
Yield Curves Invert in U.S., U.K - samsonradu
https://www.bloomberg.com/news/articles/2019-08-14/u-k-yield-curve-inverts-for-first-time-since-financial-crisis
======
throwaway5752
Everyone serious knew that a trade war would set a recession in motion, and
that it would be a trade war the US would lose because of the directionality
of the trade. The thought has always been that the president was using a high
leverage negotiating strategy (see [https://www.newyorker.com/news/news-
desk/for-trump-diplomacy...](https://www.newyorker.com/news/news-desk/for-
trump-diplomacy-is-quite-literally-a-four-letter-word), for example) to
extract maximal concessions from PRC. But in the end, most of the people
involving in mid and long range investment decisions thought that they could
model him as a rational actor. What we are seeing is the investment
community's realization this might not be true. You can look for many recent
examples of shifts in investment activity
([https://www.autoblog.com/2019/08/13/ford-gm-preparing-for-
ec...](https://www.autoblog.com/2019/08/13/ford-gm-preparing-for-economic-
downturn/)).

~~~
roymurdock
My question is what is the point of the trade war. What does trump get from
initiating/escalating it, or who is directing him to do it. Seems to be a net
negative for all sectors of the economy.

~~~
sxcurry
As Paul Krugman says, "What looks like raw ignorance and prejudice is, in
fact, raw ignorance and prejudice".

~~~
chillacy
Paul Krugman also said the internet was a fad, why is he worth quoting?

~~~
throw0101a
Besides the batting average comment, he said that in 1998 for a particular
reason:

> _First, look at the whole piece. It was a thing for the Times magazine 's
> 100th anniversary, written as if by someone looking back from 2098, so the
> point was to be fun and provocative, not to engage in careful forecasting; I
> mean, there are lines in there about St. Petersburg having more skyscrapers
> than New York, which was not a prediction, just a thought-provoker._

* [https://www.businessinsider.com/paul-krugman-responds-to-int...](https://www.businessinsider.com/paul-krugman-responds-to-internet-quote-2013-12)

That was the year Apple was still on the ropes (Microsoft's investment was in
1997), Google was _just_ kicked off by a $100K cheque by Bechtolsheim, Amazon
was four years old, and Facebook didn't even exist.

Give it a rest, it's been over twenty years:

> _I must have tossed it off quickly (at the time I was mainly focused on the
> Asian financial crisis!), then later conflated it in my memory with the NYT
> piece. Anyway, I was clearly trying to be provocative, and got it wrong,
> which happens to all of us sometimes._

* [https://www.snopes.com/fact-check/paul-krugman-internets-eff...](https://www.snopes.com/fact-check/paul-krugman-internets-effect-economy/)

How wise were you when you were twenty years younger than you are now? Sheesh.

------
elamje
A very useful caveat from the insightful, and cautious, Howard Marks -

> In that regard, the Financial Times noted on June 1 that “the [yield curve]
> has ‘inverted’ before every US recession in 50 years.” (Note, however, that
> this is different from saying every inversion has been followed by a
> recession.)

[https://www.oaktreecapital.com/docs/default-
source/memos/thi...](https://www.oaktreecapital.com/docs/default-
source/memos/this-time-its-different.pdf)

~~~
kkotak
Akin to - "It always rains on my birthday. It's raining today - it must be my
birthday."

~~~
jjwhitaker
It's more like:

"It only rains on my birthday. It's raining today - it must be my birthday."

At least I'm not aware of any inversions of the 10-2 bond yield curve in the
last 50 years that was not followed by a recession, however minor.

~~~
vkou
There have been inversions in the X - Y bond yield curve in the last 50 years
that were sometimes followed, and sometimes not followed by recessions.

You didn't come to the number 10 - 2 independently. It was cherry-picked to
fit the narrative.

~~~
jjwhitaker
The other ratios have inverted over the last 6 months, I think as early as the
5-1 ratio in January. The 10-2 is simply the more extreme indicator and the
bigger signal that a recession will probably happen in the coming 12-24
months. I used 10-2 both as it is in the news this week and is the critical
indicator that I studied in college. In January I was referencing the 5-1 as
an early indicator that without correction would lead to the 10-2 inverting as
well.

------
apo
Key recession indicator is flashing red. Unlike the stock market, which is
both backward- and forward-looking, the bond market is myopically forward-
looking.

When the yield between the 10-year and 2-year US treasury inverts, a recession
is months away.

This chart, showing the difference between the yield (or spread), shows
recessions in grey:

[https://journal.firsttuesday.us/using-the-yield-spread-to-
fo...](https://journal.firsttuesday.us/using-the-yield-spread-to-forecast-
recessions-and-recoveries/2933/)

Notice how even getting close to zero spread can sometimes be followed by a
recession. But a negative spread always does.

