Tag Archives: recession

An Inverted Yield Curve Did Not Always Precede Recessions

I made a post before how an inversion of the yield curve has preceded the last 8 recessions in the US. Recently, I came across this interesting chart on Twitter which shows the yield curve spread for US treasuries with a maturity of 3 month and 10 year from the last 100 years.

This chart shows that yield curve inversions didn’t happen between the 1930’s and 1960’s before a recession happend.

Long Term Yield Curve Inversion Chart
Long Term Yield Curve Inversion Chart

Currently the US 3 month – 10 year yield curve is inverted.

Yield Curve Inversion 3 month - 10 year spread
Yield Curve Inversion 3 month – 10 year spread

Does The Inversion Of The Yield Curve Signal a Recession?

An inverted yield curve is one of the few indicators that before have always correctly signalled an upcoming recession. An inverted yield curve happens when the yield on 10 year treasuries is below the yield on 2 year treasuries (sometimes called the “2s10s”). The 2-10 year yield curve is the most common people view. Currently the 2-10 year yield curve is positive after it turned negative for the first time since 2007 at the end of August.

Yield Curve Inversion
Yield Curve Inversion

In the past a negative yield curve has always signalled that a recession could happen in the next 1 to 2 years. Note from the chart below that the curve can be at or below zero for a long period before a recession happens. Furthermore from the chart it looks like a rapidly steeping yield curve signals a recession is close.

Yield curve inversion long term chart
Long term chart of the yield curve

The question arises will an inverted yield curve signal a recession this time? A big difference in my opinion with other times is that this time the yield curve is watched by a lot of participants in the market and so a lot of stories are published about it.

Stories mentioning "yield curve"
Stories mentioning “yield curve”

From the mainstream media such as Drudge Report.

Drudge report yield curve inversion recession
Screenshot of the frontpage of Drudge Report on August 14, 2019

To the president of The United States who even talks about a “crazy” inverted yield curve.

Donald Trump President of The United States Tweets on the Yield Curve Inversion
Tweets from the president of the United States Donald Trump mentioning the yield curve inversion

And even members of the Federal Reserve such as Atlanta Federal Reserve President Bostic (picture below) and Neel Kashkari (in a post on Medium here) the President of the Minneapolis Federal Reserve are openly talking about the inversion of the yield curve and what it means for the economy.

Federal Reserve Bostic Yield Curve Inversion
Headlines from Fed’s Bostic on May 16, 2018

It remains to be seen whether the signal works this time.

Where Is That Stock And Dollar Crash I’ve Been Waiting For All These Years?

Fear sells. For years a big fear-mongering industry has been putting out books and articles about how the economy is going down the drain soon and the U.S. dollar will be worth less than the paper it is printed on. The bears have been saying this for years. Here are a few (hilarious) examples of “Doom & Gloom” books over the years that I found.

Below is picture of an impressive 300-page book by Doug Casey called “Crisis Investing: Opportunities and Profits in the Coming Depression“. In this book Doug Casey makes the case that the market is about to crash any minute now! The dollar will be destroyed soon and the stock market is going to zero. The next great depression is just around the corner. You have to act fast before all your wealth, that you have been carefully building up for years, will vanish in front of your eyes! But wait.. Let’s check something.. When did this book hit the shelves? July 1980?! There certainly hasn’t been a “new great depression” since then.

Crisis Investing: Opportunities and Profits in the Coming Great Depression by Douglas Casey

Crisis Investing: Opportunities and Profits in the Coming Great Depression by Douglas Casey (1980)

Ok maybe Doug was just a little bit early on his call that ‘the world as we know it’ is going to end. What about this book from Jerome F. Smith: “The Coming Currency Collapse“. In this book Jerome describes how the dollar is going to be toast in the near future. Oh wait that one was penned down in September 1981. He’s only 33 years (and counting) off on his call of an imminent dollar crisis. The only thing that collapsed in all those years is the price of this book since you can now get it for $ 0.01.

Coming Currency Collapse by Jerome F. Smith (1981)

Coming Currency Collapse by Jerome F. Smith (1981)

What about Howard J. Ruff’s book “How To Prosper During The Coming Bad Years“? This book came out in 1984. Everyone who followed the advice in this book missed the greatest bull market in stocks ever. The S&P 500 was trading at 160 at the time. Some reviews for the book on the Amazon page even talk about all the “missed opportunities” investors lost because they followed the recommendations in this book.

How to Prosper During the Coming Bad Years by Howard J. Ruff (1984)

How to Prosper During the Coming Bad Years by Howard J. Ruff (1984)

But Howard J. Ruff was maybe just a few years off of his imminent call for a new period of “Doom & Gloom”. In this book I got here by Martin D. Weiss called: “How To Survive The Money Panic” the author talks about the coming destruction of the U.S. economy and the U.S. dollar (of course). This one came out in 1989.

The Money Panic by Martin D. Weiss (1989)

The Money Panic by Martin D. Weiss (1989)

And then there is this one by Ravi Bata called The Great Depression of 1990. 1990? You got to be kidding me.

The Great Depression Of 1990 by Ravi Bata (1988)

The Great Depression Of 1990 by Ravi Bata (1988)

Here are some more recent ones:

The Dollar Crisis: Causes Consequences, Cures by Richard Duncan. This book came out in 2005.

The Dollar Crisis: Causes Consequences, Cures by Richard Duncan (2005)

The Dollar Crisis: Causes Consequences, Cures by Richard Duncan (2005)

This one is more bizarre because shortly after this book was published in 2008 the dollar index set a long term bottom (chart) and is trading higher ever since. The Collapse of the Dollar and How to Profit from It by James Turk.

The Collapse of the Dollar and How to Profit from It by James Turk (2008)

The Collapse of the Dollar and How to Profit from It by James Turk (2008)

And here is one from November 2013 where the author is forecasting a stock market crash in 2016. The Crash of 2016: The Plot to Destroy America – and What We Can Do to Stop It by Thom Hartmann.

The Crash of 2016: The Plot to Destroy America - and What We Can Do to Stop It by Thom Hartmann (2013)

The Crash of 2016: The Plot to Destroy America – and What We Can Do to Stop It by Thom Hartmann (2013)

The last time I checked (5 minutes ago) the S&P 500 was still trading near all time highs. The U.S. Dollar is still the world reserve currency and certainly not reduced to toilet paper. The Euro is still around as are a lot of other economies and currencies the bears have been warning us for, for years.

All the authors of the books above are still touting their doom & gloom stories to this day.

The bottom line is this: Although the bears are sometimes right about their calls for stock market crashes (2000-2002 and 2008-2009) and housing market crashes (2006-2011) the crashes never seem to bring us to a new normal of forever lower stock/housing prices and a destroyed currency (at least for the U.S. market and the U.S. dollar).

This doesn’t mean that it’s never smart to be a bear. It can be very profitable, but you need to have your timing almost exactly right. It is no secret that the market goes up on average every year (7%).

Being a long term bear is thus bad for your financial health.