Recession becomes more likely now

I bet not many people took it seriously over what I was saying early this year that a recession could occur within 2 years in the US. Indeed who should believe me? After all I’m not an economist and knowing very little about any fancy economic theories. But I know a little about the markets with various leading indicators that could help me “foresee” what may be coming months ahead. It is interesting to note that the market often seems very irregular and chaotic over short term, pretty much driven by the extremely volatile and daily-changing emotions of all the traders involved, it is actually a very reliable and great forecaster over a longer term period. As presented in that blog, the market is forecasting a possible recession in the near future. Now this view appears to become more of a front page topic in the financial circle. Here is the headline on July 6 in Fortune: Deutsche Bank Says the US Is Likely Headed for a Recession.  According to the DB analyst, “the US has a 60% of chance entering a recession in the next 12 months, the highest probability since the Great Recession.” What a coincidence! I’m even thinking this guy may be reading my blogs and simply copying my idea (Haha…..). Now seriously, the financial world has become more fragile following the Brexit and the downside risk becomes increasingly high, although on the surface the US market seems very resilient and is poised to break out to its all time high (for S&P 500). I don’t mean it is not possible but I’d be very cautious to chase high at this level. To give you 3 more indicators suggesting the equity market may likely be heading much lower in the months ahead:

• The 10 year Treasury yield has reached all time low below 1.4%. This is really not a good sign as it strongly indicates major investors are really scared about the near future and want to hide for safety
• While the interest rates become increasingly low, the US dollar becomes stronger. This is counter intuitive as usually US$ should be weaker with lower rates. It again suggests people are running into the safe heaven
• Gold goes up together with stronger US$. Again a counter intuitive move but further suggesting safety is the leading place for major market participants

 

These 3 indicators appearing at the same time are not a good sign for the equity market and are likely also signaling some sizable downside move is approaching.  This is not a time to be hero. I’m very cautious in handling my own investment and trying to use a holistic approach to manage the potential risks:

• For my 401K money where not many choices are available, I simply move 90% of the money into the Treasury/bond funds or money market funds. The safety is more important for me at the moment.
• Outside my retirement accounts, I hold a lot of precious metal positions as I believe gold/silver has started its next bull run. They will also be one of my major hedges against the market downside risk. Please note, while I’m super bullish about gold and silver for years from the long-term perspective, I’m very cautious about its near term euphoria. It is not the time to chase up. I still believe a sizable correction is in the cards in this sector.
• Over years, I have gradually established a portfolio of quality dividend stocks for the long term dividend reinvestment strategy (DRIP). From time to time, I’m talking about such stocks here as well. I have no worry at all about the fluctuations of such stock prices as the lower prices they are, the better for me eventually in terms of my long-term wealth building. These are the stocks with which I can sleep well at night. However, I do some technical trading on them using covered calls (for overbought) or naked puts (for oversold) when the technical setup is appropriate. This has become an important short term income source for me to speed up my process of building wealth via DRIP.
• I do have quite a few speculative positions betting for some sizable moves from them. But I tend not to hold them outright. Rather I’m trying to use options to hedge as much as possible in case the market tanks or they move in the opposite directions.
• Last but not least, when the market seems very comfortable and complacent with the volatility index near its all time low, buying some inverse funds to hedge for your overall portfolio is not a bad idea. Here you can find more detailed information about such ETFs.

 

I hope this blog can bring your serious attention to the potential marekt risk and help you do something to protect based on your own situation. Regardless how you look, it is not a safe world anymore. Financially the world is becoming increasingly challenging moving forward. You are warned here!!