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> While the 3-month to 10-year spread “has a relatively decent track record of predicting recessions, it suffers from a timing problem,” said TD Securities U.S.

by apo 8y ago

> While the 3-month to 10-year spread “has a relatively decent track record of predicting recessions, it suffers from a timing problem,” said TD Securities U.S. rates strategist Gennadiy Goldberg. “Its inversion can suggest a recession occurred six months ago or will occur two years from now.” Not just "relatively decent," but perfect over the last seven recessions at least. When the 3-month treasury yields more than the 10-year treasury, the economy has been in recession within two years 7/7 times. https://seekingalpha.com/article/4250287-fully-inverted-yield-curve-consequently-recession-coming-doorstep-soon https://seekingalpha.com/article/4250287-fully-inverted-yiel... There are a lot of leading economic indicators, but this one beats them all in terms of reliability. There's one complicating factor that I don't see getting the attention it deserves. Unlike previous cycles, the Fed has been actively manipulating long-term yields for over a decade. That used to be taboo, but not anymore. The Fed holds trillions of dollars of long-term treasuries, accumulated under its QE/X programs. The ownership of that debt by the Fed puts downward pressure on long-term yields. Recently, the Fed started allowing its long bonds to mature through its "quantitative tightening" (QT) program. That pressure (which really ramped up a few months ago) may have temporarily pumped up yields, and in so doing delayed a yield curve inversion signal. The status going forward of QT and the Fed's gargantuan balance sheet is anybody's guess. My bet is the Fed is done with QT until at least after the 2020 election. If things really start going south, watch for the Fed to begin buying stocks directly like the Bank of Japan has been doing for years. That and negative-yielding treasuries. Either way, this is unprecedented territory. Signals could be quite confounded for the foreseeable future - which means policy makers are winging it. They almost certainly will make the wrong decisions.

cinquemb 8y ago
> There's one complicating factor that I don't see getting the attention it deserves. Unlike previous cycles, the Fed has been actively manipulating long-term yields for over a decade. Yeah, very few are talking about what has been going on in the back end by them and how it distorts the curve gymnastics, but even the fed warned last year that it (long end inversion) might not be a reliable signal as it once was (because of their dealings) implying that things may come faster than people may expect if that was what they were only looking at. The big problem is that people are now starting to realize is that even though QE can provide liquidity, it can't provide solvency: more debt just makes it worse when banks try to lend out their fresh reserves they were able to get from their trade in for liquid assets from the fed, especially if the top line of companies stays the same or starts to deteriorate, even setting aside companies that have been skirting along on negative income for so long because they were able to keep rolling over debt at ZLB. >The status going forward of QT and the Fed's gargantuan balance sheet is anybody's guess. My bet is the Fed is done with QT until at least after the 2020 election. QT is still on, just tweaked now: " - Begin tapering the “runoff” of Treasury securities in May. - End the runoff of Treasury securities on September 30. - Continue shedding mortgage-backed securities (MBS) at the current maximum of $20 billion a month, essentially until they’re gone. - After September, reinvest MBS principal payments into Treasury securities. Chair Jerome Powell said during the press conference that the balance sheet will by then be “a bit above $3.5 trillion.” - The balance sheet will remain at this level even as the economy grows, thus slowly shrinking in relationship to GDP. - The Fed may sell MBS outright to speed up the process of getting rid of them. - No decision has been made on the delicate issue of the maturity composition of the balance sheet – which would require buying short-term bills for the first time in years to replace longer-term notes and bonds." [0][1] >They almost certainly will make the wrong decisions. Yes they will, and plenty of traders are betting on it. It's amazing that some people think CB's have control of this ship… but hey, someone needs to be on the other side of the trade. [0] https://wolfstreet.com/2019/03/20/feds-new-balance-sheet-plan-get-rid-of-mbs/ https://wolfstreet.com/2019/03/20/feds-new-balance-sheet-pla... [1] https://www.federalreserve.gov/newsevents/pressreleases/monetary20190320c.htm https://www.federalreserve.gov/newsevents/pressreleases/mone...
sytelus 8y ago
As an investor, I find this rather a good thing. If I have to constantly afraid of recession then I would tend to just wait and sit on cash. If Fed is doing all these interventions including directly buying stock with their trillion dollar war chest + printing press then may be recession can be avoided or at least softened out. I also worry that recession may happen just because people are expecting it to happen even though economy is pretty sound. In that case, Fed intervention can avoid things falling fast just for short time and collective fear can be subsided back to sanity.

by apo 8y ago

cinquemb 8y ago

> There's one complicating factor that I don't see getting the attention it deserves. Unlike previous cycles, the Fed has been actively manipulating long-term yields for over a decade. Yeah, very few are talking about what has been going on in the back end by them and how it distorts the curve gymnastics, but even the fed warned last year that it (long end inversion) might not be a reliable signal as it once was (because of their dealings) implying that things may come faster than people may expect if that was what they were only looking at. The big problem is that people are now starting to realize is that even though QE can provide liquidity, it can't provide solvency: more debt just makes it worse when banks try to lend out their fresh reserves they were able to get from their trade in for liquid assets from the fed, especially if the top line of companies stays the same or starts to deteriorate, even setting aside companies that have been skirting along on negative income for so long because they were able to keep rolling over debt at ZLB. >The status going forward of QT and the Fed's gargantuan balance sheet is anybody's guess. My bet is the Fed is done with QT until at least after the 2020 election. QT is still on, just tweaked now: " - Begin tapering the “runoff” of Treasury securities in May. - End the runoff of Treasury securities on September 30. - Continue shedding mortgage-backed securities (MBS) at the current maximum of $20 billion a month, essentially until they’re gone. - After September, reinvest MBS principal payments into Treasury securities. Chair Jerome Powell said during the press conference that the balance sheet will by then be “a bit above $3.5 trillion.” - The balance sheet will remain at this level even as the economy grows, thus slowly shrinking in relationship to GDP. - The Fed may sell MBS outright to speed up the process of getting rid of them. - No decision has been made on the delicate issue of the maturity composition of the balance sheet – which would require buying short-term bills for the first time in years to replace longer-term notes and bonds." [0][1] >They almost certainly will make the wrong decisions. Yes they will, and plenty of traders are betting on it. It's amazing that some people think CB's have control of this ship… but hey, someone needs to be on the other side of the trade. [0] https://wolfstreet.com/2019/03/20/feds-new-balance-sheet-plan-get-rid-of-mbs/ https://wolfstreet.com/2019/03/20/feds-new-balance-sheet-pla... [1] https://www.federalreserve.gov/newsevents/pressreleases/monetary20190320c.htm https://www.federalreserve.gov/newsevents/pressreleases/mone...

sytelus 8y ago

As an investor, I find this rather a good thing. If I have to constantly afraid of recession then I would tend to just wait and sit on cash. If Fed is doing all these interventions including directly buying stock with their trillion dollar war chest + printing press then may be recession can be avoided or at least softened out. I also worry that recession may happen just because people are expecting it to happen even though economy is pretty sound. In that case, Fed intervention can avoid things falling fast just for short time and collective fear can be subsided back to sanity.