The Inverted Yield Curve And A Recession Could Be Extremely Positive

With the 2-year yield higher than the 10-year yield, the yield curve has officially inverted as of 3Q2019 and now again in 1Q2020 due to the coronavirus pandemic. History has shown us there's a high chance of a recession within the next 6-18 months.

In fact, data now shows the U.S. did go into a recession in February 2020. Once again, the yield curve was a prescient economic indicator!

To parry a recession, the only thing the Fed can do is to cut rates aggressively to entice consumers and investors to borrow and get the yield curve closer to normal. Even then, perhaps it's too late. The Fed did an emergency rate cut in March 2020 to 1.25% – 1.5%, but the 10-year bond yield is now around 0.5%. Therefore, the Fed still has a long ways to cut!

When short term interest rates are much higher than long term interest rates, consumers tend to hoard cash and not invest. Why should they when the future looks so cloudy and short-term rates are paying higher than inflation?

Lenders, on the other hand, get squeezed because they have to pay higher short-term deposit rates while earning a lower interest rate on their lending portfolio. As a result, credit standards go up, and even less borrowing and investing occur.

When the velocity of money slows, investment growth, corporate earnings growth, and economic growth also slow. Finally, if enough of us think a recession is on the horizon, then a recession is probably what we'll get.

Why An Inverted Yield Curve Could Be Great

Everything is yin yang when it comes to investing. If someone is losing, someone else is gaining.

Given I'm an optimist, let's take a look at the positives of an inverted yield curve. Let's see if you are experiencing some of these positives as well.

1) The cost to own a home got way cheaper. As long-term interest rates plummet, so do mortgage rates. In 2014, I took out a 5/1 ARM at 2.5% when I bought my existing primary residence. It was a stellar rate I thought I'd never see again. But here I am, refinancing to a 7/1 ARM at 2.75% just as my mortgage resets.

My payment will go from $3,912/month to $2,859/month partially because I paid down 29.2% of the principal. If I had waited until the 10-year bond yield collapsed to ~1.6%, perhaps I could have gotten 2.5% and reduced my mortgage payment to just $2,766.

In the meantime, the estimated rent for my home has risen from about $4,800/month to $6,200 a month. Even after accounting for property taxes and maintenance, paying about $2,000 less a month to eventually own my house rather than renting is good forced savings.

For those looking to buy an average property, now is the time to go hunting. Inventory is up, rates are down, and sellers are nervous. For those who haven't refinanced their homes in at least six months, it's worth checking to see what you can get. Mortgage rates are now at ALL-TIME lows. (see the 10-year Treasury yield below).

Check out Credible, my favorite lending marketplace to get pre-qualified lenders competing for your business for free in under three months.

Mortgage Rates Are At All-Time Lows

2) Luxury property is going to get clobbered. As the fear of a recession grows, the prices for multi-million dollar luxury homes nobody really needs weaken the most. This is exactly what I'm hoping for in the Honolulu luxury market.

By 2022, we plan to relocate to Honolulu when my boy is eligible for kindergarten. If we can experience a recession in 2020-2021, the timing will be almost perfect for us to buy.

We'll be able to save for three more years while potentially saving 20% – 25% off the price of a nice Honolulu home. I'm talking about a $1 – $1.5 million discount for the homes I'm targeting. A recession simply exacerbates an already weak luxury property market.

Although my existing properties will also decline in value, they won't decline in value as much on a percentage basis and absolute dollar basis because I own properties only slightly above the median price here in San Francisco. Besides, I've got my fingers crossed the liquidity bonanza starting in 4Q2019 through 1Q2020 will support the SF property market. We shall see!

3) Boring bonds produce decent returns. After I sold one of my SF rental properties in late-2017, I decided to invest about $600,000 in bonds, $600,000 in stocks, and $600,000 in real estate crowdfunding. The idea was to simplify life, earn 100% passive income, and reduce risk.

I decided to go really conservative and buy a smattering of AA-rated zero-coupon and 3%-3.5% yielding California municipal bonds. My goal for my bond portfolio was to earn a boring 3.5% – 4% a year risk-free.

