Question of the day: Why would anyone purchase a 10-year Treasury when the yield on the two-year is higher?
When you digest the question and answer, you will be transported back to August 2019 when the inverted yield appeared. It is defined by having the 10-year Treasury rate falling below the 2-year Treasury rate. The talk at the time was the presence of this inversion. As an indicator of the future of our economy, it has never been proved wrong. It is the most accurate indicator of a looming recession.
When you read more into this indicator, you realized that it is a very early call as to what will happen with the economy. If you review the last four times that the inverted yield appeared, it took generally more than a year to fulfillment. Nevertheless, the recession did take place. I bring this to your attention as recent economic reports are all negative. The timeline says we are in the fourteen month. Even if nothing worse happens to the economy, the inverted yield says that a recession is coming. It will probably arrive (average time) by the end of March 2021. If you consider some points that I have gathered, this indicator will keep its title has one that has never failed in its call.
Quick Recap
The Federal Reserve tries to quickly dissipate any presence of an inverted yield. They use their printing and buying power to eliminate its presence from society and the market. This is how they operate with their machinations to engineer the economy. Just last week, Fed governor, Randal Quarles stated that the Fed should make new rules to prevent runs on money market funds. Hedge funds and banks were seeking a higher yield due to the Fed's policy of low-rate yield returns on money. They began taking money out of circulation in the money market funds because it no longer gave them any return. These runs caused a chain effect within the market to which the Fed will seek to impose new rules to control it. This small sign is also a "tell" in poker terms. The Fed is printing so much money that it is losing control of the currency. The tell has been broadcasted in the past with fiat currencies that were about to enter hyperinflation. Anyway, the last time the inverted yield appeared was in...
2005
It took another 16 to 22 months to form the market top. Then, we had the worst recession ever. It lasted two years.
2000
The market peak came in two months. Then, we had a short recession.
1998
The market kept rising for another 21 months. Then, we had another short recession.
1988-89
It took the market another 20 months to peak, Then, we had another short recession.
Present Trends
Even before the pandemic appeared, many segments of our economy were in trouble. Restaurants and retail were constantly seeking refinancing. They kept cutting costs as best as they could. They announced store closings in record fashion. If you recall from our previous pieces, the two industries had announce 8,200 store closings before the pandemic. This number will double due to the virus.
The three big airline carriers, Delta, United and American all showed in excess of $2 billion in losses for the last quarter. Keep in mind that these carriers have all entered bankruptcy before and it is looming larger in the near-term. The airline industry employs one in fourteen workers with quality wages. This news is not good for our shrinking middle-class.
There are over 3,500 US firms that are suing the government over president Trump's tariff policy, especially with China. They all claim that they are dying. There cries are questionable, however reports of Americans not paying rent (8-million) or mortgages (2-million) are believable. Together, all of the above will put pressure on government to enact another stimulus plan to which puts the US deeper in debt. This leads to concerns on a international level about our reserve currency status. I cannot say that the inverted yield saw all these developments, but its forecast looks to be correct.
