The last few weeks marked a turning point in the global economy. It’s more than the trade war. A sense of vulnerability is replacing the previous confidence—and with good reason. We are vulnerable, and we’ll be lucky to get through the 2020s without major damage. Let’s talk about the risks facing us in the next year or so and the economic environment in which we will face those risks.

Supply Shocks Ahead

In a recent Project Syndicate piece, NYU professor and economist Nouriel Roubini outlined three potential shocks, any one of which could trigger a recession:

• The US-China trade and currency war

• A slower-brewing US-China technology cold war (which could have much larger long-term implications)

• Tension with Iran that could threaten Middle East oil exports

The first of those seems to be getting worse. The second is getting no better. I consider the third one unlikely. In any case, unlike 2008, which was primarily a demand shock, these threaten the supply of various goods. They would reduce output and thus raise prices for raw materials, intermediate goods, and/or finished consumer products. Roubini thinks the effect would be stagflationary, similar to the 1970s….CLICK for complete article

The spread between 3m and 10Y yields has been inverted since mid-May and reached its most inverted since April 2007 this morning…and here is Bloomberg showing how the yield curve inverted in 1989, in 2000 and in 2006, with recessions prompting starting in 1990, 2001 and 2008. This time won’t be different.

Critically, as Jim Grant noted recently, the spread between the 10-year and three-month yields is an important indicator, James Bianco, president and eponym of Bianco Research LLC notes today. On six occasions over the past 50 years when the three-month yield exceeded that of the 10-year, economic recession invariably followed, commencing an average of 311 days after the initial signal….CLICK for complete article