Are We Setting Up For a Major Recession and a Major Crash?

Since Donald Trump’s victory on election night we have seen the worst bond crash in 15 years.  Global bond investors have seen trillions of dollars of wealth wiped out since November 8th, and analysts are warning of another tough week ahead.  The general consensus in the investing community is that a Trump administration will mean much higher inflation, and as a result investors are already starting to demand higher interest rates.  Unfortunately for all of us, history has shown that higher interest rates always cause an economic slowdown.  And this makes perfect sense, because economic activity naturally slows down when it becomes more expensive to borrow money.  The Obama administration had already set up the next president for a major recession anyway, but now this bond crash threatens to bring it on sooner rather than later.

For those that are not familiar with the bond market, when yields go up bond prices go down.  And when bond prices go down, that is bad news for economic growth.

So we generally don’t want yields to go up.

Unfortunately, yields have been absolutely soaring over the past couple of weeks, and the yield on 10 year Treasury notes has now jumped “one full percentage point since July”

The 10-year Treasury yield jumped to 2.36% in late trading on Friday, the highest since December 2015, up 66 basis point since the election, and up one full percentage point since July!

The 10-year yield is at a critical juncture. In terms of reality, the first thing that might happen is a rate increase by the Fed in December, after a year of flip-flopping. A slew of post-election pronouncements by Fed heads – including Yellen’s “relatively soon” – have pushed the odds of a rate hike to 98%.

As I noted the other day, so many things in our financial system are tied to yields on U.S. Treasury notes.  Just look at what is happening to mortgages.  As Wolf Richter has noted, the average rate on 30 year mortgages is shooting into the stratosphere…

The carnage in bonds has consequences. The average interest rate of the a conforming 30-year fixed mortgage as of Friday was quotedat 4.125% for top credit scores. That’s up about 0.5 percentage point from just before the election, according to Mortgage News Daily. It put the month “on a short list of 4 worst months in more than a decade.”

If mortgage rates continue to shoot higher, there will be another housing crash.

Rates on auto loans, credit cards and student loans will also be affected.  Throughout our economic system it will become much more costly to borrow money, and that will inevitably slow the overall economy down.

Why bond investors are so on edge these days is because of statements such as this one from Steve Bannon

In a nascent administration that seems, at best, random in its beliefs, Bannon can seem to be not just a focused voice, but almost a messianic one:

“Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement,” he says. “It’s everything related to jobs. The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement.”

Steve Bannon is going to be one of the most influential voices in the new Trump administration, and he is absolutely determined to get this “trillion dollar infrastructure plan” through Congress.

And that is going to mean a lot more borrowing and a lot more spending for a government that is already on pace to add 2.4 trillion dollars to the national debt this fiscal year.

Sadly, all of this comes at a time when the U.S. economy is already starting to show significant signs of slowing down.  It is being projected that we will see a sixth straight decline in year-over-year earnings for the S&P 500, and industrial production has now contracted for 14 months in a row.

The truth is that the economy has been barely treading water for quite some time now, and it isn’t going to take much to push us over the edge.  The following comes from Lance Roberts

With an economy running at below 2%, consumers already heavily indebted, wage growth weak for the bulk of American’s, there is not a lot of wiggle room for policy mistakes.

Combine weak economics with higher interest rates, which negatively impacts consumption, and a stronger dollar, which weighs on exports, and you have a real potential of a recession occurring sooner rather than later.

Yes, the stock market soared immediately following Trump’s election, but it wasn’t because economic conditions actually improved.

If you look at history, a stock market crash almost always follows a major bond crash.  So if bond prices keep declining rapidly that is going to be a very ominous sign for stock traders.

And history has also shown us that no bull market can survive a major recession.  If the economy suffers a major downturn early in the Trump administration, it is inevitable that stock prices will follow.

The waning days of the Obama administration have set us up perfectly for higher interest rates, a major recession and a giant stock market crash.

Of course any problems that occur after January 20th, 2017 will be blamed on Trump, but the truth is that Obama will be far more responsible for what happens than Trump will be.

Right now so many people have been lulled into a sense of complacency because Donald Trump won the election.

That is an enormous mistake.

