How Much Time do we have Before the Next Economic Crisis?

Not much time.

Since early July, the 30-year US Treasury Bond Price Index has plunged 8.3%. It’s now called “the rout” in longer-dated government bonds. One of the specters is rising inflation at a time of ultra-low yields.

What has become the number one predictor of a bear market in stocks over the past many decades? The US Treasury yield curve. It drives bank lending – which can strangle the economy. But this time, the risks are much higher, and the potential economic consequences steeper.

The yield curve depicts the yields of different maturities of Treasury securities. Normally, those with short maturities have very low yields, and those with longer maturities have higher yields.

Here’s Christine Hughes, Chief Investment Strategist at OtterWood Capital, with a look at the yield curve, trying to determine how much longer we have until the next economic crisis. Her conclusion: not very long:

So why is this economy not yet in a recession with data like this? Read…  What’s Really Different this Time: Business Investment Drops to Lowest September since 2010

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  62 comments for “How Much Time do we have Before the Next Economic Crisis?

  1. razz traffic
    Oct 29, 2016 at 10:21 am

    Nice interview! This gal’s got it figured out. Thanks for introducing her to me!

    • rich
      Oct 30, 2016 at 10:11 am

      Unless she’s only talking about Wall Street, the gal doesn’t have it figured out. Because, here on Main Street, we’ve got 25% of the country’s children on food stamps, 76% of Americans living from paycheck to paycheck, and 69% of Americans that don’t have the cash to buy a new set of tires for an SUV. We are also at or near peak numbers of males out of the U.S. workforce.

      So while the Wall Street ponzi world of assets may be heading for a downturn, Main Street America has yet to emerge from the downturn of 2008.

      • kitten lopez
        Oct 30, 2016 at 10:58 am

        thanks for saying this. i’m with you.

      • Tom Kauser
        Oct 30, 2016 at 11:44 am

        Emerging from 2008 means admitting ” the French stole 25 trillion from us and we didn’t get a replacement statue”?
        Better to let the rabble enjoy a free ride for a bit!
        Sell Mortimer!
        I have already took the liberty ….. Sir!

      • Fesky
        Nov 2, 2016 at 7:00 pm

        Yeah, 2018 seems like a bit of a stretch considering what is going on already plus presidential elections which are notorious for contributing to recessions.

      • NM Rancher
        Nov 4, 2016 at 12:00 pm

        Well said.

  2. Debravity
    Oct 29, 2016 at 11:10 am

    How much does peer to peer lending account for the liquidity and health of an economy, Wolfenstein (Halloween, right)? ;)

  3. Ptb
    Oct 29, 2016 at 11:22 am

    Makes a lot of sense. In both the timing and the graphical trend line. The USD is rising. Time to start selling assets and get into cash. We have about a year.
    QE and stimulus spending seems like the obvious reaction, but only after the corrections.

    • AeroFX
      Oct 31, 2016 at 6:48 am

      El-Arian beat most to that conclusion and course of action….

  4. OutLookingIn
    Oct 29, 2016 at 11:36 am

    I agree with analysis.

    The US 10 year Treasury note has risen to 1.847% as flows tend to abandon the long dated bonds and into shorter term instruments.

    The UK 10 year GILT has seen the same move now at 1.259% however, most see these as highly overvalued.

    We are now in the midst of a short term deflationary phase, that is preceding the impending QE4 which will be the ultimate cause of a short lived, catastrophic hyperinflation.

    It remains to be seen if this global monetary reset event, will pass with minimal macro politico/social upheaval, or end up with one or more of the main “player’s” upsetting the table. In that event – all bets are off.

  5. Big Duke
    Oct 29, 2016 at 11:41 am

    Nowadays it seems very popular for many financial pundits to sound the alarm for pending doom. So many these days……….where were they in 2008? How about 2000 or 1998 crashes? Why are they all sounding the alarm now? Now I don’t disagree there won’t be another financial crisis since there seems to be a big one about every 10 years e.g. 1988, 1998, 2008…….2018??? ……I don’t think I’ve ever seen this many say so much doom and gloom considering about 98% tend to be wrong most of the time.

