*Investors Blog*

Sep 2, 2005
The Recession Monitor keeps climbing

Screenshot 2022-02-09 at 02-29-46 Public ChartLists StockCharts com.jpg
That chart is tracking the Yield Curve and pointing to an inversion of the 2 and 10 year Treasury yield as a recession indicator.

Fair enough. Lots of economists and psudo-economists (economic podcasts love to talk about the yield curve) use it as an indicator. It's not the only one though.

Typically, the longer an institution borrows your money, the less chance you'll be paid back, the higher the risk, the more interest (the yield) the bond pays. The yield curve should look just like that: A curve. Short term Treasuries pay less than long term Treasuries, with each successive increase in time having a slightly higher yield. When a short term Treasury has a higher yield than a long term Treasury, this is an inverted yield curve. The idea behind it is that when a 2-year Treasury has a higher rate than a 10-year Treasury, the bond market is signaling the government will have a more difficult time repaying the bond in 2 years than in 10 years. That is, a 2-year Treasury is riskier than a 10-year.

It is incredibly disingenuous to call the brief inversion in 2020 an actual recession indicator. The general view is that the yield curve has to stay inverted for a sustained period of time. You can see the previous three inversions remained that way for at least a year and sometimes up to two years.

What does the yield curved not predict? A global pandemic, which is what caused the recession. Would the 2020 inversion blip have continued for a sustained period of time and become an actual recession indicator? Maybe.

It's even more crazy when you look at how the yield curve reacts in relation to inflation. When the bond market believes inflation is a problem, the yield curve will become steep as investors look to protect their investment against long term inflation. That is the opposite of what is happening right now. When the yield curve flattens (the extreme being an inversion), the bond market believes inflation is not going to pose a long term issue.

There's an indicator for you: Current bond pricing is indicating inflation will not remain a problem.
Folks - a question out of sheer ignorance -- to potentially weather recessions, what are simple items that one can do?

Carry minimal debt and remain at a stable job? I am shaping up to where soon here I will only have a mortgage.
Folks - a question out of sheer ignorance -- to potentially weather recessions, what are simple items that one can do?

Carry minimal debt and remain at a stable job? I am shaping up to where soon here I will only have a mortgage.

A couple of hints.

The biggest thing to do is watch your spending. Look at your budget and see where things can be cut.

Taxes. Make sure you are paying only the taxes you need to pay. If you are getting large refunds back in the spring then rework your withholding so you are closer to break even. That extra money each payday can be saved or invested.
There is an old says that goes:

Economists have predicted 10 out of the last 3 recessions.

If this indicator really was what you claim, all the money would clamor to get to safety and the markets would take a dive.
Are you correct??? Maybe.
Are you wrong??? Just as likely.
I always talk those recession talks with a grain of salt. I remember the dot com bust, people were saying it was going to crash back in 1996 but it took 4 more years before it finally crashed and when it did crash, it didn't crash back to 1996 levels and it did recover, but it was sideways for a while. Instead of a crash, you might have what we have now, goes up for a while, then crashes down a little bit, like that 10% mark, then goes back up again. And then repeats but in the end, you don't go up or down that much.
Always normal to have wacky days like today, a war starts and of course the stock market takes a big hit but then comes roaring back by the end of the day. When you think you know what it's going to do, it kinda tends to do the opposite.
What people tends to forget is, both economic collapse and hyper inflation are bad for long term economy. It is healthy to have growth and recession and we are sort of overdue for one.

We will have a recession or depression, just not sure how big and when, to clear out the garbage in our economy (crypto? NFT? failing tech startup?), reset some debt and wipe out some greedy folks' life savings, then start another cycle with a clean slate.

Eventually it has to happen, the longer you postpone it the bigger the bubble and the bigger the crash.