Economy

Yield Curve Inversion

August 18, 2019
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Strewth, WHAT a shitty week that was.

Made a TON of mistakes at work (some forced, some unforced) and it doesn’t help when I’m dealing with probably the most arrogant, demanding and obnoxious client in a LONG time.

Still, moments like these I come back to the tried and tested adage for myself, which is – when I’m 80 will I remember this time?

The answer I’ve decided, is a resounding NO.

WHEW.

Now that’s off me chest, let’s move on shall we?

What’s down with the yield curve?

We also heard this week the big bruhaha about something called “yield curve inversion”, which set off a cacophony of media noise about recession this, and downturn that.

But why and what does it actually mean?

I’ll try and explain.

Just like you borrowing money from the bank, governments and large institutions sometimes borrow money from each other.

Welcome to the bond market, with the typical transaction in the billions if not more.

Image result for bond
Um, no… not that Bond… James Bond.

And just like how there are different loan maturity dates for different loans, there are different bond maturities for different bonds.

Now logic would state that if I am holding a longer term bond, I would want to be compensated more than if I was holding a shorter term bond.

This is because I am locking my money up for longer, and as no one can predict the future – I would want a higher return for this.

However, what’s happened in the past week, is the 10 year yields dropped below 2 year yields for the first time since 2007.

So what?

Well, it’s just that when this has happened, usually it has preceded every recession going back longer than I was born…

160819-1
bps…bps… beats per second?

Uh oh.

Yeah exactly.

What this is telling us, is that the market is bracing for more sluggish growth ahead.

Hence why the stock market (the smallest but most visible with the biggest media noise) dropped like a stone.

What to do TheFrugalSamurai?

PANIC, RUN, SELL!

Is not what I’d be doing.

Because as I’ve so often alluded to, by the time the market has reacted – most often the big moves have already occurred.

However I am a big believer of history and although past performance is not an indicator of future…blah blah blah, I still think that history is a great teacher for pattern recognition.

It is inevitable that a recession will occur, because that is how market cycles work .

Note: I refrain from putting in timeframes, because I am not a middle-aged Gypsy woman. I am not even a woman, nor am I middle-aged. I may however be a Gypsy – but that is undetermined. It is all very confusing.

But I digress.

History has told us that recessions usually follow within a couple of years:

Sigh.

Fair enough.

It might happen, it might not.

But I can tell you what I think will happen in the short-term.

Please do!

And this is my opinion only, but I think that these days politics and economics are more entwined than ever.

Look at the trade war – a couple of schoolyard bullies going at it with each other; look at the Brexit mess – each political party yelling and screaming from the rooftops that their proposal is correct (by corollary, making each proposal incorrect); look at the Eurozone; the recent HK protests… all political situations with direct cause and effect on a nation’s economy.

Add in nationalist fervor and more populist feeling than ever before – and you have a cauldron of political quagmire wrapping itself like a heavy chain around the markets.

However, the silver lining is that politics is built on feelings, and emotion, and sentiment, and perception.

That’s why I think the major character later this year will be The Donald McDonald.

There’s a small issue of him running for re-election in 2020.

And love him or loathe him, I think the guy is a master manipulator and negotiator.

Methinks he’ll do everything and anything he can to get re-elected, to “Make America Great Again”.

The threat of a US recession is NOT what he wants to run his platform on.

Which is why he is vehemently going after Fed Chair Jerome Powell personally on the socials (to force the fed to cut rates, read why that’s a positive for the economy here).

Which is why he is going to try and put a resolution to the trade war.

Which is why we’ll probably see markets bounce back again.

~~~

Although I could be wrong. And I’ve been known to be wrong before, many times in fact.

August 2019 could be the beginning of the Great Recession v2.0.

In which case, it’s been great knowing everyone, but the old Curriculum Vitae needs a good polish.

But nah, methinks we’ll be right in the short-term.

And (most likely) The Donald McDonald gets back in, using whatever means he had at his disposal – that’s when it’ll get really interesting.

Hm, which conveniently makes it within that 2 year timeframe predicted by the yield curve inversion… gulp.

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