm all over the world. Plenty of things were waiting to go wrong, and it seemed like they all did at the same time.
We don’t have an inverted yield curve now. But when the central bank artificially holds down short-term rates, it is difficult if not almost impossible for the yield curve to invert.
We have effectively suppressed the biggest warning signal.
But there is another recession in our future (there is always another recession), which I think will ensue by the end of 2018. And it’s going to be at least as bad as the last one was in terms of the global pain it causes.
Below are three scenarios that may turn out be fateful black swans. But remember this: A harmless white swan can look black in the right lighting conditions. Sometimes, that’s all it takes to start a panic.
Black Swan #1: Yellen Overshoots
It is clear that the US economy is not taking off like the rocket some predicted after the election:
- President Trump and the Republicans haven’t been able to pass any of the fiscal stimulus measures we hoped to see.
- Banks and energy companies are getting some regulatory relief, and that helps; but it’s a far cry from the sweeping healthcare reform, tax cuts, and infrastructure spending we were promised.
…click on the above link to read the rest of the article…