Point to consider is the effect of Quantitative Easing (QE). Here, the Fed
buys long-term treasuries such as 10-years. This makes long-term rates appear
lower than they would otherwise be.

The Fed only slightly unwound this policy, meaning it still holds most of the
long-term bonds it bought to fix the 2008/2009 crisis.

The net effect is that the Fed could be triggering an early recession warning
here.

Regardless, combining this leading indicator with others such as
transportation weakness, manufacturing slowdowns, and other economies tipping
into recession (despite the loosest central bank policies in modern memory)
leads to only one conclusion.

Prepare for the inevitable recession. It's not different this time.

Edit: one way to play this as an investor is to buy long-term treasuries. The
idea being that as interest rates fall, the value of these assets increases
(bond prices move inversely with interest rates). Go as long out on the yield
curve as you can. Then when the Fed inevitably rides to the rescue, begin to
unwind and capture the capital gains. Or not. Instead, just continue to
receive above-market rate interest payments. There's risk here because there's
no way to know how low long-term rates will fall before reversing course (and
eroding any capital gains you might have picked up).

~~~
cletus
I'd just like to point out that the yield curve inverted in 2018 [1] yet here
we are.

> Prepare for the inevitable recession. It's not different this time.

This point is tautological. Of course there will eventually be a recession. No
one can say when.

There are different factors in every cycle. The QE period is essentially
unprecedented. The rise of tech stocks in the last 20 years is a once-in-a-
century type structural change in the economy.

It's fair to say the market is currently closer to the top than the bottom and
above the historical mean and a reversion to mean is inevitable but whether
the current mode goes on for days, months or even years is anyone's guess.

[1] [https://www.bloomberg.com/opinion/articles/2018-12-03/u-s-
yi...](https://www.bloomberg.com/opinion/articles/2018-12-03/u-s-yield-curve-
just-inverted-that-s-huge)

~~~
hn_throwaway_99
> I'd just like to point out that the yield curve inverted in 2018 [1] yet
> here we are.

As pointed out in the article you linked, what happened in late 2018 was a
small section (3-5 year treasuries) inverted. When people talk about yield
curve being a harbinger of recession, they're usually talking about the 2-10
year spread, which is what the parent post referred to.

You may argue "things are different this time", but you shouldn't be comparing
apples to oranges.

~~~
ohyes
Okay, I’ll get my shorts in. What date do you think everything will collapse?

~~~
govg
It needn't be a "collapse", could be a protracted period of little to no
growth, and most indications are that it will start in a couple of years at
most.

------
dkrich
I'm surprised that everyone blindly cites the inverted yield curve as a
recession indicator without considering the "why". Seriously, if you were to
ask ten people why an inverted curve predicts recession, you'd get ten
completely different answers.

I personally don't think this is necessarily the inversion that is going to be
predictive of a recession because the inversion is occurring at the long end
(the 10/30 years spiking as opposed to the 3 month/2 year selling off). I
think the short end is far more important than the long end because the short
end tells you about monetary conditions in the economy. If the short end
yields start moving up, that means that it's going to become more expensive to
borrow money so spending and capex contracts, which is what can bring on a
recession. Even that depends on the degree to which monetary conditions
deteriorate.

Why are long bonds spiking? Because other central banks around the world are
even more dovish than the US Fed, so money that is looking for long-term safe
haven investments is coming aggressively into US long bonds.

Take a look at three month commercial paper rates, which are actually in a
major downtrend (not surprising given Fed policy):
[https://ycharts.com/indicators/3_month_aa_financial_commerci...](https://ycharts.com/indicators/3_month_aa_financial_commercial_paper_rate)

Three month commercial paper rates represent the cost at which businesses are
currently borrowing for short-term expenses on the open market. That cost is
going down, too. I take that to mean monetary conditions are very good in the
sense that there is no shortage of money floating around the economy looking
for a return. Without some major fundamental change in economic conditions I
don't see how equities can be expected to drop a whole lot from here. I think
this is a blow off the top for rates that is going to be short-lived,
especially if other central banks start tightening policy which nobody seems
to consider a possibility. But if inflation starts creeping up, then they will
likely start raising rates or keeping them where they are. Ironically, when
central banks raise rates that is usually an extremely bearish indicator. It's
a bit puzzling to me that everyone seems convinced that lower rates are
bearish.

Also, I can't think of a time when literally everyone focused on a single
indicator at the same time, used said indicator as a predictive tool, and were
proven correct. That's just not how markets work. People get scared and
excited at the worst times tactically.

~~~
xivzgrev
I agree. For the two recessions I’ve lived through, we didn’t arrive at them
with everyone well aware it was going to happen. They snuck up and took the
country by surprise. The tech bubble burst, and the real estate subprime
bubble burst.

We may go into a slump because everyone is expecting a splump to happen
because it’s been 10 or so years of a bull run. But I don’t see a full-on
recession without a large bubble bursting somewhere in the economy, causing a
panic.

