Does the Inverted Yield Curve Signal a Coming Recession?

Dr. Paul Cwik joins Bob to discuss the inverted yield curve's "signal" of an impending recession.

00:00 Introduction
01:18 What is the Yield Curve and How Does it Invert?
09:40 Mechanics of the Recession-Yield Curve Relationship
21:53 The Current Inverted Yield Curve is Worse than Before
31:06 Severity of the Coming Recession

[coletrain]

One thing people need to keep in mind is that this recession will be the first US recession since the 19th century caused by a domestic public sector liquidity crisis, so the "flight to quality" will end up being AWAY from bonds and INTO equities (as well as precious metals). Just look at the stock market in Argentina right now, that is what is happening to US equities as we speak but to a much more subtle degree. I'm expecting another scare in equities in Q3 this year, but any decline in equities will be short-lived and represents a buying opportunity for those looking to beat inflation (or gold/silver... especially silver because its more liquid than gold). The fact that the Federal Reserve has been raising interest rates is allowing some flight from equities, but as soon as they pause it will be off to the races again. This is because price inflation is mainly a supply-side issue, thanks to anti-energy climate policies and ongoing supply-chain whiplash from the lockdowns. The Fed has no real power to stop price inflation, they can only mitigate the damage by easing up on the monetary inflation. So many dollars are leaving the United States because of global demand produced by dollar-denominated debt in emerging markets, as well as foreign interest in hedging against their own currencies. This is actually mitigating SOME of the supply-side inflation for Americans, and that will remain true unless something really crazy happens like this Trillion dollar coin idea floating around.

I think people would be surprised how even seasoned professionals in the hedge fund industry will have a knee-jerk reaction to a recession and bail out of equities. These people are not as sophisticated as you might imagine, they are trained like Pavlov's dogs at this point to trim their positions in equities. But any kind of panic selling in equities will only serve to setup another sling-shot in equities, and equities will continue to climb until a replacement for the US treasury market is developed following a default by the Federal Government. This could all end very badly depending on whether the political climate shifts entirely to scapegoat antics, in which case I suspect we will see quasi-secessionist movements to begin between 2027-2032. Think tax protests, and non-compliance with Federal authorities & regulatory bodies deemed unconstitutional by Red states and even some Blue state.

[benjamindover]

Great topic. Thanks for sharing your insights.

[FourOf]

and here I thought it signaled an ongoing one 🙃

[cwalenta]

Of course we'll see if this relationship holds true and there are many indications which suggest a recession seems baked into the cake at this point, nevertheless an inverted yield curve would also seem to be rational if we presume that a market perceives elevated inflation today but disinflation tomorrow.

[jsc]

No more comment sections on articles published at The Mises Institute ?!

[thomasd]

Good Grief ! It took me 37 seconds in a thought experiment to realize how money moves from the source's addition computer to the source's subtraction computer.
What has happened to American colleges ability to improve the skills of reading comprehension & listening comprehension ? ? ? ? ?

[steventhibert]

I've always found it a falsely pointed claim that the past rewinds in a gragh showing reccetion or a boom it's much more complex. That's why professor's are not billionaires.

[DrProgNerd]

Just changed the definition of 'inverted yield curve'. Problem solved.

[paulburbank]

An inversion of a yield curve of NEGATIVE REAL INTEREST RATES portends ...

[aslkdjfzxcv]

i wish it signaled the end of the united states.

[tensortab]

So, if Biden becomes even more of a vegetable (like Wilson), we might have a chance?