    • VK
      Oct 29, 2016 at 12:59 pm

      The only guy who has been there consistently since prior to the noughties tech bubble is John Hussman.

    • Frederick
      Oct 29, 2016 at 1:46 pm

      Big Duke you left out 1992 New Englands economy was a disaster and I won the bid on 17 acres of prime Hamptons real estate at a bankruptcy auction for a pittance Its time to be conservative and go to cash no doubt

    • Dave
      Oct 29, 2016 at 8:04 pm

      Totally agree with you on this!

    • DataJunkie
      Oct 30, 2016 at 2:25 pm

      Previous downturns have been blips compared to global reset and the end of USD as reserve currency rejected by most world economies and the New Silk Road. The emergence of the NSR is also a complete upending of previous western hegemony as they will come forward with gold platforms, letters of trade and reset physical gold/silver prices away from phony ‘paper’ gold/silver. The global fiat system is in extreme jeopardy although the USD, ironically, may be the last fiat standing. In other words this next major move is a humdinger.

      • Oct 31, 2016 at 11:18 pm

        “Gold and the Global Monetary Reset”

        In my article Deflation in the Casino, I argued that the 1973 petrodollar replacement for the Bretton Woods agreement–making oil the basis for the $US– has run its course now that the diminished oil-export nation surplus liquidity is insufficient to provide liquidity to service the massive global debt. The loss of this increment of $US liquidity flow is crucial. The abandonment of the BW gold standard in 1971 marked the beginning of the end of the American century. The adoption of the petrodollar system and the emergence of industrial China after 150 years of western imperialist domination delayed the finale of the American century as China accumulated several trillion in $US denominated paper. The US dollar enjoyed a ¨dirty float¨: no nation could afford to operate without otherwise unredeemable $US reserves (Bernanke´s global savings glut?) that would allow them to transact international trade in that one reserve currency. In this casino the US was the house and no one could turn in their chips for anything but more of the same debauched chips.

        On October 1 the Chinese yuan became an IMF Special Drawing Rights currency. In spite of China´s economic and banking excesses, note that China has

        no external debt

        massive industrial capacity

        the most gold production and steadily increasing gold reserves

        a One Belt One Road colossal intercontinental infrastructure project

        a strategic military-industrial-raw material partner in Russia

        a new swift (international payments transfer) system: the CIPS, swap arrangements around the world

        new infrastructure development and foreign exchange emergency lending banks

        the sixth most used trading currency

        This could be China´s century. A monetary reset will upset all international geopolitical relations.

        The world monetary system needs a governor on the creation of money-as-debt because excessive money-as debt creation has debauched currencies. Gold, the traditional governor on the global monetary system, has been deemed to be an anachronism largely because it has been more than a generation since any currency was redeemable in gold. The major decision makers have been schooled in a fiat system and have no experience with any other system and no incentives to curb monetary excesses. It´s the only system they know. In hindsight, those countries that increase their physical gold reserves will be deemed to have made obvious choices in an environment ripe for a reset, but now look anachronistic.

        When will the reset occur and when will gold be reintegrated into the global monetary system? Not before nations begin steadily reducing the US dollar component of their national monetary reserves–now approximately 60%– well below 60% and not before the proportion of world trade conducted in the US dollar–now approximately 43%– falls significantly below 40% of the total amount of currencies used in trade. When these trends are irreversible, economic confidence in the current fiat system will erode because capital flows to where its owners deem it is safest. Loss of that confidence will trigger the reset.

    • Frederick
      Nov 5, 2016 at 12:57 am

      Duke perhaps because all the indicators are so much worse now yjan they were back then Just look at the national debt ,velocity of money or workforce participation Youd have to be deaf dumb and blind not to “get it” sorry

  6. walter map
    Oct 29, 2016 at 12:42 pm

    Not likely.

