What a Yield-Curve Inversion Really Says About the U.S. Economy

There is no shortage of folks publicly hoping for a recession to prevent Trumps second term.
Though I do agree that a recession is innevitable. It has been for long time.

The dynamic to consider is this: the longer we postpone, the harder it will hit. However, the better off we are when it hits, the harder it will be on our competitors (Russia, China, etc). We know it and they know it. This global financial meltdown is being manipulated (by all with means) as a weapon. Trump is trying to (as it could be argued that both Bush and Obama did) reposition more of this financial fallout onto our competitors, so we suffer from it less and emerge from it more easily than they do. And they are trying to do precisely the same to us.

 

Trump is doing nothing to stop it as he doesn't believe it's gonna happen, Just like Bush.... but don't worry, republicans will whine about the next Dem President not cleaning up Trump's mess fast enough

 

You know this how?

 

he said it publicly that he doesn't believe it, just like the Bush admin said the economy was fine... until it wasn't

now, he may not really believe that, he is probably lying and hoping it happens after the 2020 election if that is what your asking

 

Pretty much. Trump has an obligation to promote 'faith' as it were in the economy. He can no more warn against a coming recession than he can tell people to stop paying their taxes.

If Trump is who I think he is, he'll spend the first 3 years of his second term avoiding the recession while making the nation as financially strong as possible (and weakening China as much as possible) and then tank everything his fourth year so his predecessor can't reverse the dynamic, leaving the US in the best possible position to 'win' (floabt) the imminent global collapse.

Time will tell.

 

so you think it's Trump's job to lie to the American people about the economy?

I think it will be a dem President working his first three years after Trump loses in 2020, trying to get the economy stable again, I would life to see a big tax cut for the middle class, maybe a stimulus, an infrastructure deal to create jobs, ect..

 

No, he does not have a damn thing to do with it. Politicians have no more effect on the economy than they do on the weather.
The Federal Reserve along with European and Asian central banks induced the largest stimulus package in history into the world economy inflating asset values and creating false prosperity.
Their pump and dump scheme is now coming to an end and it is my guess that this winter will be the beginning of the worst recession the world has seen sense the great depression. The reason being is all asset classes are overinflated and the world consumers are over their heads in debt.
The central banks have no where to go when this defecation hits the rotary oscillator because they are already suppressing interest rates and cannot do anything meaningful when the bottom does drop out. Whomever wins the next election will find themselves going down in history as the next Herbert Hover.

 

How do you square "we are not in a recession" with "the trend is towards deflation" ?

If we get deflation - that means the economy is horrible in general.

 

The meaning associated with the inverting of the yield curve, and the reason it is an indicator of recession is that it shows increasing demand in short term borrowing.
Short term borrowing is what business does to cover short term cash flow problems. When the demand for short term money increases to the point where short term interest exceeds long term interest that is considered to be an indication that there is excessive demand for short term borrowing. Thus it is an indication of excessive corporate cash flow problems.

 

But corporations right now generally don't have cash flow problems. They're sitting on piles of money and don't see an adequate place to invest it.
Or at least that was the situation just a year or two ago coming out of the Recession. (I doubt the situation has changed all that much)

 

Many corporations are having cash flow problems. Many corporations do not even make profits. Some of the larger names are Tesla, and Netflix, but there are thousands of others smaller companies who do not make profits and rely on lines of credit and stock offerings to keep the doors open.
What the yield curve is showing is that the demand for short term credit is rising considerably.

 

No, I think it had more to do with the depth of the last recession which pretty much dwarfed those of the previous 50 years. And we can certainly include the 1 trill in yearly deficit spending to stimulate the economy. If Trump did not spend 2.5 trill more than the government took in over the last 3 years i think this boom would have been come to an end already.

 

The extension past 10 yrs was a result of central banks worldwide pumping more liquidity into world than it has ever seen by a long shot.