Since purchase, the bonds have indeed paid out 3%-3.5% interest a year. But what I didn't anticipate was strong capital appreciation on top of the tax-free interest income. Check out some of my bond holdings below.

Municipal bond performance 2019

Not bad right? The second to last holding that shows only +0.61% is a 3-month treasury bond position I bought a couple months ago so that doesn't count. Even sleepy CMF, the California Muni Bond fund is up about 7.2% YTD while also paying a current 2.2% yield.

If you are a conservative investor with a heavy bond portfolio, you are likely having one of your best years ever with little-to-no volatility or stress.

4) Income-generating assets increase in value. Given interest rates have collapsed, it is now harder to generate an equal amount of income with the same amount of risk, effort, and capital.

For example, back in 2018, a $100,000 10-year treasury bond position could have generated $3,200 a year in interest income. If you bought $100,000 worth of 10-year treasury bonds today, it would only generate about $1,600 a year in interest income.

As a result, any income-producing asset you own that has maintained or grown its income has also appreciated in value. This is why we've seen such strong capital appreciation in bonds.

In addition to bonds, assets such as rental property and a cash flow positive business have become more attractive. Smart money should be seeking to buy up such assets. On the flip side, money-losing businesses will probably underperform because of their heightened risk of shutting down.

Let's say you have a rental property that generates $55,000 a year in income after all expenses. To generate $55,000 a year in income requires $1,375,000 in capital at a 4% rate of return. But if you can only generate a 2% rate of return, you now need $2,750,000 in capital.

Income producing assets increase in value when interest rates decline

During a declining or low-interest-rate environment, it is important to hold onto your cash-generating assets for dear life. Hug and kiss them every day. If you can buy cash-generating assets for cheap, even better.

5) The wealth gap should narrow. As we learned from my Median Net Worth of Americans post, the top 1% has extended its lead over the middle class. The reason for the widening wealth gap is because the top 1% has invested in assets like stocks and real estate that have rapidly appreciated over the past 10 years.

If there is a recession, the top 1% will get hurt the most. For example, let's say Warren Buffett is worth $80 billion today and loses 30% of his net worth in the next downturn. The middle class will have caught up to Warren by $24 billion on average. Hooray!

The divergence of wealth between the top 1% and the middle class is unsustainable. Eventually, there will be civil unrest and rioting in the streets if the gap isn't narrowed.

It is too much to expect the middle class to simply hustle harder, save more, and invest more for their own good. Something is structurally wrong with the system. Instead, we must hope that a recession mugs the wealthiest people and results in a better wealth equality equation.

Yield curve inversion in 2019, first time since 2007 and a harbinger for a recession

6) You will finally get motivated to do something different. It often takes a scary situation to change bad habits. I have a friend who crash-landed on a plane because its landing gear didn't deploy. After that incident he quit smoking after 25 years and prioritized his children over work. He realized he had been taking his life and his family for granted.

When 2009 eliminated ~35% of my wealth, I finally hired some guy for $1,000(!) off Craigslist to help launch Financial Samurai. I had been putting the idea off for three years after graduating from business school. “Too busy” was always my excuse.

Without the recession, Financial Samurai would never have been born. I'm sure I'd still be working my same miserable finance job wondering how I was ever going to escape. The recession changed my life for the better. It may change your life for the better too.

Welcome The Inversion With Open Arms

There is always a silver lining in every bad situation. I'm sure some people interested in politics are even hoping for a devastating recession so that the current elected incumbents will lose their jobs.

It'll be nice to drive on less busy streets, eat at quieter restaurants, and speak to people who have more humility. A recession is truly great if you can figure out a way to lose less than the average person.

We can focus on the negatives or we can focus on the positives. I've found that focusing on the positives makes me happier and more optimistic about the future.

Related Post: Personal Lessons Learned Since The Financial Crisis

Readers, what are some other great things that could come out of an inverted yield curve?