    Some analyses suggest it should have crashed a couple of years ago. But the present U.S. business cycle has some serious abnormalities and there are indications its economy has turned into a zombie.

    Some measures indicate the U.S. economy has been in recession since 2005, and barring a catastrophic event it may not actually crash. Instead it will continue sputtering along indefinitely in this low-grade recession so the banksters can simply bleed it.

    This is a different approach for them: historically they’ve cashed in on engineered bubble-bust cycles. But in some ways they’re still cleaning up the messes from the last crash, which was so serious it may have made them more risk-averse.

  7. Oct 29, 2016 at 12:55 pm

    So, Ms. Hughes is suggesting an inverted yield curve even as longer-dated maturities are blowing out?

    I can see the past few years’ yield chasers losing their shirts particularly on euro-denominated issues but not much chance for rising short term interest rates. Central banks cannot afford to ‘support’ higher rates — even if they could — b/c of the interest burden on insolvent governments.

  8. Cookie
    Oct 29, 2016 at 12:58 pm

    2018 is way too long. They should just crash it after the election.

  9. RD Blakeslee
    Oct 29, 2016 at 1:01 pm
  10. NY Geezer
    Oct 29, 2016 at 1:32 pm

    I do not believe one can use a long term yield curve chart to predict the next recession. Central Bank interventions have so changed the situation that predictions are useless unless one has a seat at their tables. But wouldn’t that be insider information?

    • polecat
      Oct 29, 2016 at 1:50 pm

      Uhh …You’d have to ask a CONgress perp. that question ….

      just sayin …… ‘:]

    • Tom Kauser
      Oct 30, 2016 at 11:53 am

      Trillion are out there in zirp and you muse about the long end of the curve!
      People can’t run and be dumb at the same time?
      Money is flowing into the bonds for safety and not yield! Certainly not front running QE4?

  11. Ed
    Oct 29, 2016 at 2:14 pm

    Subprime lending has experienced strong growth recently. Seems to be a leading indicator of trouble to come.

    • walter map
      Oct 29, 2016 at 4:35 pm

      It’s not what it could be. It takes time and a lot of irresponsible lending to gin up a decent bubble in a recession.

    • Tom Kauser
      Oct 30, 2016 at 11:55 am

      Everything is sub prime without treasuries as collateral!

  12. interesting
    Oct 29, 2016 at 3:39 pm

    Damn, this sucks. I’ve been in recession since Q3 2014 so that means i got two more years of this shit until everyone else catches up?

    I’ll be bankrupt before then.

    • Mick
      Oct 29, 2016 at 4:01 pm

      Yeah, this one is unlike all others. Using a chart of any indicator is useless.
      I liken this to a sinking ship where cargo is being thrown overboard as necessary to prevent submersion. Note how some people and even cities, states, are and have been in recession for years, while others are still doing fine.

      The CB’s planned this event from the beginning of their Ponzi scheme, and are bleeding it for every last drop before letting go of their con job.

      Buybacks are a prime example. That’s how you suck every dime of equity from a corporation and convert it into bonuses before letting the dried out husk collapse.

      Same deal with the national economies. One by one they are being emptied out and collapsing.

  13. Mick
    Oct 29, 2016 at 3:53 pm

    She says to sell assets like canadian real estate in late 2017. She’s already 3 months behind the curve. Sellers are panicking in vancouver, as yesterday’s sales data indicates, the average reduction was 10%

    That, on top of already discounting that’s been going on since the foreign buyers tax was introduced.

    Liquidity is only alive in one city, Toronto, and with the recent mortgage regulations now biting, I doubt that will be the case in a month.

