Recession Talk

Yield Curve Inverts For The First Time Since 2007

Update: The most prescient recession indicator the market just inverted for the first time since 2007.

Larry Kudlow last summer explaining that everyone freaking out about the 2s10s spread is silly, they focus on the 3-month to 10-year spread that has preceded every recession in the last 50 years (with few if any false positives)…

“Actually we’re reading the spread wrong,” Larry Kudlow says of the flattening yield curve. “There’s no recession in sight right now.” — CNBC (@CNBC) July 19, 2018

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. 

Bloomberg is 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.

Equity markets appear to be waking up what this all means…

On the heels of a dismal German PMI print, world bond yields have tumbled, extending US Treasuries’ rate collapse since The Fed flip-flopped full dovetard.

The yield curve is now inverted through 7Y…

With the 7Y-Fed-Funds spread negative…

Bonds and stocks bid after Powell threw in the towell…

But the message from the collapse in bond yields is too loud to ignore. 10Y yields have crashed below 2.50% for the first time since Jan 2018…

Crushing the spread between 3-month and 10-year Treasury rates to just 2.4bps – a smidge away from flashing a big red recession warning…

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. 

Bianco concludes that the market, like Trump, believes that the current Funds rate isn’t low enough:

While Powell stressed over and over that the Fed is at “neutral,” . . . the market is saying the rate hike cycle ended last December and the economy will weaken enough for the Fed to see a reason to cut in less than a year.

Equity markets remain ignorant of this risk, seemingly banking it all on The Powell Put.

Different views ….Tthe yield curve is reflecting capital flight from the Eurozone and Japan, and probably other places that favor ZIRP (Zero Interest Rate Policy) and NIRP (Negative Interest Rate Policy) while monetizing debt beyond the imagination. The world wants to get a piece of the economic stability of the US. They are buying our rates downward by financing UST debt. This could have more to do with the yield curve inversion.

Most people focus on the Yield Curve Inversion and how knee jerk economics proclaims it as a recession indicator. While recession in the NIRP countries is possible or probable the US is still growing. The US economy is still strong, although maybe not as strong as first estimated.

The US could avoid a recession, providing the Fed resists a panic attack which results in a rate decrease in a couple of weeks. If so, household income will decrease from a decrease in interest income and GDP will fall, causing them to lower rates some more. 

One thing to worry about is a removal of liquidity.

Recessions usually are a result of working capital removed from the economy, not typically asset bubble liquidity. Working capital makes the payroll and covers accounts payable. Removing working capital is the biggest part of the 2009  ‘Great Recession’. Had it been protected, it would have been a stock market correction.