Lord knows there are enough reasons to feel morally outraged and politically incensed these days — the “sordid legacy” of the Japanese Internment policy rising up in the Muslim ban decision; the continuation of the moral depravity demonstrated by the Mis-administration’s Immigration policy; the utter stupidity of trade spats and tariff wars with our friends, to name some major causes for immediate concern. However, there’s one more, esoteric as it is, which hints at some problems yet to come — Jacob Marley’s third visitor waiting in the wings. It’s called a yield curve. The New York Times explains:
Terms like “yield curve” can be mind-numbing if you’re not a bond trader, but the mechanics, practical impact and psychology of it are fairly straightforward. Here’s what the fuss is all about.
The yield curve is basically the difference between interest rates on short-term United States government bonds, say, two-year Treasury notes, and long-term government bonds, like 10-year Treasury notes.
Typically, when an economy seems in good health, the rate on the longer-term bonds will be higher than short-term ones. The extra interest is to compensate, in part, for the risk that strong economic growth could set off a broad rise in prices, known as inflation. Lately, though, long-term bond yields have been stubbornly slow to rise — which suggests traders are concerned about long-term growth — even as the economy shows plenty of vitality.
Okay, pretty straight forward so far. Something has the traders on Wall Street spooked about long term economic growth. So what? Well, all those pretty predictions about what the Great Trumpian Tax Giveaway To The Rich and Richer would mean for the overall economy were based on what were already unrealistic expectations for economic growth, and now the traders are edgy about even that? A stagnant, or worse faltering, economy could easily turn a really bad idea (and we’ve figured that out already) into something close to catastrophic. But fear not, the Trumpers will castigate the previous administrations for causing a problem the Trumpers created for themselves; whilst the Trumpers announce They Alone Can Fix It…with something worse than the initial problem because there is never a Plan B because they never had a Plan A to begin with.
Thus the New York Times continues:
At the same time, the Federal Reserve has been raising short-term rates, so the yield curve has been “flattening.” In other words, the gap between short-term interest rates and long-term rates is shrinking.
The Times has my attention at this point, and then the old Gray Lady gets me bolt upright.
The gap between two-year and 10-year United States Treasury notes is roughly 0.34 percentage points. It was last at these levels in 2007 when the United States economy was heading into what was arguably the worst recession in almost 80 years.
Ouch. Before we hit the Panic Button, there’s no way to predict exactly when recessionary pressures take form, and we can’t be certain that the central banks may not take actions which mitigate the recessionary trends associated with previous economic downturns. However, we can’t ignore a situation in which people put more funds into long term investments which in turn causes more people to put ever more funds into long term investments because they fear a recession, and wishing makes it true. And, this spiral makes banking a losing proposition — borrow at short; lend at long; hit the golf course by 3 — inversion can, as the Times says “slam the brakes on” the banking sector. Love them or hate them — banks are the circulation system of good old fashioned free market capitalism.
So, we need to keep the economic data in our peripheral vision as we stare into the abyss of corrupt immorality and utter ineptitude so evident in our current mis-administration. We can’t say the traders didn’t try to warn us.