~~~
WarDores
The question is, what is the bubble? I'd argue the entire stock market is the
bubble right now, with boomers throwing everything they have into the market
to get some of that free money before they retire. Once they start pulling
back it's going to be a sad day. Right now US household "wealth" is sitting at
>500% of GDP. That's not sustainable.

~~~
kart23
Not just boomers. Robinhood has made it so you can buy stock on your iphone in
a couple minutes. Everyone has stock, and I think the market is crazy
overvalued right now. I think everything's a bubble right now.

People are in loads of debt, more regular americans invest in the stock
market, driving prices higher, all we need is a spark to get the fire going.
Could come in the form of china and Hong Kong, could be the collapse of
Deutsche bank, or very high valued startups failing, or something completely
unforseen. Theres a lot of uncertainty right now, and any big event could
crash it all.

~~~
sigstoat
> Everyone has stock

everyone _should_ have stock; what reasonable investment plan doesn't have
stock?

you might as well hyperventilate about everyone having drawers full of socks.

~~~
kart23
Sorry, I meant more like day traders and volatile stocks. Especially younger
people, who can now become day traders and even trade options with ease.
Investment plans are different in the idea that the money is in there for an
extended amount of time, and usually just stays invested.

------
strenholme
I remember the dot-com crash of 2001 and seeing companies close so fast, they
didn’t their employees a final paychecks; I remember one day, after the dot-
com collapse a position I was qualified for got filled within three hours.

As someone who has seen this before, things are looking ominous: The stock
market drop of late 2018 reminded me of the stock market drop we had in 2000,
about a year before everything fell apart. The yield curve inversion doesn’t
look good, nor does the problems with the German economy. Uber posting a
multi-billion dollar loss and Tesla having a hard time getting income remind
me of the very same issues during the dot-com bubble, where highly valued
companies weren’t actually earning money. Moviepass’s debacle reminds me of
Webvan; a company which tried to get VC by having a business model which was
hemorrhaging money.

I hope I am wrong, but I predict a tech sector crash in late 2019 or early-to-
mid 2020.

~~~
ummonk
I think the difference this time around is that the largest tech companies
(Apple, Google, Facebook, Microsoft, to a lesser extent Amazon) are generating
healthy profits. So while there is likely an issue with a lot of the
unprofitable unicorns, the industry as a whole won't collapse.

~~~
hyperpape
If anyone has done a comparison of the size of profitless companies in the
(tech) market, today and before the dot-com crash, that would be incredibly
valuable.

My gut feeling is that they constituted a larger portion of the market back
then, but I've never seen a direct comparison.

~~~
strenholme
Not enough time to do a real comparison, but Uber feels a lot bigger than all
of the mid-sized startups which dominated the dot-com landscape. They are a
lot bigger than Webvan was (22,000 vs. 3,500 employees) not to mention
Netscape (2,500 employees at its peak); Webvan and Netscape were the most
famous big dot-com flops.

~~~
hyperpape
Thanks for the data point. It's helpful, but I'd be worried about
extrapolating too much from one outsized data point.

For one thing, BLS stats say that computer programming has grown from 528k to
1666k from 1999 - 2018 (the broad category of Computer and Mathematical
Operations went from 2620k to 4384k). For another, just looking at the largest
company only works if the distribution is similar.

Still, it is relevant that Uber is so big.

------
elicash
Question: While I'm sure economists have been studying this effect for
decades, or maybe even way longer for all I know, it seems like this metric
has been popularized as the key thing everyone looks at just in the last
decade -- after the last recession that we had.

Given the popularization, any chance of an increased observer effect? In
either direction, I mean, positive or negative.

~~~
mattdeboard
no. also there is no "popularization." it's just a historical pattern.

~~~
Godel_unicode
That's absolutely not the case The Yield Curve is now talked about on nightly
news shows and it used to be only known about by economists and people in
finance.

It's completely legitimate to question whether this increase in publicity for
this one metric might be causing it to be less useful.

~~~
elicash
I just went and fact-checked myself via Google Trends.

It does seem like the term had similar amount of web search traffic in
late-2005 across all categories, compared to now. I didn't expect that at all.
However, "News Search" only goes back to January 2008, so it's difficult to
tell if 2005 also had similar news coverage. But the graph since 2008
definitely shows a massive increase:

[https://trends.google.com/trends/explore?date=all_2008&geo=U...](https://trends.google.com/trends/explore?date=all_2008&geo=US&gprop=news&q=yield%20curve)

So I think I might be mostly wrong. (Of course, this wouldn't mean there's no
observer effect... just that it would be at least partially baked-into our
current understanding of how it works.)

Edit: Hm. This seems to change a lot depending on the specific term used.
"Yield curve inversion" makes it sound like people only started searching for
this term in the last few years, and not really back in 2005. But changing it
to "Yield curve inverted" shows the 2005 spike again.