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53 thoughts on “The Inverted Yield Curve And A Recession Could Be Extremely Positive”

  1. So suppose a recession hits. Normally recession is to be considered just a part of the business cycle and not worry too much, as long as one is prepared- things will get better. But what if the recession were to cause severe consequences like 2008 potentially had, like collapse of the banking /financial sector.
    Iam concerned about several sectors – but primarily the national debt, the unfunded liability particularly the pension area and corporate bond market and potential effects on dollar valuation, which all interacts and intersect .
    A recession is going to have brutal effects on the corporate bond market with 45 % of corporate bonds based on leverage ratios, technically already in the junk status

    1. Sure. Things could get REALLY bad… like 2008-2009 bad. But I highly doubt things will go back to those levels.

      Companies have MUCH stronger balance sheets. Banks have lent to much stronger borrowers now too.

      Stock ownership and housing ownership is much lower for the middle class too as you saw from post, The Median Net Worth For Americans.

      I see a 20% correction at most.

  2. Bottom Line Up Front (BLUF): The yield curve is not inverted yet. [1]

    Definition: Yield Curve = 10 year U.S. Treasury – 2 year U.S. Treasury

    The yield curve inverted in the summer of 1998, but just barely, and the Fed cut rates. There was no recession in the two years that followed.

    The yield curve went negative, starting in February 2000, and the Fed was raising rates. In March 2001, the U.S. entered a recession. Did the yield curve cause the recession? No. It was a collapse in asset prices (stocks).[2]

    The yield curve went barely negatively starting in December 2005, and the Fed raised rates from 4.25% to 4.5%. Then the yield curve went solidly negative in 2006 and the Fed raised rates from 4.5% to 5.25% over several months. In December 2007, the U.S. entered a recession. Did the yield curve cause the recession? No. It was a collapse in asset prices (real estate).

    The yield curve has not yet inverted in August 2019. It came close to inverting on August 14, when the 10 year yield was 1.59% and the 2 year yield was 1.58%. That 0.01 difference is the closest it has come in the past 12 years to inverting, but the yield curve is not inverted yet.

    How did the Fed respond? The Fed has cut rates.

    There is more to forecasting a recession than relying on the media screaming about an inverted yield curve that has not even inverted yet.

    Yes, use the yield curve as one piece of data. But also look at the Federal Reserve rate, unemployment rates, inflation rate, new home sales, housing starts, and other data. Then make up your own mind.

    I do not think that there will be a recession in the next 18 months. The Federal Reserve is cutting rates, and this is good. The unemployment rate is low, and this is good. The inflation rate is low, and this is good. New home sales are up 2% over the same period in 2018, and this is good.

    Is there data that is concerning to me? Yes. The global economy is slowing. The U.S. economy is slowing. Who knows what POTUS will say next on Twitter. For that matter, a black swan event could happen that sends us into a recession. But I do not see a recession starting in the next 18 months that can be based on the current economic data.

    What would cause me to change my mind? If the Federal Reserve starts raising rates to fight inflation. If the unemployment rate starts to creep back up indicating that we have reached a trough [3]. If new home sales start to decline. If the yield curve actually inverts, and stays inverted for over 30 days.

    Now, back to the things that matter: my family.

    Sources:

    [1] 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y)
    https://fred.stlouisfed.org/series/T10Y2Y

    [2] Does the Yield Curve Really Forecast Recession?
    https://research.stlouisfed.org/publications/economic-synopses/2018/11/30/does-the-yield-curve-really-forecast-recession/?&utm_source=fred.stlouisfed.org&utm_medium=Referral&utm_term=related_resources&utm_content=&utm_campaign=es

    [3] Recession Signals: The Yield Curve vs. Unemployment Rate Troughs
    https://research.stlouisfed.org/publications/economic-synopses/2018/06/01/recession-signals-the-yield-curve-vs-unemployment-rate-troughs/?&utm_source=fred.stlouisfed.org&utm_medium=Referral&utm_term=related_resources&utm_content=&utm_campaign=es

    1. @Lifeguard – Well reasoned and well stated comment. I agree with the current state, things are generally ok but not as good as they were. However I think Trump is so erratic right now that he is undermining sentiment. This ends once he’s out of office, or if he somehow has a change of heart and we see Navarro and Lighthizer get canned.

