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The U.S. Economy Is Stronger Than Investors Anticipated, Which Could Be Very Bad News

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The U.S. Economy Is Stronger Than Investors Anticipated, Which Could Be Very Bad News

If a surprisingly strong June jobs report, a solid early start to Q2 earnings season and a stock market surging to new all-time highs has you optimistic about the U.S. economy, you may be getting ahead of yourself.

According to the Wall Street Journal’s Ian Talley, stronger-than-expected U.S. economic growth in the near term could trigger the next recession.

Very few investors were anticipating strong U.S. economic growth, and the financial losses that that growth could bring about could derail the U.S. economy.

“If the economy were to pick up faster than markets think, which I think has substantial probability, it could lead to some financial turmoil,” International Monetary Fund chief economist Olivier Blanchard explained.

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Blanchard believes surprisingly strong U.S. economic growth might trigger a series of events that could ultimately bring the economy to a screeching halt. Strong growth in the near term would likely drive aggressive interest rate hikes from the Federal Reserve. Those hikes would raise borrowing costs and disrupt investment portfolios that are based on lower interest rates.

Talley noted the major compression of the yield curve on U.S. treasuries that has developed in recent months is typically an indicator of an imminent U.S. recession. However, if the economy continues to heat up, a rapid decompression of the yield curve could hit investors with long bond positions very hard.

The IMF has warned since last year that rapid decompression of the yield curve could shock global markets.

So far this year, the SPDR S&P 500 ETF Trust (NYSE: SPY) is up 5.4 percent while the iShares Barclays 20+ Yr Treas. Bond (ETF) (NASDAQ: TLT) is up 17.4 percent.

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Disclosure: The author holds no position in the stocks mentioned.

Posted-In: Ian Talley IMFBonds Top Stories Economics Federal Reserve Markets Media Best of Benzinga

 

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