So now I'm just discounting Google Trends as a source, either way.

~~~
mattdeboard
You were asking a totally reasonable question and I gave a needlessly curt &
unhelpful response. Especially considering I heard "yield inversion" and its
variations literally like an hour before I commented.

Sorry.

~~~
elicash
I've never gotten a reply like this on the internet in my life and it's such a
nice thing to receive! Thanks for that!

I actually appreciated the response because it made me rethink my assumptions.
But I also appreciate this note.

~~~
mattdeboard
I'm glad.

------
learc83
It's a self fulfilling prophesy to an extent because all it takes to cause a
recession is to convince everyone there's a recession.

~~~
jfengel
That's partly because the market boom is itself a self-fulfilling prophecy.
Stock markets go up because other people think they're going up. People who
buy securities for the purpose of re-selling, rather than holding, bid prices
up, based not on fundamental valuation but on the thought that it will become
more popular.

Stock markets aren't the same as the economy as a whole, but stock market
bubbles boost the economy when irrational exuberance increases the total
apparent wealth. And when enough people decide that it's peaking, it does, and
the same process works in reverse, causing a recession.

So yeah, it's a self-fulfilling prophecy, but that doesn't mean there's a way
to avoid it. The market prices are already high; they must eventually revert
to something closer to a true valuation. But since that time is determined
almost entirely by consensus, nobody knows when. Indicators like this one are
a sign that people are changing their minds, but it's been that way for a
while. They're just indicators of public perception, and the public takes them
into account, too.

~~~
paganel
> That's partly because the market boom is itself a self-fulfilling prophecy.
> Stock markets go up because other people think they're going up.

I'm really curious how the index funds will behave in the upcoming recession,
afaik that was one of their main mantras and selling points, so to speak, i.e.
that the market only goes up (or a certain part of the market, the most
important part of the market) and that you'd be a fool not riding the wave by
investing in said index funds which were in turn investing in that part of the
market "assured" to always go up.

In other words, what will people do when they'll see their index funds go down
10 or 20% yoy? Will they take their money out of said index funds? Will they
wait for the next uptick?

~~~
Anon1096
We've already seen this in 2008. The funds will go down, then once the
recession passes will return to normal. Long term holders have little to fear.

------
the-dude
German economy shrinks : [https://edition.cnn.com/2019/08/14/business/germany-
economy-...](https://edition.cnn.com/2019/08/14/business/germany-economy-
gdp/index.html)

UK economy shrinks : [https://metro.co.uk/2019/08/09/pound-plummets-uk-
economy-shr...](https://metro.co.uk/2019/08/09/pound-plummets-uk-economy-
shrinks-first-time-since-2012-10546136/)

~~~
marcusverus
There are articles all over the internet stating matter-of-factly that the US-
China trade war has had a hand in the German recession. Why is that the case?
At first blush it seems like newly un-fulfilled demand in the US and newly
available supply/capacity in China would be a boon for other countries. What
am I missing?

~~~
IfOnlyYouKnew
Germany exports mostly industrial goods, such as machines (for manufacturing).
As such, China is a far more important market than the US. The overlap of
things both China and Germany manufacture is relatively small.

Or, in economists' terms: Germany's and China's goods are complementary more
than competitive.

------
40acres
The forward looking indicators indicate recession, the backwards looking
indicators indicate recession, and the general pattern of the yield curve
suggests a downturn within ~20 months.

Question is; what's a normal personal investor to do? Knowing that
expectations are baked into the price and timing the market is a fools errand,
what can normal people do to shield themselves?

I've been 90/10 asset allocation since entering the workforce (2013) and it's
been amazing for me. I obviously plan to continue to contribute to my funds
but at what point would a rebalance or choosing a different fund be wise? A
majority of my fund holdings are in tech, healthcare and banking/finance.

~~~
starky
That depends on your risk profile. Are you going to freak out if your
portfolio loses 30% of its value in a year? Then maybe move to a more balanced
portfolio. If you are happy to wait and let things turn around again, then
stay the course. Timing the market is generally not recommended because the
people that do this every day have a much better grasp on what is going on
than the public in general and they will have already responded en-masse
before you can, so at best you are hoping to get lucky.

------
whatshisface
Yield curve inversions could be forecasting either bad stock market
performance or low interest rates. If the Fed drops interest rates in a year
back down to near-zero rates, nobody is going to be selling a 3 month treasury
for 3%. In that case, being in a 10-year treasury for 2% will feel like a
pretty good idea. Interest rates put an upper limit on federal bond yields,
and it's possible that the yields represent a forecast of a very low upper
limit.

------
0003
It literally broke the Fed:
[https://fred.stlouisfed.org/series/T10Y2Y](https://fred.stlouisfed.org/series/T10Y2Y)

If you go to the homepage of the st louis fed and search popular series, this
is the first that shows up.