      Meantime, people and corporations will sit on their cash. That is the risk in the economy.

  3. I noticed you shifted your holdings from CMF (California Muni Bonds ETF) to individual muni bonds? Is there a reason you made the switch?

  4. What’s your thoughts on cash out refinance, to buy a rental property . I plan on staying at my current residence for 5 yrs. My job is pretty secure ?

  5. Funny to read this when the markets have gone up strongly the past couple days. I try to ignore all the noise and keep my eye on the prize. Am 64/26/10 now in stock/bonds real estate and continent to move a little out of equities when the markets pop like they just did. Goal is 60/30/10 at retirement a year away. I’ll keep that level long term and ride out any crashes with a nice cash cushion.

  6. Potential home-buyer

    “For those looking to buy an average property, now is the time to go hunting.”

    Does this apply in crazy coastal markets like San Francisco?

    I’ve been sitting on the home-ownership sidelines in a rent-controlled apartment, and the taxes alone on anything comparable would cost nearly as much as my rent. True I’ve missed out on property appreciation, though the money I would have put into a house has done well in the market – so far.

      1. Can you explain what you mean by building a pent-up demand as volume is low and rates have collapsed? Why wouldn’t whatever demand is created by low rates just cause prices to rise now to meet that demand?

        1. Sure. Because people are taking a wait and see mode. As more people take a wait and see mode, the pent-up demand builds. People tend to only invest or purchase things way after it is safe to do so, which is why there is often a boom bust cycle and herd mentality.

  7. What’s up buddy! It has been a minute since we have hung out in the bay area. Sounds like you and the family are doing well. The move to Maui has been good and I am glad to hear you are making a game plan for the islands! Come and visit next time you are out here!

    So please help me out in my financial illiteracy! You opted to finance your primary residence with 5/1 and 7/1 arms. What was the logic to do this as opposed to financing with a 30 year fixed? If you were planning to stay in your primary long term would you do 30 year fixed?

    Also, sweet move on the bonds!
    -Pat

    1. Word up! You playing tennis out there?

      If you refinance to a seven or 10 year arm, you are getting the lowest dip in the yield curve. Take a look at the first graphic in the post.

      It is the best bang for your buck. You could refinance to a 30 year fixed, but I believe you will be paying a higher interest-rate than necessary because we are in a low interest-rate environment for the remainder of our lives in my opinion.

      Check out this post for more: https://www.financialsamurai.com/30-year-fixed-mortgage-loan-vs-adjustable-rate-mortgage-arm-the-choice-is-obvious/

      1. I’ve refinanced my home about 6 times in the last 16 years—always 30 years fixed because each one was my “last refi” and I’m hanging on to this house. Of course an ARM would have saved me money.

        Having read financial samurai for the last several years, I completed a refi in early July for the “last time” again. But I still haven’t learned my lesson. I went with a 30 year at 3.375%. For me personally I don’t think I would go with an ARM until the spread is > 1%.

        I maintain a portfolio of mortgages including my rental properties, mostly with ARMs because 30 year fixed mortgages aren’t available for apartment buildings. I like to keep 30 year mortgages where I can get them because it helps diversify my mortgage portfolio.

          1. I’m a glutton for punishment. I did it to save an 1/8% on a zero cost loan so it was just the work of submitting the requested docs.

  8. Of course, looking at the glass as half full is better. I’d buy growth funds for a cheaper price. Since I’m at the accumulation phase, a lot of fixed income securities don’t make sense right now for me.

    All investments are on sale during a recession. The question is do you have the funds and the courage to buy with the uncertainty factored in?

  9. Sam,

    Yet again – just excellent work. Thank you for the value you provide to all of us, and my wife and I truly appreciate you.

    Thanks,
    Quinton

  10. hmmm… going by the general thumb rule of ” be greedy when others are fearful” one would think this is a great time to buy. But then again markets are never predictable enough to follow thumb rules. Batten down the hatches and wait is all that we can do i guess.

