It always feels good to outsmart the markets.
To see value before others or where others fail to look… to gain that small advantage over the rest of the investing world.
That’s what we devote a lot of time and energy to in these very pages.
But it’s time for a little straight talk.
Did you ever have one of those radios with two-band dials?
I don’t mean FM and AM. I mean the one dial that could move the needle wildly across the spectrum. While the other moved very slowly — with small, refined movement — to hone in on your exact station.
It’d take too long to go from 88.1 to 106.5 with the small mover. But it’d be impossible to hit an exact frequency with the wild swinger.
I mention this because of all the specific advice in the world — here, market and stock analyses, financial advisers, you name it — we are the refining knob. We hone in on exactly what you need to do to maximize your returns — and your wealth.
But the wild swinger? The knob that shifts everything — no matter how smart or careful you are with your money? That’s the overall economy.
Which is why every once in a while, we like to take a step back and check in on the health of the overall economy.
Both so we can know what to expect going forward… and so we can prepare our wealth.
Because the best way to beat the markets is to know when NOT to play. When you should put your cash in countercyclical investments (like gold) or when to double down on high-risk, high-reward ventures.
Nothing can totally make up for a bad economy. But wise portfolio allocation can certainly take away the sting… and often even help you make a bit of money while everyone else is losing their shirts.
So today, we’re going to look at the four major warning signs of recession. Some are flashing red already… while others are calm for the moment.
Predicting recessions is notoriously difficult — if not downright impossible. Some of the smartest minds in business consistently fail. And those who get it “right” tend to be lucky, not smart. They usually can’t repeat their prognostication “skills.”
Still, your best bet is to know the warning signs — the Four Horsemen of the Economic Apocalypse.
Check out these measures — and save today’s article as a guide you can refer back to whenever you find yourself wondering what’s about to happen.
The First Horseman: GDP Growth
This might seem too obvious to include. After all, recessions and expansions are defined by GDP growth. When the economy contracts for two straight quarters, you’ve got a recession. Pretty straightforward, right?
Well, yes and no.
There are a few more things you should pay attention to here.
One is the trend. GDP growth can bounce around a good bit, but there is some correlation between how the economy performs between one quarter and the next.
So if you’ve got an economy that’s growing faster and faster over the past eight quarters, it’s unlikely it will suddenly fall off a cliff (short some outside shock).
Likewise, if you’ve got growth shrinking fairly consistently over two years, it’s more likely than not that trend will continue.
The other thing to look at is the actual raw GDP growth number.
If it’s over 4%, it’s really, really unlikely to take a nosedive — again, short some major external shock like a massive disaster or war.
But if it’s under 2%, you’re in the danger zone. It doesn’t take much to tip that downward — especially since revisions can sometimes move that number down in the future.
And if it’s under 1%, we could be in real trouble. We could already be in a recession and just not know it given the initial rough estimates GDP growth is based on.
Right now our GDP growth doesn’t have too much of a trend. If push came to shove, I’d call it slightly downward — but not so dramatically that we can conclude much.
And 2019 Q2 growth was exactly 2% — at least before later revisions and adjustments. Just on the fringe of worrying.
The Second Horseman: The Manufacturing Sector
The manufacturing sector isn’t as important as it once was…
While the actual amount of manufacturing has gone up since the 1990s, the sector employs fewer and fewer people (thanks, automation). Since other sectors have grown much faster, it makes up a smaller slice of the pie.
That said, more than one out of every 10 dollars made in the U.S. comes from manufacturing.
And those who work in manufacturing fan out into the rest of the economy with particular force — as most are working or middle class, most of what they make goes right back into the economy.
Think of it this way: 20 people making $50,000 each will spend most of that $50,000 over the course of a year.
One billionaire who earns an extra million will probably just put it in a bank or invest it in a company. They aren’t taking that million down to the grocery store.
Anyway, the important thing to watch here is the manufacturing index. Any number under 50 represents contraction — and a very worrying signal.
In November, the U.S. manufacturing index contracted for a fourth straight month.
We can consider this a flashing red signal — albeit one that doesn’t carry as much weight as it used to.
The Third Horseman: The Retail Sector
The U.S. is a consumer economy more than anything else today. And that’s most easily measured by looking at retail numbers.
Which is not to say that retail numbers are easy to parse.
Sales can be seasonal… they can be greatly affected by things like strikes (hello, GM!)… plus, fads, fashions and popularity can have outsized, unpredictable effects.
With all that said, retail performance has an almost-perfect correlation to GDP growth.
Bad news — retail growth has been relatively anemic in 2019 and actually shrank in October.
Good news — a lot of that dip was due to GM basically closing up shop for a month, along with a few other one-offs. Retail sales would be flat taking those into account.
Bad news — lots of retail watchers are worried about the upcoming holiday season. Since Thanksgiving came so late this year, there are fewer shopping days.
Good news — other retail watchers expect all the same amount of shopping to get done, just in a shorter time period. And a healthy holiday season can easily make up for weakness elsewhere in the year.
The long and the short of it is — we won’t really know the health of the retail sector until after the holiday shopping season ends. But the numbers suggest some weakness here, with expectations consistently moving downward.
Keep a close eye on this one.
The Fourth Horseman: The Hidden Metrics
You probably remember we saw an inverted bond yield earlier this year (short-term bonds paid higher interest rates than long-term ones).
The inversion has corrected itself, but that doesn’t necessarily mean we’re out of the woods…
It usually takes six–18 months after a bond yield inversion for us to see a recession — no matter what bond rates do in the interim.
Then there are freight and shipping numbers, which are great leading indicators of overall trade:
- The Cass Freight Index, for instance, shows North American freight movement. It also shows contraction in the second half of 2019 — which is very worrying
- The Baltic Dry Index is a great measure of overall world trade — and it fell off a cliff in September
- The Shanghai Containerized Freight Index is a wonderful measure of trade in China — and it’s performed horribly in 2019.
Lots of people have their favorite indexes to help map out the economic future. Pick your favorite — from those above or any of the other similar measures out there.
Right now the hidden metrics show a lot of weakness. You could probably cherry-pick some better ones… but it would take some contortion.
Bottom line: There are a lot of worrying signs that a recession is closer than we think. Indeed — we could already be in it, since it takes a while for the numbers to catch up to the facts on the ground.
However, your main takeaway should be this — prepare for choppy waters.
Even if we don’t have a recession, the economy isn’t about to go gangbusters either. Keep your ear to the ground — and get your portfolio ready for whatever may come.
Editor-in-chief, Unconventional Wealth
P.S. The best possible way to prepare for a recession or a sluggish economy? Owning precious metals — which always go up when economic worries grow. And the best place I know to get precious metals is through our partners at Hard Assets Alliance — find out why here.
Ryan Cole is the editor-in-chief of Unconventional Wealth. He’s been covering the alternative investment space for nearly a decade and writing about finance and investment for almost 20 years.
Ryan has walked the walk for years, living a very unconventional life. He’s led snowmobile tours through the mountains of Colorado, settled in Japan for five...