A shaking has already begun in the financial world, and this shaking could easily become an avalanche.

Now is not a time to party.  Rather, it is time to batten down the hatches and to prepare for very rough seas ahead.

All of the things that so many experts warned were coming may have been delayed slightly, but without a doubt they are still on the way.

So get prepared while you still can, because time is running out.

Free "dummies guide" to trading options

Did you know trading options can actually be safer and more profitable than buying and selling stocks? Video and plain English training guide reveals how to get started tonight. 100% free.

Download now.

You May Also Like

About the Author: The Economic Collapse Blog

  • JohnDille

    YOU ARE ABSOLUTELY RIGHT… ALL YOU RIGHT WINGERS CAN DO IS TO SPEW LIES AND DISTORTIONS AND STEER MANURE… AND WHINE WHINE WHINE!!! ENDLESSLY!!!

  • JohnDille

    I AM A DATA WONK… I WORK WITH DATA FROM PROFESSIONAL SOURCES… CORPORATIONS… GOVERNMENTS AND GOVERNMENT AGENCIES FROM ALL OVER THE WORLD… PUBLICA AND PRIVATE PROFESSIONALS WHO UNDERSTAND HOW TO COLLECT AND COLLATE AND ANALYZE DATA!!! YOU, ON THE OTHER HAND… ARE JUST ANOTHER BRAIN WASHED FOX NEWS ADDICT!!!! JUST LIKE TENS OF MILLIONS OF OTHER RIGHT WING REPUBLICANS!!! NO WONDER YOU ARE SO STUPID!!!

  • proudamerican

    blah blah blah whine whine whine. no wait BLAH BLAH BLAH WHINE WHINE WHINE.

  • proudamerican

    you are a propaganda wonk. you listen to the propaganda put out by the communist democraps and believe it. you can’t have a very hi IQ which makes you a useful idiot.

  • JohnDille

    I AM A DATA WONK… I WORK WITH ACTUAL HARD FACTS ON A DAILY BASIS!!! HERE IS A FACT THAT YOU MAY FIND USEFUL…. YOU ARE A TOTAL IDIOT!!! NOW GO BOAST ABOUT THAT TO YOUR RIGHT WINGER FRIENDS… TO THEM, BEING AN IDIOT IS A HUGE IMPROVEMENT ON WHAT THEY WERE BEFORE THEY GOT THEIR BRAINS WASHED BY THEIR RICH REPUBLICAN MASTERS!!!

  • JohnDille

    DONALD TRUMP RAN ON A PLATFORM OF MAKING DONALD TRUMP EVEN RICHER THAN HE ALREADY IS!!! PERIOD!!! AND NOW… ALL OF THE ELITE YES MEN AND SYNCOPHANTS AND WHITE SUPREMACISTS… IN OTHER WORDS… THE MODERN REPUBLICAN PARTY… ARE RUNNING TO KISS HIS REAR END… IN THE HOPE THAT HE WILL MAKE THEM RICH, AS WELL!!! YOU BETTER HURRY AND GET YOUR LIPS ON TRUMPS RUMP, OR YOU WILL MISS OUT ON THE CRUMBS AND PEANUTS THAT TRUMP WILL SHOWER ON ALL OF HIS BRAINLESS SUPPORTERS!!! ENJOY YOUR BIRD FOOD… BECAUSE THAT IS ALL THAT YOU ARE GOING TO GET OUT OF A DONALD TRUMP ADMINISTRATION!!! THAT AND LOTS OF REALLY SERIOUS PROBLEMS… BUT YOU IDIOTS CAN BLAME THOSE PROBLEMS ON OBAMA, OF COURSE… EVEN THOUGH THEY WILL EVOLVE LONG AFTER HE LEAVES OFFICE!!!

  • proudamerican

    where have you been the last year, in a crack induced coma? Trump ran on helping the working man by bring back jobs and kicking out the illegals keeping wages low. That is the exact opposite of what odumbo and communists are all about. democraps want everybody poor, except for the party elites and their wall street banker butt buddies.

  • proudamerican

    you would not know a fact if it bit you on the a$$. You certainly don’t live in the real world. You are so screwed up that you think the democrap/communist cares about you useful idiots.