~~~
cryoshon
this frightens me far more than the yield curve inverting. the information-
distributing capacity of the fed's website is built for routine loads, but the
fact that it is down suggests that everyone is scrambling.

------
alkonaut
It will be interesting to watch a recession that hits with zero or near zero
(or even negative) central bank rates together with ongoing market disruptions
such as the US/China trade conflict and Brexit. By “interesting” I mean
terrifying.

~~~
frankbreetz
I agree with this, also will we try to pass another tax cut to try to
stimulate the economy. It seems to me should use tax cuts, large increases in
government spending, and rate cuts to stimulate the economy on a "rainy days".
Doing these things during a good economy seems foolish to me.

~~~
radiorental
And Mitch McConnell recently argued the exact opposite. When asked he said
(paraphrising) "Why would we increase taxes when the economy is doing well,
why would we want to hurt that growth?"

The mind boggles.

~~~
prewett
Mitch McConnell and the Republicans have a non-nuanced view that taxes == bad.
It seems to lead to a lot of motivated cognition.

------
datpuz
I asked this in a similar thread a couple of weeks ago, but I feel like the
sentiment is a lot more pessimistic today than it was then. Anyway, I've been
holding way too much cash for the last two years in anticipation of a
recession. Everyone was telling me that trying to time the market is a bad
idea and that I should just invest and forget about it, but given the current
signals, might it be a good idea for me to hold out just a little longer?

I'm really on the fence about it, I know I've lost a lot to opportunity cost
and inflation and I regret holding out, but given recent news, it's hard for
not to want to keep waiting... just a little longer...

~~~
prewett
Timing the marking is a bad idea, but getting good value for your money is a
good idea, and has some element of timing. Don't try to figure out when
_prices_ are low, figure out when _value_ is high. For instance, relatively
low P/E, high dividend yield, high ROI, high ROE, etc. If you're looking to
invest in an index fund, check out the S&P 500 historical P/E:
[https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-
ea...](https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-
chart)

There's no shame in holding cash when value is low. People like Buffett are
known for doing it. There are no called strikes in investing, so don't swing
at mediocre pitches. But when value is high, you'd better swing for the
fences, because that doesn't happen all that often.

~~~
aoeusnth1
Earnings are also cyclical, just like prices. Imagine an industry whose
earnings are especially sensitive to business cycles. On an upswing of the
cycle, they look like a good deal because their P/E might be low, but that's
only because the market is reflecting the risk inherent in the industry. After
earnings crash during a recession, investing in such a "value" company at the
top starts to look like it was a bad idea.

------
torstenvl
Time to get more conservative with your investments. Just moved my retirement
accounts from 100% in a 2050 lifecycle fund to 75% in a 2030 lifecycle fund
and 25% in just government bonds.

Not all investment vehicles have a "lifecycle" fund but its intent is to be
_appropriately_ conservative for a target date. As the date grows closer, the
fund gets more conservative in order to lessen the risk of sudden swings right
before you retire.

I don't recommend day-trading, or liquidating all your investments, or
anything like that. However, if there's a professionally managed fund with the
specific goal of being stable along the timeframe of 11 years, I'm gonna take
it.

~~~
jermaustin1
I'm 40% in cash, 50% in S&P and 10% in small-cap. The last few months, all of
my contributions have been going into cash, so that when the fall happens, I
can hopefully scoop up a deal.

~~~
wil421
Let’s talk in 10 years and see if your cash will beat my S&P allocation.

~~~
Retric
It’s about diversification and timing the market not simply holding cash for
10 years. I also just sold some stock, but I am still 75% in stocks.

~~~
dboreham
"and timing the market"

Hmm. Isn't that known to be impossible?

~~~
leetcrew
not impossible, but very unlikely for a layman. it's like trying to win a 1v1
against an NBA player.

~~~
Retric
Depends on what you mean by timing the market.

Several strategies like keeping a fixed ratio of stocks to bond are
effectively timing the market. You pull money out of stocks when they go up,
and put money into them when they go down.

Personally, I am less interested in absolutely maximizing my returns as I am
maximizing the likelihood of reaching a return threshold.

~~~
refurb
A fixed ratio like rebalancing? That’s not really timing the market as you
typically rebalance after a set period regardless of how the market has moved.

~~~
Retric
But you still money money the opposite of how the market moved.

Rebalancing is really taking money out of whatever the better investment was
and putting it into what was the worse investment. Consider what would happen
if you rebalance an asset like a stock that’s slowly going to 0. Over time
your portfolio also hits ~zero even if everything else was going well.

Sure, for a sufficiently diversified investment like the S&P 500 it’s unlikely
to hit zero. But the question stands why take money out of the better
investment for 50+ years? You could be moving from 10% returns to 2% returns.
The theory is about timing the market, you get better returns investing after
ups than downs.

PS: Though better may in fact relate to stability more than absolute
percentages.

------
aalleavitch
You’re not going to get a return on investment if none of your consumers have
enough money to buy anything. A negative return is the market itself telling
you that you need to give them money for purchases to even happen.

------
alexandercrohde
So, somebody with a more rigorous understanding correct me if I'm wrong, but I
always thought it was a truism that any advice about the market appearing in
print was necessarily useless:

If there is advice (e.g. Buy/Sell when X happens) and there is statistical
proof it's a good indicator, then large companies with multibillion portfolios
would act on that evidence. At which time their behavior would "correct" for
the indicator. At which point there is no value to the layman.