  11. Very interesting Sam, I’m thinking about investing in another rental property or if possible follow you to Hawaii. Great advice! What would be the scenario if we (USA) are no longer the dominant economic power? Or what would the recession be if the turmoil in Taiwan arise with china spiral out of control. Look, I do not wish for any of these scenario, as I’m an immigrant who survived the genocide. But I would like to position myself to gain the economic benefits.

    1. We will probably always be in the top five for economic and military power. I expect China and India one day to surpass us.

      Global Recessions are the worst because there is no where to hide.

      Then again, global recession is cause interest rates to plummet and if you so happen to be living in a strong local economy, your rental property should hold up better than most other assets.

  12. This post is right on the money. It’s yin and yang. The inverted yield curve is helping me to lower my mortgage interest rate. This week I received an offer from BofA to refinance my 20 year mortgage with current rate of 3.75% down to 15 year at 2.75%. My monthly payment will go up slightly from $2,181 to $2,365. As for my 401-K this week wasn’t the best one. Speaking of consumer confidence I think my neighbor defined it well by buying $92,000 Tesla Model S. My predictions of recession in the next 18 months stand at 60%.

  13. Good spin on thinking about a potential recession on a positive note. I am currently waiting for yields to go even lower so that the 30 year fixed mortgage rates drop below 3%. If you look at Europe, you can get a 30 year fixed mortgage for less than 2%! Just a matter of time before that happens in the US.

    Although I would say that there are a ton of people out there that are highly exposed to equities right now, soon to be retirees especially. Had a friend who’s dad is in his mid 60s and he was 80% exposed to equities! A prolonged recession like we may have next will unfortunately wipe all these future retirees out…

    People need to prepare for the downturn. Decrease exposure to equities, save up at least one year in emergency savings, and minimize unneccessary costs. The 10 year bull run will end soon and it will not be fun at all.

  14. Love the positivity! Recessions aren’t fun but they are inevitable and we’re gonna go through another one eventually- and with the yield curve inverted most likely sooner rather than later as you stated.

    Another positive about recessions is they remind us to be thankful for what we have. During the last one it was a great reminder to me to appreciate everything much more. I was able to enjoy and focus on what I already had and thus had very minimal wants and desires for new things. Recessions can really help stir action to produce and earn versus just spend and consume.

  15. As the owner of a profitable small business, I’m not sure the value goes up. Even though the risk-free rate is dropping, risk appetite is also dropping. Almost every business is positive S&P, real estate, or startup beta.

    Also, a recession probably reduces cashflow / growth expectations. If you try to DCF most businesses or side hustles, I’d say the cost of capital goes up with future cash flows and growth dropping.

    But I fully agree, suddenly the cashflow hustles seems like the superstars in my portfolio. It just seems prudent to hold off on doubling down.

    1. You’re right, valuation multiples get compressed during a recession so an acquirer might not pay as high of a valuation.

      But if you own a private business with a very defensible cash flow stream, he will personally appreciate the business more. It fundamentally is much more valuable if the Kaushal continues at the same or greater pace.

      1. We all know that markets inevitably bounce back after a recession. I don’t need the money or the income it generates for at least 10 years, and once it’s in the Roth, it grows tax free. I also want to draw down my IRA so that I’m not bound by the Required Minimum Distribution when that time comes.

        1. True, BUT the tax money that you are paying for the conversion would have also appreciated the same degree (and the tIRA portfolio if left alone obviously too) if it remained and stayed invested during those 10+ years. So it comes down to tax rate arbitrage. If your bracket in retirement would be similar or higher (and the higher rmds w/o Roth conversion obviously contribute to this possibility), sure Roth convert. But not simply because it grows tax free and the stock prices and its attendant / P/E ratios, etc, seem to inform a great buyer’s market; *everything will have appreciated anyway so it’s all about your specific tax situation during conversion vs during drawdown stage.

    1. This is intriguing. Can you explain how this works, and benefits during a recession? I’d be interested to do the same if there are good benefits.

