Inverted yield curve. China Outwits the US, again!

The US backtracked from the recent Trump “tariff tweets” due to be implemented on September 1.  Essentially, Trump admitted that U.S. consumers were bearing the brunt of the impact and decided to delay tariffs, recognizing the negative impact further tariffs would have on the U.S. economy. He has lacked the understanding of the effect of tariffs on his own people – ie it’s weakening the American consumer and the escalation of the trade war is making it worse.

This has caused the yields on two-year US notes to trade higher than 10-year treasuries – a predictor of past economic recessions.  Financial markets sold off stocks and commodities of all types.  The added attention to the fragile world economy did not help.

Comparisons to the last US recession have already begun.  But the yield curve began sporadically inverting in 2005 before the last recession in 2008 even though stock prices continued to rise for another couple of years before falling heavily in 2008 and 2009.  We note the 2008/09 fall wasn’t due to a recession but the GFC.

A recession historically begins an average of 22 months after the yield curve inversion begins.  Moreover, the start of a recession also doesn’t necessarily overlap exactly with a stock market crash.  Whilst its not a great sign for the US, its unlikely this is the end! It’s another example of short term (Western) thinking where analysts see a downturn and fear the worst – causing the market to drop substantially.  It is what we call reactive investing – it’s the same as its always been done. It’s great for Pythagoras as we can take advantage of these cycles.

Trump can’t survive politically if the U.S. economy slows down too much. For China there is little incentive to offer concessions of any significance. If that is true then the trade war could drag on indefinitely – or until a new President is installed who is more amenable to China.

For those who read our blog “Trade Wars – determining who is the real superpower” on August 6 on you will have read “China wants to destabilize the US, both as a country and economically.  China can play the US as they like, with their methodology being clear, slowly wear the US down.”

Viewed in this way: China is the cat playing with USA which is the mouse.  It will not devour it immediately.  The current situation means that the US will be allowed to regain ground, hence other parts of the world with it, until they overstep and then China will step in again.  China has predicted the US moves and controlled the game to date. China is still the biggest holder of US treasuries with a $1.1 trillion holding.  There are lots of moves to come but it is not in Chinas interest to kill the US but take advantage of their weaknesses for profit. 

While some have said today’s yield curve inversion is a sign that it’s time to sell stocks, it’s still as hard as ever for everyday investors to time the market profitably – without help.  That is where Pythagoras and its mathematical predictions of share price behaviour is a so valuable – buying ahead of a positive and selling ahead of a negative predicted  event. 

Our system utilises 130,000+ lines of mathematical programming to do all the research and complex analysis that no team of humans can. It took 10 years of ground-breaking research to perfect our market-leading mathematical algorithms.  Our recommendations are made without all the emotional baggage which causes individuals to make investment mistakes. 

Pythagoras deals with the market mathematically and takes advantage of the cycles resident in every stock and market.  Our returns have been terrific – in the past year almost double the equity market. 

We see many more steps to go in this war, but we believe the next one should see a return to increased value of stocks. 

If interested in knowing more please contact Michael Dee on 0419 726223 to discuss further.

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