Deadly Accurate Recession Indicator Just Went Off
SilverDoctors.com
December 10, 2018
Given the wild economic distortions the Fed has worked these past 10 years, the thumping could shatter all existing records…
by Brian Maher of Daily Reckoning
Start off every day with a smile, said W.C. Fields — “and get it over with.”
Thus we force a grin to start today’s reckoning, here expressed verbally:
The stock market did not lose one solitary point today.
Our duty to Mr. Fields now discharged in full, we proceed with a scowl…
The exchanges were closed today in honor of the nation’s late 41st president, George Herbert Walker Bush.
Hence no losses today. Hence our insincere, dutiful smile.
But investors are still mourning for the money they lost yesterday.
The Dow Jones hemorrhaged 799 calamitous points — its fourth-worst single-day point loss in history.
Both the S&P and Nasdaq absorbed murderings on similar scales.
Partly responsible were comments issuing from the West Wing of the White House.
“I am a Tariff Man,” said Trump.
His chief economic man also expressed doubts about a Chinese trade deal before the 90-day “truce” lapses.
But it was not trade news alone that panicked the horses yesterday.
What else?
A Bloomberg Op-Ed gives the overview:
“The U.S. Yield Curve Just Inverted. That’s Huge.”
What is the yield curve, precisely? And why is its inversion “huge”?
Come sit down before our campfire… and prepare for a strange tale of time…
The yield curve is simply the difference between short- and long-term interest rates.
Long-term rates normally run higher than short-term rates.
It reflects the structure of time in a healthy market.
The 10-year yield, for example, should run substantially higher than the 2-year yield.
For the reasons we needn’t look far…
The 10-year Treasury yield rises when markets anticipate higher growth — and higher inflation.
Inflation eats away at money tied up in bonds… as a moth eats away at a sweater.
Bond investors therefore demand greater compensation to hold a 10-year Treasury over a 2-year Treasury.
And the further out in the future, the greater the uncertainty.
So investors demand to be compensated for taking the long view.
Compensated, that is, for laying off the sparrow at hand… and willing to accept the promise of two in the distant bush.
But when the 2-year yield and the 10-year yield begin to converge, the yield curve flattens… and time compresses.
When the 10-year yield falls beneath the 2-year yield, the yield curve is said to invert.
And in this sense time itself inverts.
Time steps all over itself, staggered by a delirium of conflicting signals.
The signs that point to the future lead to the past. And vice versa.
In the wild confusion, future and past collide… then run right past one another.
They end up switching places.
Thus an inverted yield curve wrecks the market structure of time.
It rewards pursuit of the bird at hand greater than two in the future.
That is, the short-term bondholder is compensated more than the long-term bondholder.
That is, the short-term bondholder is paid more to sacrifice less… and the long-term bondholder paid less to sacrifice more.
That is, something is dreadfully off.
An inverted yield curve is a nearly perfect omen of lean days ahead.
It suggests an economic winter is coming… when investors expect little growth.
Since 1955, an inverted yield curve has accurately forecast all nine U.S. recessions.
All nine.
Only once did it holler wolf — in the mid-1960s.
It has also foretold every major stock market calamity for the past 40 years.
The yield curve last inverted in 2007.
2007, the calendar confirms, immediately preceded 2008.
Prior to 2007, the yield curve last inverted in 1998.
Recession was not far off.
Warns Paul Hickey, co-founder of Bespoke Investment Group:
When it comes to an inverted yield curve, anyone who ignores its economic message should do so at their own peril.
And now, late in 2018…
This doomy portent drifts once again into view…
From The Wall StreetJournal:
For most of this year, both short- and long-term bond yields rose as government bond prices fell across the board [bond prices and bond yields move in opposite directions]… The pattern indicated both the short- and long-term growth outlooks had improved…
That is no longer true. Now, the yield curve is closer to inverting not because short-term economic indicators are improving, but because longer-term rate expectations are falling.
Yesterday the yield curve inverted… for the first time since July 2007.
Rather, a portion of the yield curve inverted yesterday for the first time since July 2007.
The 5-year Treasury yield dipped beneath the 2- and 3-year yields.
The Rest…HERE