    If you own canadian real estate in a major city, especially vancouver, you’re already down at least 10%, and possibly 20-30%

  14. Unitron
    Oct 29, 2016 at 4:18 pm

    Isn’t a better indicator the Yuan exchange rate? The weaker the Yuan, the closer the inevitable financial crisis that will spread from Asia to the rest of the world. Using that measure, the next crisis could be here by Monday.

    • Tom Kauser
      Oct 30, 2016 at 11:57 am

      Yes and YUP!

  15. MIke R.
    Oct 29, 2016 at 4:19 pm

    If Clinton gets elected, she already has stated she’ll do a huge fiscal stimulus (probably 1T or more); the usual suspects: bridges and roads.

    If Trump gets elected, his tax plan will be the stimulus.

    Either way, lots of debt will be poured into the economy and soon as most realize the gears are starting to seize up again.

    • walter map
      Oct 29, 2016 at 6:02 pm

      ” . . . stimulus . . .”

      Artificial fiscal stimulus isn’t actually necessary because the money is already out there with years of monetary stimulus. All that really needs to be done is to re-enable labor rights and implement disincentives to business for exploiting economically destructive dodges outside the U.S., like offshoring and labor arbitrage.

      It would also help to do things like removing the subsidies enjoyed by the oil companies, which would enable transition to sustainable energy. Start paring down the military, which has long been known as an economic drag. It doesn’t take much imagination because the targets have been well-known for decades. Hold down irresponsible lending to limit bubble effects.

      Just undo the causes of the current malaise and the economy should pick up organically.

      • walter map
        Oct 29, 2016 at 6:40 pm

        That said, I’ve been reminded in no uncertain terms that it is NOT my job to save humanity and establish a global civil order that is just, peaceful, properous, sustainable, and enlightened, because I have other employment and am absolutely constrained to honor the prior commitment.

    • Tom Kauser
      Oct 30, 2016 at 11:58 am

      Trump will shatter William Jennings Bryant record!

      • walter map
        Oct 30, 2016 at 6:13 pm

        It’s said Americans get the government they deserve. That should terrify you.

  16. NotSoSure
    Oct 29, 2016 at 5:17 pm

    Hm, don’t know. After the swoon earlier this year, Christine also predicted another swoon quickly after, but nah, everything turned out fine. The problem with a lot of these analyses, including gold bugs, etc, is that they’ve consistently underestimated the muppets. Muppets will wait until the entire edifice has already tumbled down before blaming everything in TPTB, but in the meanwhile, they’ll do anything to maintain the “current” way of life.

    I guess it all depends on what the term “crisis” means. For most people in the 3rd world, everyday is probably a crisis. In Murica, not getting your burrito properly can also be construed as a crisis. Heck coffee prices going down from 5 to 4 dollars in SF is approximating a crash.

    I still think Dow 30K or perhaps 300K is still coming.

    • walter map
      Oct 29, 2016 at 6:32 pm

      “I still think Dow 30K or perhaps 300K is still coming.”

      Can’t happen in a zombie economy. Equities are only somewhat below the maximum possible under present conditions. Which isn’t to say that conditions can’t change.

      Besides, world war is coming, and the resulting destruction is bound to put a damper on things. The U.S. is gearing up for it and already has half a dozen starter wars going. Russia has been calling for calmer heads, but that will be unavailing because it’s what the FIC and MIC want to complete their global corporate totalitarianism. It’s not exactly a secret.

      A global economic crash will likely be one result, but with all the collateral problems you probably won’t pay it much attention.

      • NotSoSure
        Oct 29, 2016 at 11:15 pm

        Muricans at the top have this amazing idea: “We became the biggest power on earth after WW2, therefore to make Murica great again, we’ll need WW3.” What can go wrong with that? Seriously. All that rebuilding and rebirthing will surely make Murica’s GDP the envy of whatever’s left of the world.

        Of course the Dow can go to whatever value. The Fed has not started buying equities outright yet. Plus, the powers that be can always throw a ton of bright ideas such as Public Private Partnership to build infrastructure, etc. For example: self driving cars and/or EV cars will need supporting infrastructure to make things really work.

