An inverted treasury bond yield curve is the most accurate predictor of a recession. This curve has inverted before every major recession we’ve had in modern history.
The concept is based on the fact that investors demand higher payments for larger amounts of risk. The definition of an inverted yield curve on bonds is that investors demand higher interest rates on shorter term bonds then they are on longer term ones.
Normally, investors would demand higher payments for the longer time period involved in a long-term note. The difference between 2 year and 10 year treasury notes actually became 85 basis points or almost a full percentage point in early December.
Investors were demanding a higher interest rate for the shorter amount of time. This is because they expect more difficult times in the short term, than in the long term.
The inverted yield curve is at a point it hasn’t touched since 1981. This tells us that we face two distinct economic futures.
A Soft Landing
This is defined as unemployment increasing a little, with the economy not recessing. Currently inflation has softened but the job market remains high with employers continuing to add jobs.
Many are predicting that inflation will fall back to the Fed’s target of 2% next year with the jobs market remaining relatively strong. A soft landing would obviously be the better of the two outcomes.
A Full Recession
Others are predicting that the Fed will keep interest rates high until the accompanying job losses and economic distress is so bad that they’re forced to reverse course and again lower interest rates. No one wants a recession, but many consider it to be unavoidable.
I’ve always thought of our economy as an eight hundred pound gorilla. It takes a lot of force to get it moving in one direction and an even greater amount of force for it to reverse course.
One thing is certain. The inverted yield curve on treasury notes tell us that one way or another, inflation will certainly come back down. Whether the economy recesses or not is simply a matter of opinion.
Let me leave you with this.
The question becomes how can we prepare for either circumstance? A smart warrior plans for war, praying that it never comes.
Watch Your Numbers
Be a student of your numbers. If necessary, don’t be afraid to raise your prices. Maintaining your margins and doing everything possible to remain profitable is your main job.
Cash is King.
Everyone loses something in a recession. Period. End of story. Fagetabadit. Make sure that what you lose won’t radically alter the course of your life.
That being said, cash is king. Make sure you have enough cash on hand to handle any eventuality.
If we do go into a recession that’s long and deep, you’ll be glad you didn’t buy that new machine that maybe would have increased your efficiency. With lighter demand, you might not need it after all.
Be conservative. If you’re going to lose something, let it be some cash rather than your entire business, your health, or your sanity.
Think Like The People Around You
Whether its your employees, your suppliers, or your customers, their view of your world will always be different from your own. If we do go into a recession, you’re not going to get through it without employees, raw materials, or customers.
Make Your Cuts Early
If you need to cut staff, get to it. Waiting too long will only empty your bank account.
Entrepreneuring is a lonely and difficult job. Anyone who says that its easy is probably an employee.
We’ve had three tough years, and we might be going into another one. Gird your loins, dig a hole, and shoulder your weapon for an adversary we all pray will never come.
Be ready.
A smart warrior plans for war and prays that it never comes. And do so knowing that we’re right there with you.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Employee Retention Credits, M&A Due Diligence, Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
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