  • JohnDille

    STATING ACTUAL FACTS ABOUT HOW CROOKED AND CORRUPT AND ARROGANT REPUBLICANS ARE IS NOT WHINING! SNYDER MAKES UP GARBAGE AND CONSTANTLY WHINES. I STATE FACTS OR OPINIONS BASED ON FACTS… AND THAT IS A TOTALLY DIFFERENT THING!!! WHICH YOU WOULD KNOW IF YOU LIVED OUT HERE IN THE REAL WORLD!!! GO STARE AT YOUR MIRROR SOME MORE, AND KEEP TELLING YOURSELF HOW WONDERFUL YOU ARE… YOUR HERO WILL SOON BE THE PRESIDENT OF THE UNITED STATES, AND THEN YOU CAN WASTE A LOT OF TIME MAKING EXCUSES FOR HIS HORRENDOUS BLUNDERS AND HIS DELIBERATE ACTS OF BRAZEN TYRANNY!!! AND SNYDER CAN WHINE ABOUT HOW OBAMA MADE THINGS TOUGH FOR TRUMP AND HIS WRECKING CREW!!!

  • Joe Cabot

    And your constant whining about republicans differs how?

  • JohnDille

    MOST LIKELY, TRUMP WILL BE VERY VERY GOOD FOR THE RICH!!! BUT EVERYONE ELSE SHOULD EXPECT TO GET SCREWED OVER… BIG TIME!!! TRUMP IS A CON ARTIST AND TOTAL FRAUD… AND REPUBLICANS ARE BIG FANS OF CON ARTISTS AND CROOKS AND THIEVES AND FRAUDS… AS LONG AS THEY KISS UP TO RICH REPUBLICANS.. OF COURSE!!! BUT TRUMP WILL NOT TOADY UP TO THE RICH… EXCEPT WHEN HE CAN SCAM THEM BY DOING SO… SO THE REPUBLICAN ELITE… WHICH IS ALREADY WARY OF HIM… WILL LIKELY END UP BEING TRUMPS MOST BITTER AND VICIOUS ENEMIES!!! WE DEMOCRATS COULD END UP LOVING TRUMP… BECAUSE HE WILL MOST LIKELY SCREW OVER RICH REPUBLICANS EVEN MORE THAN HE SCREWS OVER US ORDINARY FOLKS!!! AND THAT WOULD BE HILARIOUS!!!

  • JohnDille

    WHINE, WHINE, WHINE… CAN’T THIS SNYDER FELLOW EVER DO ANYTHING BUT WHINE??? OBVIOUSLY NOT… AFTER ALL HE IS A RIGHT WINGER… AND THATS ALL RIGHT WINGERS CAN EVER DO… IS TO WHINE WHINE WHINE… AND BLAME OBAMA AND DEMOCRATS FOR PROBLEMS CAUSED BY REPUBLICANS!!! NOTICE HOW HE BASHES TRUMPS BIG PLANS… BUT QUIETLY BLAMES OBAMA FOR ITS INEVITABLE FAILURE??? TRUMP AND HIS DEMOCRAT STYLE POLICIES COULD BE THE BEST THING TO HAPPEN TO THE USA SINCE THE DAYS OF THE NEW DEAL AND THE GREAT SOCIETY…. ASSUMING THAT TRUMPS SUPPORT FOR WHITE SUPREMACISTS WAS ALL JUST FOR SHOW… TO GET STUPID WHITE REPUBLICANS TO VOTE FOR HIM, OF COURSE!!! BUT… TRUMP’S BIG PLANS COULD BE VERY PAINFUL FOR RICH REPUBLICANS… AND WE CAN EXPECT SNYDER TO CONTINUE TO WHINE, WHINE, WHINE… NO MATTER HOW THINGS TURN OUT!!!

  • Eileen

    This is a good warning. I don’t think the market has finished doing price discovery. Some pundits are saying that the price has already been built into – however, other than the two weeks before the election, I don’t recall a price discovery phase. There are rumors abound (not that i believe them) that PE Trump’s choice for Commerce is a former successful commodities trader (Crude, Nat Gas and Gold). Will be interested in seeing where this goes.