For the first edition of the Paradise Lost Financial substack, I’m throwing [economic] spaghetti at the wall to see what sticks because I’ve gotta start somewhere.
Recession in the US (as defined by 2 consecutive quarters with negative GDP growth) appears to be on the horizon, and the possibility of large-scale kinetic warfare with multiple countries perhaps equally so.
Just a couple of weeks ago, it was Federal Reserve’s stated plans to hike the Federal Funds rate that was all the buzz in the financial markets. Incredible how quickly the winds can shift, isn’t it?
To go along with that, oil prices reached $137 per barrel this past Sunday night, which is almost double where prices were two months ago back in January (last time oil was above $130 per barrel was back in July of 2008).
As the “master resource”, oil price shocks, coupled with supply disruptions can cause “one in a thousand year floods” as we are currently seeing with commodity prices (some are up as much as 40%):
Chart Source: Maudin Economics
Not seen on the chart above include other materials such as palladium, which just hit an all-time high in US dollars, gold which has been hitting new all-time-highs in many currencies outside of the US
Before we go much further, I think it’s worth highlighting some of the structural dynamics at play in terms of US policy actions:
US policymakers refuse to allow for domestic oil production
At the same time, the Biden administration is reaching out to countries such as Venezuela and Iran requesting foreign oil imports
The US continues to import Russian oil, and excluded energy from the economic sanctions against Russia, effectively funding both sides of the Russia-Ukriane conflict
Those are recent developments and more relevant in my opinion than previous actions by policymakers to cancel domestic pipelines and other US oil and related infrastructure projects, but the consequences of those decisions are also worth pondering.
Moving on, if history can be a lesson (as I personally believe it must be in order for individuals and society at large to evolve and grow), oil price shocks like this are quite often a leading indicator of a potential recession:
Flattening Yield Curve
Even before the Russia-Ukraine war, the 10-year and 2-year treasury yield spread has been in steady decline for months, something many investors and analysts have been watching closely (thank heaven I have had the privilege of learning from individuals much more knowledgeable and intelligent than I).
Interesting note - the 10-Y/2-Y yield curve historically flattens and/or ultimately inverts (goes negative) after the Fed raises interest rates. This time, they haven’t even raised rates yet and there is hot warfare/supply disruptions/moderate inflation/near 0% interest rates already/$30 Trillion in debt and over $100T in unfunded liabilities (such as medicare/medicaid). The Fed will for the first time in history be trying to raise rates into such a fragile economic organism (they have a poor track record of blowing bubbles/pulling levers until something breaks… even when the economy has been robust and much healthier).
Here is a chart as of market close today showing that the difference in yield between a 10-year treasury and a 2-year treasury is just 0.23% (or 23 basis points or “bps” as they say in economics):
Chart Source: Ycharts
The reason this is historically significant is because nearly every economic recession in the US has been predicted approximately 6 to 12-months after the 10-year/2-year spread turns negative.
It’s a bizarre time to be living through these events, especially considering the Federal Reserve (as of right now at least) still plans to hike the Federal Funds rate in hopes of taming inflation, and in my opinion to give themselves the slightest credibility to those watching that they follow through on what they say they will. That credibility has also been tarnished after repeatedly hearing that inflation would be “transitory” for over a year until Jerome Powell finally retired that scenario much more recently (as CPI headline inflation hit 7.5%, the highest in 40 years).
We’ve recently surpassed $30 trillion in national debt here in the US, and the government debt-to-GDP ratio is over 130%… something that does not spell good news (again) when looking at history. To illustrate this point, a study by Hirschman Capital has shown that since the year 1800, 51 out of 52 countries that had debt-to-GDP ratios of over 130% have defaulted via currency debasement (high inflation), outright default, restructuring, or a mixture thereof.
But I don’t believe it’s all doom and gloom, because in my humble opinion it is often generational crises and the exposing of weak, corrupt, or simply incompetent authorities that results in the masses waking up and demanding (or otherwise forcing) a change for an improved system moving forward.
As a student of history, economics, and finance I also fear the false promises of socialism and misguided, well-intentioned citizens may also fall for a new cast of clowns running the show and promising handouts. As such, I intend on continuing to share my research and thoughts in hopes of starting a dialogue with them and fellow citizens who may also disagree with me on any number of economic, financial or political topics.
On that note, if you enjoyed this I ask that you consider sharing with friends, family or colleagues and feel free to write me directly at paradiselostfinancial@gmail.com if you feel so inclined - I will take the time to read and reply to any notes from readers as soon as I’m able to.
Until next time,
Paradise Lost Financial
Twitter: https://twitter.com/riskytatertots
Archived Podcast Episodes: https://anchor.fm/paradiselostfinancial
Sources/Links:
https://www.bloomberg.com/news/articles/2022-03-04/history-suggests-oil-shock-raises-probability-of-u-s-recession
https://www.msn.com/en-us/money/markets/2-and-10-year-treasury-yields-flash-warning-as-reaction-to-ukraine-crisis-deepens/ar-AAUJqru
https://ycharts.com/indicators/10_2_year_treasury_yield_spread
https://www.mauldineconomics.com/frontlinethoughts/change-squared
Thank you FC, Regards: R2006