~~~
prewett
As you may have noticed from the article, the point of yield curves inverting
is that it is a pretty reliable recession-coming indicator: "The curve
inversion to this point is flagging a 55-to-60 percent chance of a U.S.
recession over the next 12 months"

Also, if your timeframe is long-term, information in print is relevant, since
a stock frequently trades in a region for months or years. In fact, there is a
whole school of investing, value investing, that looks for companies the
market is undervaluing. Generally they do this by looking at information in
print but seeing it with more wisdom than the short-termers. (Problem is,
wisdom is difficult to get.) But for short-term trading, I think Bloomberg
would invite you to subscribe to the terminal. "Before it's here it's on the
terminal" I think they say.

~~~
alexandercrohde
>> "The curve inversion to this point is flagging a 55-to-60 percent chance of
a U.S. recession over the next 12 months"

So if that's reliably actionable, why aren't billion-dollar investors shorting
market indices right now?

------
neplus
I find the general interest of the public in inversions - similar to their
interest in negative yields - a bit surprising. I suppose it must be due to
these concepts seeming counter-intuitive. Some brief notes, not all of which
are meant to tie seamlessly together:

1\. What's the lag time? Inversions in the past have had rather large lag
times before recessions actually began (most recently they've been 24 months,
13 months, and 19 months for 2s10s). Inverted yield curves signal anticipation
of future rate cuts or long-term rates staying the same or whatever (depends
on the shape, obviously), but if you're of the view that global yields are
just going to stay low for the foreseeable future (an increasingly common
view, I make no claim as to my agreement with it) then sure the US and UK need
to adjust down and get flatter. Why is there not a recognition of a new normal
going on here? It's not like money is outrageously expensive or developed
economies have been running hot (as historically inversions have indicated).
We've had a decade of reasonably good growth in the US and UK with very low
rates and the assumption was that long-term rates would be ~3-4%. Maybe money
will just always be relatively cheaper now with long-term targets around 2-3%.

2\. How expensive is money? In the past when inversions have occurred the Fed
Funds rate has been significantly above inflation (sometimes by hundreds of
bps), making money outright expensive. Money right now is relatively expensive
(compared to the past 10 years, post GFC), but historically we're still
talking about money being very cheap. I'm a bit of a relativist, but I think
you need to make a distinction between money that is outright expensive and
money that isn't (as is currently the case).

3\. Where's high yield going? Over the past month a bit up. But this is after
we've seem high yield spreads compress in to historically tight levels. Cov-
Lite offerings are still being printed and snatched up despite the inversion
of 3ms10s we've seen for a few months now.

4\. Is there an issue in our financial systems plumbing? In my view, yes. The
yield curve has been inverted for foreign-buyers (over 2016-2018 a very
important buyer of treasuries) because they don't fund around the 3m point,
but rather on (OIS + Libor-OIS spread + XCCY of the relevant currency). If
you're a Japanese life insurer or European pension fund you can't take FX risk
(FX markets are volatile!) so you need to swap back into your local currency.

These hedging costs got to a point last October where you're facing
significantly negative yields (practically speaking) for foreign buyers so
they buy their local negative yielding debt instead (as it's a relatively
better investment). Because US auctions can't fail - primary dealers need to
act as a back stop - you've had firms like JPM and BofA taking on huge amounts
of treasuries. This has really clogged the o/n repo market and is beginning to
distort bank balance sheets. They can't keep absorbing the amount of issuance
the Treasury is pumping out with these trillion-dollar deficits. There's also
an issue of bill-issuance notional amounts and banks trying to elongate their
duration which is dampening down the 10yr.

The Fed needs to cut rates further - in my view - to steepen out the yield
curve to get foreign buyers coming back in. It'll probably need to be at least
75-100bps from here to get meaningful purchases. The Fed has really pushed
themselves into a tight spot from a pluming perspective.

5\. Yields down, prices up. If you bought the 100yr Austrian bond you'd get
negative yields, yes. Also if you bought the bond a few years ago you would
have outperformed equities on an absolute basis. So, like, negative yields
aren't great, but asset appreciation from a sovereign bond with no default
risk going into more negative territory is good if you're a fast money player
(the bond price is nearly $200 now!). In fact, it's even good for a pension
fund who has no intention of holding to maturity.