      • nick kelly
        Oct 30, 2016 at 2:36 pm

        20,000 nukes would put a damper on the economy alright.
        Or do you mean there’ll be a major war let alone a ‘world war’ that doesn’t use available weapons?
        That would be a first.

  17. Oct 30, 2016 at 2:17 am

    It’ll be about a year most likely. October/November 2017.

    At the end of the day it’s a political decision to ‘collapse’ the Western economies and that can’t happen before the upcoming Dutch, French and in particular German Elections (due in September 2017).

    Once the German Election is out of the way, them the next major election is the Russian Presidential Election in March/April 2018.

    There is simply no better time to initiate the collapse in this window after the German Elections and prior to the Russian Elections.

    Keep up appearances in Germany and then undermine Putin’s reelection campaign in Russia 6 months later.

    If that doesn’t work to get rid of Putin them we will have serious escalation in 2018 on the road to war – also a handy re-election gambit for the President in 2018 Mid-Terms to distract from the economic crisis.

    To avert the worst scenario the voters of the USA, Netherlands & France need to elect at least 2 of Trump, Wilders & Le Pen.

    If not, there will be little hope to avoid a global economic crisis & World War III.

    • Mick
      Oct 30, 2016 at 4:16 pm

      The German and Dutch elections must happen before the collapse.

      I’m still laughing…

  18. Nicko
    Oct 30, 2016 at 5:46 am

    Immanent Clinton victory will juice stocks. Easy street baby!

  19. Petunia
    Oct 30, 2016 at 8:13 am

    What the hell does the red line on her chart represent? It seems like an arbitrary line drawn for no particular reason. I can draw red lines on charts too.

    • kitten lopez
      Oct 30, 2016 at 11:07 am

      PETUNIA!!!! you’re AMAZING. no flies on you, girl. i’m laughing because she kinda did skate over how she came to that arbitrary point and i shrugged because i’m just an art chick… and charts, shmarts… i don’t know how such business folks are so chill as things are already snapping, dissolving, cracking…

      • barefoot charley
        Oct 30, 2016 at 1:57 pm

        The best (in fact, only) explanation I’ve got for the power of drawing lines is that everyone draws the lines. They represent past patterns of price support and resistance, and since everyone drew the same lines and anticipates the same results of the price bouncing off the red line, they invest accordingly and, presto! the lines have predictive power.

        Petunia, for easy examples of how they’re used, go to Zero Hedge a few minutes after the NYSE market close, and you’ll see daily analyses of price movements using red lines. You’ll see that when they don’t work at all, that’s information too! Me, I prefer chicken entrails.

        • walter map
          Oct 31, 2016 at 12:29 pm

          “I prefer chicken entrails.”

          Galline haruspication. Dart boards are less messy, unless you have spectatators and a bad aim, do not require an account with a butcher, require less specialized reading skills, and are easier to corroborate with random-number generators.

          Our high-tech contemporaries naturally go in for logarithmancy, which rates right up there with dowsing rods. Today, incidentally, is traditional for dririmancy.

  20. Tom Kauser
    Oct 30, 2016 at 11:34 am

    The good old interest rate zombies going ng to eat your brain!
    Its a double wammy.
    Fed is behind the curve in interest rates( must raise faster than quarter point) and pruning down of the 5 billion dollar fed balance sheet?
    Any sign fed is going to stop rolling over
    Maturities or having to go half or full points to catch up raising interest rates would do it?
    It will be a crash in the systems mechanics and not from lack of liquidity or effort!
    Skyrocketing LIBOR rates are mechanics and not lack of liquidity?