      1. The money you withdraw from an IRA is taxable like regular income. Of course you hope that your future tax bracket will be lower, but if you’re investing well, that may not be the case! The RMD on my IRA may be high enough to bump me to a higher tax bracket than I’m in now. If a severe recession causes my IRA to crater, then I can roll it into a Roth IRA and pay tax on the much smaller amount. Assuming markets recover, the Roth IRA grows tax free and there’s no RMD. Of course this involves some market timing, so it may be best to convert in stages once it’s clear we’re in a recession.

        1. Can’t disagree with you, but it is somewhat unusual to hope your investments go down to save taxes on the ROTH IRA conversion, but I guess if they go up again it saves money. I think this strategy is better aligned with making the best of the recession when it does happen vs. preparing for it in advance by liquidating some investments.

          Having said that, I am a big fan of ROTH IRAs. I re-read Sam’s article which all makes sense comparing 401Ks to ROTH IRAs. Given the choice, I’d pick a pre-tax 401k (or traditional IRA) any day. The real comparison is after-tax investment vs. ROTH IRA. In this case, I’d pick the ROTH IRA every time. My 401K is already maxed, so I max out my backdoor ROTH contribution next, and then my after tax investments.

  16. Recessions hurt those on the margins, i.e. the poor. Even if a wealth gap is shrunk it’s cutting off the nose to spite the face. If Bob’s net worth drops from $1M to $500k and mine drops from $500k to $250k the gap has shrunk, but am I really better off?

    Recession hurts those already stretched because it stretches them further, and they’re more likely to enter bankruptcy or take on debt to cover the difference, which can hurt long term wealth appreciation.

      1. The poor and middle class have relatively little of their net worth in stocks and investment real estate so their percentage net worth decrease would be modest in a recession. However, if they lose their job because of a recession, they’re done. The wealthy can weather most downturns as long as they are not over leveraged.

  17. Thanks for the analysis, newish to the site!

    Perhaps someone would share some feedback on my situation.

    I have 150K out of my current 392K net worth in cash. I’ve read the research about LSI vs DCA but I’m hesitant of investing at the peak before the decline.

    How should I be thinking about deploying this cash to take advantage of the market trajectory?

    Right now, I mostly have Lifecycle Funds and Total Stock Market but I get the feeling my asset allocation is all over the place. I’ve begun chasing FI and I’m 27.

      1. Thanks Sam! Will do, just waiting on my account approval. I’m in the accumulation phase and hope to reach “FI” in 10yrs or slightly faster. We plan on investing 70K annually. (50k pre-tax, 20k after-tax) after getting married in 2020.

  18. By the law of averages, most of you will achieve financial freedom in 10 to 35 years.

    Once you have chosen the time frame to execute FI that fits your particular financial situation.
    The next step is to get educated on the game of finance – FS is a good institution!

    Once you have decided on the financial vehicles to take your hard earn money forward,
    have the full confidence in them. If you don’t believe in yourself – WHO WILL?

    Accumulation phrase begins once you have put your first dollar into your investment of choice.

    That dollar should not have any movement until the de-accumulation phrase – when you
    have crossed the FI mile marker.

    The movement of that dollar will have two consequences (99 PERCENTS of the time).

    First, lost gain opportunity in the choice of investment if the recession forecast is wrong.
    The market is more random than the best of any mathematical model.

    Second, when your dollar move, it allows opportunistic and sophisticated piranha to chip a tiny bit of value.

    Most of the time you don’t even know. Otherwise, you will play a different financial game
    whereby, you are chipping someone else dollar.

    If you believe FS is correct with the 70% recession forecast, do not make automatic investment
    with new money, but hoard up cash.

    Put all that chips on the table when it rains and don’t touch the chips again until you needed to
    take care your family requirements.

    Stay calm, play golf, go fishing and spend time with your family is the best prescription for
    the time like now!

  19. Why do I keep on seeing how it’s a bad thing that there’s a “wealth gap”?

    I don’t hear about a “height gap” even though that plays an important role in people’s lives.

    People are different, so what? We all make different choices which have various consequences. I praise the extreme wealthy in the USA due to how they make such a positive impact on everyone around them

    1. But how will my 6’1″ frame get into the NBA when there are 7’2″ monsters out there?

      /s

      I guess the the financial equivalent is the level at which one can become and accredited investor, but otherwise, I’m with you on this one.