~~~
gniv
> Because US auctions can't fail - primary dealers need to act as a back stop
> - you've had firms like JPM and BofA taking on huge amounts of treasuries.
> This has really clogged the o/n repo market and is beginning to distort bank
> balance sheets.

I haven't heard about this. Any public reading material?

~~~
gniv
(Replying to myself)

I found this graphic:
[https://fingfx.thomsonreuters.com/gfx/mkt/12/4001/3971/U.S.%...](https://fingfx.thomsonreuters.com/gfx/mkt/12/4001/3971/U.S.%20primary%20dealers%20Treasury%20holdings.png)

linked from this article: [https://wkzo.com/news/articles/2019/jul/30/us-seen-
ramping-u...](https://wkzo.com/news/articles/2019/jul/30/us-seen-ramping-up-
bill-supply-after-budget-deal/922978/)

Funny thing is, given the recent trend in treasury yields, these banks are
making good money on their holdings.

~~~
neplus
You'll notice in this graphic the sharp jump in holdings that corresponds to
around October. This is when - for foreign buyers - the yield curve really
inverted for practical purposes, leading to primary dealers filling up their
books, which I detailed a bit in my initial post.

------
abstractbarista
Time to buy more equities, as always. Seriously, once you have good emergency
cash, just keep buying whenever you can and stay sharp at work. What happens
in the future is always a buying opportunity.

------
paulliwali
Let's say a recession is in the future (12-24 months), what should the average
person's position be? Transition to even longer-term investments?

~~~
abvdasker
Yeah, same boat. I'm a pretty naive investor and through my 401k have about
50% of my net worth invested in index funds with the other 50% in cash. Are
there simple strategies to limit exposure other than "sell everything"?

------
whenanother
lol, the gig (economy) is up. us employment numbers was a sham hiding
underemployment.

------
synaesthesisx
Market conditions have changed to the point where the yield curve is likely
irrelevant, and markets will continue to moon indefinitely.

~~~
rfrey
What specifically has changed?

~~~
whatshisface
I'm not the OP, but if the Fed decides that the stock market isn't going to
fall, then come hell or high inflation it's not going to fall. Some people
think that the recent history of interventionist monetary policy (QE) points
to a Fed that is willing to pump up asset prices in the event of trouble. Does
that mean the economy won't fall apart? No, but it does mean that holding cash
could be a worse idea than holding equities.

~~~
gzu
There’s now also moral hazard too with the rise of indexing and retirement.
They need to keep the WHOLE stock market up. Many fewer investors now do any
research and chose companies based on fundamentals. The companies that exist
today must exist forever into in roughly the same proportions to keep SP 500
index from falling too heavily.

Companies exploit this relationship now by destroying their balance sheets and
using buybacks to boost their relative market caps vs other companies to
capture more passive investment money flow.

There’s a good argument (elsewhere) that because vanguard of we’ve entered a
pseudo communist market system.

~~~
mrep
> Companies exploit this relationship now by destroying their balance sheets
> and using buybacks to boost their relative market caps vs other companies.

Buying back shares doesn't increase your market cap, it increases the value of
each individual stock since they now own a larger percentage share of future
earnings.

> to capture more passive investment money flow.

It has no real effect because index funds will actually have to sell stock
from companies who do buybacks in order to decrease their share of the company
back to normal proportional levels.

~~~
gzu
In practice it does increase market cap because constantly buying back shares
increases PE multiple growth which then makes the stock then sell at a higher
valuations since they are showing (artificial) growth. The long term stability
of those buybacks isn’t taken into account with valuation models.

Every new dollar put into index funds gets invested proportionally in each
company to the market cap of SP 500. Microsoft gets bid nearly 4.5c on every
dollar. The top 10 stocks combined get 25c on every dollar.

~~~
mrep
> The long term stability of those buybacks isn’t taken into account with
> valuation models.

Really? The money that can be made in finance results in billions of dollars
of wages and you think the PHDs they can hire with that money cannot properly
evaluate the effect of stock buybacks in their valuation models?

> Every new dollar put into index funds gets invested proportionally in each
> company to the market cap of SP 500. Microsoft gets bid nearly 4.5c on every
> dollar. The top 10 stocks combined get 25c on every dollar.

What's your point?

------
cryptozeus
What would be the best asset store money? Cash ?

~~~
majewsky
If there were a "best" asset store, people wouldn't bother with the other
ones. In reality, it's all tradeoffs depending on your situation.

~~~
cryptozeus
I mean during the recession not in general. Equities are clearly the best for
investment.

------
Myrmornis
What change if any should someone make if they have money in robo-investing
services like wealthfront? Is shifting money to cash or lower risk robo
accounts a sensible strategy, or have undesirable consequences crystallizing
losses/gains, a somewhat expensive perturbation going against the robo
algorithms that you have elected to trust?

------
DiseasedBadger
Real question:

When this doesn't happen, what becomes of the handwringing and the doomsaying?
Do we just forget the errors and self-interested lies, and treat the people
disingenuously emoting over this nothing, like good people?

Serious question.