    • micromacroman
      Nov 1, 2016 at 8:03 pm

      Had to read through a lot of comments to finally see this one. Yes, Trump wins, fed raises interest rates, Christinas red line goes straight down, just like all the times before. Their will be no QE4, just an old fashioned recession, the fed will NOT lower interest rates. We will finally have the economic cleansing that has been 10yrs overdue, bank runs, defaults, maybe a bail out or two. The return on Glass-Steagall. It will all start in 6mos (2017). Through China into recession, as well as the rest of the world. In America it will be all over in less than 18mos, end of 2018. Micro-Macroman.

  21. william
    Oct 30, 2016 at 12:49 pm

    A mild recession will come. The U.S. doesn’t have any bubbles like before, at least on Main Street (yes, derivatives, etc, are huge, but this is just Wall Street paper). Home building is still way down from peak. Tech IPOs and VC fundings are below peak. Real estate is only above peak in a few coastal cities. But new peaks in places like Seattle still have reasonable price-to-rent ratios where all-cash investors can step in during periods of softness. Labor-wise, over 10,000 boomers hit retirement age each day and this number is growing, and will grow to end of this decade. The new bubbles in auto finance and student loans may soften but not go away. Plus, the new minimum wage laws will be inflationary helping to fund the rent, car, student loan bubbles, as well.

    • nick kelly
      Oct 30, 2016 at 2:40 pm

      Will the Fed lower interest rates as in all previous recessions. If so what to?

      • william
        Oct 30, 2016 at 3:25 pm

        ‘Lowering rates’ has different meanings. So, yes and no.

    • walter map
      Oct 31, 2016 at 12:34 pm

      “A mild recession will come.”

      And linger on and on. No prediction needed, since SGS clearly shows the U.S. economy has been in a ‘mild recession’ for over ten years.

  22. economicminor
    Oct 30, 2016 at 1:04 pm

    A couple of points.

    1/ when looking at the chart presented all other times were a sharp drop off. This time there is a rather long downward slope (due to QE). Couldn’t this at any time revert to the earlier pattern and just drop rapidly?

    2/ there has never been this much debt/leverage in aggregate. I haven’t seen a huge rise in the default rates yet but that could also be hidden by the extremely low interest rates charged to prime borrowers.

    Lots of writing about what may happen right after the election but it would seem to me that we need some other stresser that starts defaults rising to really kick this deflationary cycle in gear.

  23. Tod Gordon
    Oct 30, 2016 at 5:11 pm

    The CPI is now as fake as a $7 bill, muted by decades of hedonic adjustments. The GDP is adjusted by an even more mild measure of inflation than the fake CPI. The GDP contains other ridiculous adjustments, such as double counting. In reality, the GDP has been negative since 2000, with the exception of part of 2004.

  24. chris Hauser
    Oct 30, 2016 at 9:39 pm

    it’s hard to make a good living in a lot of places.

    imagine ketchup as a luxury.

    i hope it doesn’t come to that, then there’ll be a revolution.

    • micromacroman
      Nov 1, 2016 at 8:05 pm

      Socialism, Venezuala, USSR, Eastern Europe, European Union ? Amerika ?

  25. bill stevens
    Oct 30, 2016 at 11:49 pm

    The speed at which the next economic collapse will happen will not occur at a linear rate as previous crashes have done it will occur at an exponential rate due to $500 trillion in interest rate derivatives. Meaning, the rate at which the economy crashes will double ever second. It won’t take a another year for it to happen. It might only take 24 hrs.

    • david
      Oct 31, 2016 at 1:07 am

      One bank goes pfffttttt and I’m grabbing everything I can get my hands on.

  26. johnnygeneric
    Nov 5, 2016 at 11:15 am

    Wolf. The drop in 2018 is the “shot across the bow”. I figured that there would be a QE4 at that low. But then the market will head to new dizzying heights. And…that is it. The market will drop and nothing will save it as the SPX hits 1000 and lower.

  27. rob c.
    Nov 7, 2016 at 2:28 am

    The next crash will happen when the Nasdaq drops 200 points in one day. Anyone that says they know what day that will be is basically lying.

Comments are closed.