Yield Curve Inversion and Recessions

By: Nadeem_Walayat

Apparently the yield curve inversion has a 100% hit rate, whenever a yield curve inverts it has always resulted in a recession.

Only problem is that it can take anywhere from 6 months to 3 years for the recession to materialise! Thus is another one of those nothing burgers that most analysts obsess over. For instance take the current inversion as of March 2022, those who swallowed the recession is coming mantra have been sat in money market accounts for the last 9 months whilst stocks such as META first doubled, then tripled and look set to quadruple, what kind of *****-A-Doodle-Doo indicator is the yield curve inversion? Which is why I don't tend to pay it much attention, given that it is pretty much useless in terms of investing.

The funny thing is that because a recession has NOT materialised the likes of Goldman Sachs are now proclaiming that this time is different! Which is actually more useful, i.e. expect the opposite of Goldman Sachs and you'll be right 9 times out of 10! Thus a recession is coming, not because of the inverted useless yield curve but because Goldman Sachs public propaganda tends to be false.

RECESSION ODDS

A recession is what's going to be needed to cool real inflation which the econofools will call deflation! There can be no deflation because CPLIE is FAKE! The real prices in an economy rarely fall, and then we have the GDP price deflator con which tends to be LOWER than CPLIE so that recessions can be statistically dodged! Economic activity is better measured by the EGF's on the Portfolio spreadsheet, when so many stocks are deeply in the red is warning of underlying recessionary forces at work and this from a basket of largely tech stocks, so limited in scope but still beats fake GDP! So as a rule subtract 1% to get a more accurate measure of GDP, which means today's annualised Q1 rate of 2% in reality is more like 1%. So when the US is reporting an annualised rate of less than 1% than that translates into economic contraction.

So on the official GDP measure it is highly probable that the US can dodge a recession i.e. 2 consecutive quarters of negative growth but if GDP slows to 0.5% that in reality will translate into contraction of 0.5%. What this means is that interest rates won't be coming down anytime soon no matter what CPLIE does as the Fed will point to positive (fake) GDP to maintain higher interest rates. Furthermore there is no big collapse to trigger a recession i.e. in 2000 it was the tech sector, 2008 the banks and housing market, 2020 was the shutdown, and today there is nothing on an economy wide scale that is actually collapsing to trigger a deep recession.

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By Nadeem Walayat

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Nadeem Walayat has over 30 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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