~~~
aoeusnth1
Handwringing can be earnest, even if it's mistaken. Judge people by what they
could have known at the time, and their intentions.

But, more realistically, yeah, people will just forget all the bad
predictions.

------
yalogin
I wonder how much NPR's Planet Money contributed to the general awareness of
the Yield Curve. That is where I learned about this and they speak about this
multiple times on numerous episodes.

------
rglover
For what it's worth:
[https://www.youtube.com/watch?v=K-vW9ByuXTE](https://www.youtube.com/watch?v=K-vW9ByuXTE)

------
soVeryTired
Why'd neplus' comment below get killed? It's a bit jargon-y, but a decent
analysis of the macro landscape at the moment.

------
ccarpenterg
P(recession | inverted yield curve) = P(inverted yield curve | recession) *
P(recession) / P(inverted yield curve)

------
buboard
Still baffled that this is called a curve

~~~
soVeryTired
Any continuous locus of points is a curve - that's what makes the Jordan Curve
Theorem hard to prove :)

On a more serious note, the graph displayed in the article is a timeseries of
the difference between two points on the curve. The actual curve looks
something like this:

[https://en.wikipedia.org/wiki/Yield_curve#/media/File:Yield_...](https://en.wikipedia.org/wiki/Yield_curve#/media/File:Yield_curve_20180513.png)

~~~
buboard
isn't that discontinuous?

~~~
soVeryTired
Quips about the Jordan curve theorem aside, I don't think that's really a
meaningful question. It is or it isn't, depending on how you want to model it.

Yield curves are bootstrapped from known bond yields at liquidly-traded tenors
(1Y, 2Y, 5Y, 10Y, and short-dated). Those are the heavy black dots in the
image. Outside of those tenors the 'true' rate is anyone's guess: you're
basically interpolating. Whether that interpolation is continuous is up to
you!

------
golover721
While the press will blame trade tensions with China for this, in reality the
US economy has been doing well lately, however outside the US the other major
economies have not been growing. Ranging from plateauing to shrinking. That is
the real reason we are seeing this correction.

------
admiralpumpkin
Sensitive but not specific

------
gigatexal
One of the surest signs to a recession one can find.

~~~
frankbreetz
"As recession signals go, this so-called inversion in the yield curve has a
solid track record as a predictor of recessions. But it can take as long as
two years for a recession to follow a yield curve inversion."

[https://www.reuters.com/article/us-usa-economy-watchlist-
gra...](https://www.reuters.com/article/us-usa-economy-watchlist-
graphic/predicting-the-next-u-s-recession-idUSKCN1V31JE)

~~~
SketchySeaBeast
Just in time for someone else to come into power and have to deal with the
mess.

------
viraptor
No paywall: [https://outline.com/26v69X](https://outline.com/26v69X)

------
ConceitedCode
HN really seems to like these stories. Previous discussions:

8 months ago -
[https://news.ycombinator.com/item?id=18593407](https://news.ycombinator.com/item?id=18593407)

4 months ago -
[https://news.ycombinator.com/item?id=19463225](https://news.ycombinator.com/item?id=19463225)

4 months ago -
[https://news.ycombinator.com/item?id=19491763](https://news.ycombinator.com/item?id=19491763)

8 days ago -
[https://news.ycombinator.com/item?id=20615403](https://news.ycombinator.com/item?id=20615403)

~~~
odonnellryan
This is news, since it is the 2-10 year.

~~~
whenchamenia
You say election funny.

------
meddlepal
I don't want the economy to tank anymore than the next guy but if it blows up
before the 2020 elections and kills President Trump's chance of re-election
that would be a fantastic silver lining.

~~~
techntoke
I'm calling it now, but you won't actually see a recession until after he
leaves office. The rich and powerful control the market and it has no actual
real indicator to the effects a majority of people are seeing in their
personal lives.

~~~
mgamache
That supposes the rich and powerful give a rip about trump. They don't. If
anything, they don't like his unpredictability. But, I don't think it's really
tied to a person or party. For example, Obama provided the wall street
bailout.

~~~
kart23
I just thought of a horrifying thought. Bernie becomes president, recession
hits inauguration day. Banks start to fail, but he doesnt bail anyone out
because 'bernie cant be bought'. At least obama did the right thing and saved
the economy.

~~~
techntoke
I think Bernie and Warren are perfectly capable to work within the constructs
of a free market than most people give them credit for. However, that doesn't
mean that there shouldn't be transparency involved and if bankers begin
manipulating the markets to try to control politics then they should be
brought in for a public investigation in front of congress.

