Vlog: The Yield Curve Distortion

David B. Armstrong, CFA Weekly Market Commentary

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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
  • Etc.

This inversion, which I think is a 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

Recap

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.

MONCON_Recession_5

 

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About the Author
David B. Armstrong, CFA

David B. Armstrong, CFA

David B. Armstrong, CFA, is a President and Co-Founder of Monument Wealth Management. Along with his role as the firm’s chief investment strategist and portfolio manager, Armstrong is viewed as an industry leader in several areas including innovative practice management, discretionary asset management, digital marketing and social media. Dave is the writer of Monument Wealth Management's weekly "Off the Wall" Financial Blog and Market Commentary, and is frequently sought after by journalists and event coordinators. Visit his full biography here.

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