“Off The Wall” Blog
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What is the Yield Curve Distortion?
Putting things into perspective…There are trillions of dollars of debt that are exposed to negative interest rates. (For example, this means, when you give the bank $100 bucks, they give you $96 back.) That sucks!
The U.S. has the safest and best paying bonds in the world. So people are taking their money out of negative interest rate environments and buying our bonds, because our bonds actually have a positive rate of return.
When the price goes up in a bond, the yield comes down. We’re seeing the yields come down because people are buying our bonds. The yields have not been cut in half because the economic prospects of the U.S. have sunk to the bottom of the toilet… it’s a distortion, which is being caused by supply and demand.
In the news we’re seeing all kinds of unrest:
- Hong Kong at the brink of invasion by China
- Russia’s nuclear accident
- North Korea popping off missiles
- Trade war with China
- Italy’s dissolving government
- Pakistan and India trading barbs across the border
- Iran in the Gulf messing with oil tankers
- Looming decision on Brexit coming in October
This inversion, which I think is actually a yield curve distortion, does not mean there is going to be a recession now. There WILL eventually be a recession, but I don’t believe the inversion is a good recession predictor.
Remember, slowing growth does not equal a recession.
- Manufacturing and Services have softened, but are not in recession levels
- Out of the companies that have reported earnings so far, 57% beat their earnings estimates and 57% beat their revenue estimates. If we were nearing a recession, that percentage would be a lot lower.
Recessions are generally characterized by a combination of at least 2 of the following 3 things, which we don’t currently see right now:
- Commodity Spike – Check out the price of oil right now
- Aggressive Fed – They just lowered the rates by 25 basis points
- Extreme Valuations – The valuation on the S&P is almost dead on with its 25-year average
For comparison with past recessions…
In 2008 we had:
- Aggressive Fed
- Commodity Spike
In the Early 2000’s we had:
- Extreme Valuations
- Commodity Spike
In 1990 we had:
- Commodity Spike
- Aggressive Fed
We will have a recession someday, but this yield curve inversion is not a good predictor of when.
There is no perfect timing tool for a recession, but there are good ones. Our MONCON recession tracker does not warrant any type of concern or action today.
Let’s keep things in perspective.
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Wealth Management), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.
All indexes referenced are unmanaged and cannot be invested into directly. The economic forecasts set forth may not develop as predicted. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument Wealth Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Monument Wealth Management is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.
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David B. Armstrong, CFA
President & Co-Founder
Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....
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