    2. It’s especially bad if it leads people to believe extremely ignorant things, like that it’s a *good* thing for wealth to just disappear into thin air just to diminish a perceived gap. Think of the returns to society that invested wealth could generate. But a recession comes and it’s gone. Great, Warren Buffett’s portfolio shrank more than mine did and I sure do feel better about myself.

    3. I don’t understand why a wealth gap is a problem either. It’s not like there is a shortage of money where Warren Buffett has a lot of money, so the rest of us can’t. I think the job of government is to have just enough regulation to give everyone equal opportunity. If people don’t take advantage of that opportunity, that’s their fault.

    4. Interesting perspective. Most of the wealthy people I know inherited it and very few have made a positive impact on others around them. They just seem to be caught up in wreckless consumerism. Many of them have children who appear entitled. I have seen a couple exceptions to this but very few.

    5. Probably because humans are in general, empathetic and want to help others.

      If too much wealth gets concentrated into the hands of too few, there will be a revolution. Just study history and see what happened to the super rich.

    6. It’s about extremes. No one here is going to argue that socialism is a good thing. Even getting too close to it can be disastrous. We do accept public roads, public parks,public schools, public fire protection, and so on, even though an extreme capitalist would argue that people should be charged for all of these things (and not share through taxes, but through individual usage fees and subscriptions). But socialism is just one extreme.

      At the far end of the spectrum from socialism lies extreme wealth and income inequality. The damage this does to a society and the people in it should be abundantly clear as well, but somehow this doesn’t register, despite the fact it can be seen in most of the really negative parts of human history (feudal Europe for starters) and, the fact that, quite aside from hundreds or thousands of books, just looking at a sampling of movies, we have Soylent Green, Blade Runner, Gattaca, Hunger Games, Ready Player One, Dredd, Elysium, Freejack, Altered Carbon, and many other dystopian stories that feature insanely rich people lording it over a huge unwashed majority.

      Storytellers and their audiences love this because it creates conflict. In real life most of us would prefer to head that kind of thing off long before it can happen (and even a very small chance of it happening should get our attention).

      Again, humans don’t do well with extremes. This is why extremists have a bad reputation. Wealth inequality is a necessary and therefore good thing, some socialized practices are also necessary and therefore good. As Americans, we definitely are prejudiced more towards allowing one extreme than the other, but we would not be happy, any of us, if our society achieved either of those extremes (and possibly not even if you were one of the ones with all the wealth and forced to live in a walled compound with bodyguards and constant security).

      I’m not sure anyone could draw a direct correlation, at least not at this point, but google on “Is San Francisco Dirty” or “San Francisco is a mess” and look for the San Francisco Chronicle link to a June 8, 2019 article by Carl Nolte. Then do some more research to confirm he’s not just making it up.

    7. Whether you believe the wealth gap is morally right or wrong may be an interesting philosophical debate but does not change the outcome. So are opinions about whether socialism or capitalism works. I like the US system, but I do think the poor and middle class need a better social safety net. It will likely never happen precisely because it is perceived to be “anti-American” even by those it claims to help.

      History has proven over and over again that when the many have little (and perhaps little to lose) and the few have much, the few will rise up. Sometimes they even succeed. Examples include the French Revolution, Bolshevik revolution, Chinese communist revolution, etc. I’m not judging whether these outcomes worked; I’m just pointing out bad things happen when the attitude is “Let them have cake” even if the quote is misinterpreted. I’m not saying we are at this point in history but an understanding of what happens when the wealth gap increases is important.

  20. Interesting and refreshing take Sam. I’ve been reading a lot of doom and gloom posts on this inverted yield curve lately and it certainly is a buzz kill.

    There will indeed be some opportunities to buy and some people will look back years from now and say this will be the reason they made that fortune. Same thing happened in 2009.

    This can hurt a lot of people too, especially the recently retired as this would be an example of a sorr (sequence of return risk) that could devastate a portfolio especially if it was bare bones with no safety margin

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