What Happens When War Meets Recession?

Executive Summary

  • The recent tanker attacks in the Gulf of Oman are both odd and murky
  • Assessing what happens next in and around the Strait of Hormuz
  • Recession watch!  Many more signs of weakening with which to contend
  • When the black swan(s) arrive the bubble(s) will burst
  • Getting the timing right is going to be tricky, of course

If you have not yet read Part 1: Waiting For The Black Swan, available free to all readers, please click here to read it first.

There are a huge number of warning signs that a recession is imminent, if not already here, and the price of oil is one of them (more on the others later).

Right now, with oil inventories climbing despite relatively low global oil output, oil is saying “economic weakness is here.”

Perhaps the biggest “sour note” in the ongoing stock bull parade is the dramatic inversion of the yield curve, which means shorter maturity government paper is yielding more than longer maturity paper.

For example, you can get a higher yield on 3-month paper than 5-year paper.    This key indicator has now been inverted for a full quarter, an historically accurate indicator of recession.

Another is the difference between 6-month and 3-month T-bills.  Again, outside of a recession, we’ve never seen a reading as low as it is right now.

The reason I track the possibility of a recession so closely is because I don’t think that the vast majority of people will be ready to consider alternatives to the status quo as long as everything ‘seems fine.’  Despite a worsening trade war, despite weakening global trade, despite the many geopolitical risks, US and other equity markets continue to rise and seem impervious to any and all bad news.

Which is why I don’t think this bubble ends with mom and pop retail investors catching on and ducking out.  It will ends when…

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