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Talking Points and Snippets from Commonwealth Club January 25, 2019 Forecast Event

3 Month Treasury Bill Secondary Market Rate FRED St Louis Fed

Forecasting: Because of the shutdown, we are flying much more blind than we would like to be. We are not getting the normal data flow. Thus there is more than the usual level of uncertainty. Given that:

  • I believe there is something like an 80 percent probability that Europe is now in a small recession.
  • The Chinese government continues to say that all is well.
  • But somehow six percent fewer cars were bought in China in late 2018 than in late 2017.
  • Over the past half century the reliable recession signal has been yield-curve inversion—since 1965 eight inversion signals: one false (1998), one near-recession (1966), and six recessions.
  • There have been no recessions not signaled by a yield-curve inversion.
  • The Federal Reserve currently plans are to invert the yield curve in June.
  • Neither Steve Moore nor I understand why the Fed thinks that this is a good thing to do.

In the last yield-curve inversion, in 2006, they were worried about an inflationary spiral breaking out because of rising oil prices—they should not have been worrying about it, but they were. In the yield-curve inversion before that, in 2000, they were worried about the dot-com bubble. There is nothing like either of those going on now.

Some people think the Federal Reserve is about to back off. Some people think that this time really is different—that the bond market is spooking at shadows this time. Give each of these a 25% chance of being right, and you have to say that there is a 50% chance the U.S. will be in recession in a year and a half. We hope the recession, if it comes, will be a small one. We hope we will, somehow, dodge the bullet and not have a recession.

But, at least as I see it, that is the forecast: a 50% chance of 1.5%-2.5% growth over the next year and a half, and a 50% chance of negative growth.

If you want a more precise forecast, my advice is to consult your Magic-8 Ball.

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