Originally posted at Kessler Companies,
A repeated theme on financial-TV in recent weeks is that there cannot be a recession without a yield-curve inversion first because in each of the last 6 recessions stretching back 50+ years, short-term rates rose above long-term rates before the recession. This is a true statement, however; it is difficult at this point to ignore the idea that the last 6 recessions are not like this period. Those prior recessions are 'inventory-cycle' recessions, not 'balance-sheet' recessions as we've written about extensively. If you study the period after The Great Depression and even in Japan's last 25 years (that are the best examples of balance sheet recessions), it is very common to have a recession without a yield curve inversion first. In-fact, there were 6 of them following The Great Depression into the 1950's.
The reason is straight-forward. The central bank keeps short-term rates near 0%, but the long-end of the yield curve (i.e. 10yr) continues to forecast ordinary recoveries, keeping the yield curve steep. When a subsequent recession comes along without a normal recovery first, the only place for 'give' is long-term rates to come down closer to the short-term rates. The fragile state of the economy during these cycles prevents the central bank from getting a normal rate rise cycle in. We are smack in the middle of this type of cycle now.