The possibility of a major financial crisis, similar to the one that occurred when Lehman Brothers went bankrupt in 2008, is increasing day by day. An important indicator in this regard is the inverted yield curve of US bonds, which is historically associated with recessions.
As an example, it is worth noting that from the late 1960s onwards every major recession is preceded by a long inverted yield curve.
Here it is worth noting that a downward sloping or “inverted” yield curve means that investors are earning less from securities they intend to hold for a longer period of time, and this is a sign that something in the economy is not right.
Earlier this year, it set a new record for remaining inverted: for more than 527 days, which was the record set in 1980. The curve has eased slightly, but remains stubbornly inverted.
In this context, the President of the European Central Bank, Christine Lagarde, warns that a “soft landing” is far from assured for the global economy.
In fact, over time, a crash becomes more and more likely. Overall, the yield curve had not remained inverted this long since the Great Depression. Recessions reliably follow this trend.
But the main difference this time around is that it’s not signaling a credit crunch as it has in the past, while stocks have risen since the inversion of the yield curve began. Markets now better understand the yield curve and price it in, reacting with cuts before the “real” recession starts, causing more pain.
On the other hand, with a huge wave of commercial mortgages expected to expire between 2024-2025 and US cities seeing a record number of vacant buildings with little hope of finding tenants, there is at least $1.2 trillion worth of serious cause for concern.
It’s not just the US
- The Canadian bond yield curve has also inverted, with persistent inflationary pressures remaining despite the Bank of Canada’s decision to cut interest rates.
- In the UK, the yield curve has only recently flattened after being inverted for over a year.
- FED Chairman Jerome Powell ruled out a rate cut, citing “moderate progress” on the inflation front.
- Monetary policy isn’t enough to lower prices, but the Fed will defy expectations if it doesn’t cut again at its meeting next fall, as industries like commercial real estate and, by extension, banks, can no longer to manage rising interest rates without collapsing under the pressure of increased borrowing costs.
- On the other hand, interest rate cuts will worsen inflation as the dollar weakens.
- Recall that the yield curve rose after Trump’s Debate with Biden, which shook up the 2024 race and fueled expectations of a Trump victory, simultaneously increasing demand for yields in the long-term bond market.
- That’s because investors in the case of a new Trump administration are discounting larger budget deficits due to the previously announced tax cuts and spending increases.
- Meanwhile, central banks and governments are doing their best to paint a rosy economic picture, hoping their words can trump reality.
- Cooked economic reports like the CPI and recent jobs numbers indicated that Real statistics are different in practise – if we measured the economy the way we did before 1994 – can show why so many people are so miserable.
- However, economics teachers always have a new set of mental gymnastics to explain the horror and infamy of central planning.
- Inverted yield curve and still no official recession?
- Central planners and markets have become so wise that the yield curve no longer means anything.
But time will show the truth.
