It’s funny, I saw on twitter today a U.S. economic bear states that the economy is so fragile. That look how easy it is to get the yield curve inverted. Are you gals and guys noticing that the same people obsessed with the Federal Reserve, QE, Balance Sheet, and Repo Man recession are now Coronavirus news update people.
Its the nature of the beast; a cult doesn’t know its a cult because they genuinely believe in the darkest witchcraft that is their guide to their salvation, which is an American crash.
On to the inverted yield curve, which does have economic implications. However, I have taken a much different approach to this economic event than anyone else I believe on planet earth.
An inverted yield curve is one of my 6 recession red flags that I would need to raise to usher the word recession.
My model can be found here:
I already raised this flag back in December of 2018, because I genuinely believe we inverted the yield curve back then. However, lets even go back further.
My forecast at the end of 2017 was for yields to invert in 2018, and when it does, it will be the longest time before the first Inversion to the recession.
“I am also looking for yields to invert in 2018.”
“I believe we will see an inversion in 2018, but it won’t mean a recession soon. It would be the longest time before the first Inversion to a recession ever in history if we inverted in 2018.”
Since that Inversion, we got 3 rate cuts as well. However, notice that I don’t use the word recession, however. This is because this is one piece in a more significant economic puzzle.
In fact, when the 2/10 yields inverted and America was googling an inverted yield curve and recession. I wrote this:
Because of this thesis.
So what happened since the Inversion. The stock market hit all-time highs, some of the economic data got firmer. A lot of American 4th quarter bears took the Atlanta Fed initial 0.03% GDP forecast and assumed the worst right off the bad. This has been a terrible tactic of the bears for years now. GDP came in at a decent 2.1%, and while I am not impressed with the composite of the growth. In fact, this is the worst composite of GDP we have had for something that has come in at 2% plus. It’s still good enough to keep the expansion going. One thing that I was happy to see is that housing added a definite bump into GDP this time around. Housing starts should be positive again in 2020.
Now, we are back under 1.60% on the 10-year yield. So, let’s focus on this aspect.
Since the inverted yield curve, I have warned people not to jump into the higher rate of growth camp until we can break over 1.94% on the 10-year yield and see follow-through bond selling.
“However, for me to believe in the better growth story next year, not super growth, or record-breaking growth, just a tad higher in growth, the 10-year yield needs to close above 1.94% and get follow-through bond market selling. Until then, I won’t take that stance at all.”
In my 2020 forecast, I stressed not to neglect the lower levels of my multiple-year channel of 1.60% on the 10-year yield, and bad headlines can drive us lower like it did 2012, 2016, 2019. Now 2020 joins the list of the 10-year yield below 1.60% due to bad headlines, even though some of the economic data has gotten firmer recently
“For many months on social media sites, I have talked about how important it is for the bond market to close above 1.94% and get follow-through selling. A yield above 1.94% would mean that the bond market has more confidence that we will have higher growth next year. Until then, I would be skeptical of any story that predicts a higher rate of growth for 2020.”
“Any stock market sell-off, correction, or near-bear market can drive money into bonds short term. With many headline-driven risks in play next year, don’t ignore the lower end of my bond market channel just yet. If growth picks up, even just a tad next year, then I don’t expect we will stay under the 1.60% level too long if we see headline risk. This has been the reality in this record-breaking expansion; short-term headline-driven events take us below 1.60% on the 10-year yield. However, we don’t stay there too long because we were never going into recession. Slowing growth took yields lower, but slower growth doesn’t necessarily mean an imminent recession. The failure to understand this has been a plague for the American Recession Bears.”
Three different events drove yields under 1.60% on the 10-year treasury in this cycle.
1. 2012 European Bond market scare caused some to speculate that Spain would default.
2. 2016 Brexit scare, that was overkill.
3. 2019 Trade war tap dance and the inverted yield curve
2020 Forecast Article:
I don’t know how else to say it, I have tried for many years now to show you that a 1 handle on the 10-year yield isn’t recessionary yet and that these people don’t really have economic models. This is why they have been wrong for so long, and they simply don’t care that they have been wrong. This is cult-like behavior. Just be mindful of this with the Coronavirus, Repo Man, Balance Sheet American bears.
Regarding the coronavirus, something that I have talked about on my bond market discussions weekly that has been picked up by the Washington Post. This headline can drive yields lower and lower if it gets worse. However, don’t make this a U.S. economic crash thesis. If we did what China is doing right now, it would, of course, have economic implications, especially if we couldn’t contain the virus. However, we are so far from that now, and the economic impacts currently are limited to a few sectors. Remember, let the information and data come to you first before pulling the lotus plague recession on us.
Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data daily on his Facebook page https://www.facebook.com/Logan.Mohtashami and is a contributor for HousingWire.