The difference between short term and long term rates, aka the “#yieldcurve “, is widely considered the most accurate leading indicator of an upcoming #recession . When short term rates are higher than long term ones, a recession typically follows within 6-9 months (see chart).

A meaningful recession creates a conundrum for policy makers as they face the dilemma of continuing a restrictive monetary policy to keep #inflation at bay or easing monetary conditions to support economic activity. A large stock of debt, history and political game theory all suggest the latter is by far most likely. On the fiscal side, an expansive bias is also a foregone conclusion because of the entrenched addiction to deficit spending in all major economies.

Hence cycles of higher than average inflation and stagnant economic growth are the majority scenario until a critical mass of debt has been inflated away and the economic and financial system can effectively reboot. Likely at least a few years ahead. In the meantime, deglobalization and geopolitical risk will continue to disrupt both the supply and demand patterns we have become accustomed to over the last two decades, aggravating the stagflationary regime.

The implications for investors are far reaching. The aforementioned macro scenario will continue to weigh on both #equities and #bonds. The former have yet to discount lower earnings associated with a recession while the returns on the latter are constrained by persistent inflation and at least some default on the corporate side. Stores of value, both legacy and digital, will gain as currency debasement and sovereign instability drive adoption, especially in terms of self-custody. Commodities whose demand is inelastic but supply can’t be meaningfully expanded in the short term will also outperform in spite of the negative economic cycle.

Lastly, long-term minded investors with higher risk tolerance, may also want to start looking through the rubble of early-stage & venture investing, especially for those sectors that, make no mistake, will inevitably drive the next expansion cycle. After all, the future of investing will still be investing in the future.

​Disclosure: Not investment advice. Do your own research. Hold all assets mentioned. Twitter @pietroventani for more timely comments and updates.

chart, histogram