“I Expect A Financial Accident To Occur”: Gavekal Reveals A New, “Flashing Red” Warning
by Tyler Durden
ZeroHedge.com
Tue, 05/01/2018
Much ink has been spilled by analysts sounding the alarm over the rapid flattening in the US Treasury yield curve observed over the past year, as many have rushed to remind markets of the conventional wisdom that an inverted curve is one of the most reliable indicator of an imminent recession.
At the same time, others have spoken out against this orthodoxy, pointing out that there can be as much as a 1-2 year lag between the moment of first inversion and when the economic contraction officially arrives.
Yet others, note that due to the Fed’s direct influence on the long end (where the market tends to frontrun central bank monetization of Treasuries), the yield curve – which represents the market rate of interest on the short end, and the natural rate of interest, or “r star” on the long-end – has lost all signalling value.
Now, in a hybrid take on the yield curve concept, GaveKal’s Charles Gave says that the yield curve is certainly informative… just not that of the public sector, but the private sector instead.
According to Gave, recession timers should ignore government debt and focus instead on the corporate credit market. Here, the U.S. natural rate of interest can be represented by yields on longer-dated industrial bond rated Baa by Moody’s, while the market rate is captured by the prime lending rate charged by U.S. banks.
The problem is that if Gave’s interpretation is right, the US economy is about to fall off a cliff.
“The private sector yield curve reading stands at zero, or right on the threshold where trouble can be expected to begin” Gave wrote today in a note to clients, quoted by Bloomberg. “Should this spread move into negative territory, I would expect a financial accident to occur outside of the U.S., a U.S. recession, or possibly both.”
Translation: even the smallest deviation from the current unstable equilibrium could unlock a recession.
Looking at the chart above, Gave warns that either a U.S. recession has taken place within a year of the private sector yield curve inverting, or a “financial accident” has occurred in other economies with currencies linked to the dollar, which would be all of them.
The Rest…HERE