 

However, when investors become concerned that growth may slow and markets may turn volatile, they often seek shelter in longer-term Treasury bonds. Other investors, fearing that the Federal Reserve may begin to cut their federal funds target rate, may sell short-term bonds and seek to lock in the yields of longer-term bonds before they fall. When that happens, the surge in demand for those long-term bonds may push their yields down to the point at which they are lower than those of shorter-term bonds and the yield curve inverts, sloping downward from left to right. While the Federal Reserve recently cut the Federal funds rate by 0.25%, yields on longer-dated Treasury notes, which are set by the market, have fallen much further. Since the start of the year, yields on 2-year notes have fallen by about 0.91% and yields on 10-year notes have fallen by about 1.10%.

https://www.fidelity.com/viewpoints/investing-ideas/inverted-yield-curve

 

remember when conservatives and dems both gave lip service to a balanced budget. What a joke, Dems want 100 programs and the repubs don't think the rich should pay anything

 

I think it's pretty obvious that the Fed can't keep rates as low as they have been for much longer.

So I think it's doubtful investors think the rates are going to drop lower or that they are trying to lock in current rates in longer-term bonds.

The only way rates would be able to remain low is if economic growth was extremely small, keeping the natural market rate of return low. I won't discount that possibility, but that's the only way rates would be able to stay where they are or go down longer-term.

 

They just cut rates and it looks like they may cut some more.

Traders now see a bigger chance of another rate cut by the Federal Reserve in September after it lowered interest rates for the first time since 2008 and hinted at further accommodation.

The fed funds futures market now points to a 74% chance of at least a quarter-point rate cut at the Fed’s September meeting, according to the CME FedWatch tool. Before the Fed’s decision at 2 p.m. ET, traders were pricing in about a 68% chance of a rate reduction in September.


Traders are also pricing in two more cuts to the benchmark lending rate to a range of 150 to 175 basis points by the end of 2019.

The tool is based on futures pricing from live markets and reflect the views of traders placing real bets on the CME exchange.

https://www.cnbc.com/2019/07/31/chances-of-a-september-fed-rate-cut-increase-to-80percent.html

I don't like it cause I don't think it will work and they are burning their "fix" money.
But there is little question in my mind that the tariffs are screwing up not only our economy but the world economy. But I don't make the call.

 

Your scenario is faulty in that it assumes people fearing market volatility would reinvest in long term bonds. The fact is most rational investors looking for a safe haven would be much more attracted to short term bonds due to higher yields and the flexibility to liquidate their positions quickly in the event of a correction giving them the opportunity to buy at reduced prices.

 

The budget does not necessarily need to be balanced, but at the point where servicing the debt becomes a major expenditure of the budget, we have a serious problem.

 

Short term bonds normally pay less because of the reasons you state. When people fear a recession they seek longer term protection for their money as well as to take advantage of the normally higher rates. But when they flee to bonds this drives down the rates on the long term bonds creating the inversion. That's why it is an indicator of pending recession.

 

We are not talking about normally. This discussion is about the inversion of the yield curve which has happened in advance of all recent recessions. That inversion makes short term rates higher than long.

 

That's what I said.

 

No it is not. You said they flee to long term driving dow rates at the long end. That is the opposite of what I said that they flee to short term, the fact that the curve remains inverted in spite on increased demand, is proof of the increase in need for short term financing putting pressure on all short term bonds.

 

What makes bond yield go down? High demand.
I think somewhere along the line you have forgotten what an inversion is.
It's when long term rates are lower than short term rates.

 

Look you are not getting this. There are two forces at work here supply and demand. You are only looking at one side, bond purchasers. While you are correct that increased demand at the high end drives down rates, the other end of that equation is that there is less supply (borrowing) so purchasers must accept lower returns.

We see the opposite at the short end. The demand for borrowing is higher at the short end, forcing borrowers to pay higher rates for their bonds. Treasuries compete with corporate and municipals, and are auctioned accordingly.