Destroying The "Recessions Can't Happen Without A Yield Curve Inversion" Myth

Tyler Durden's picture

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.

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Chupacabra-322's picture

Off Topic but here it goes. Remember precedent was set with Criminal at large Administration Bush / Cheany / etc... Policy continued throught the Criminal Obama Administration. Thus, they're all "in on it." Globally as well. The Criminal Religious Cabal Bankster Intelligence Crime Syndiacte will stop at nothing less the Full Spectrum World Domination.

We're a Lawless republic now with Criminal Children Governing us. An Epic demonstration of a once great Empire in free fall decline. Rome is nothing compared to what the world is witnessing.

House Speaker John A. Boehner (R-Ohio) disagrees with Republicans calling for the impeachment of President Obama.

Former GOP vice presidential candidate Sarah Palin on Tuesday joined a growing chorus of Republicans calling for the impeachment of Obama, writing in an op-ed that the influx of young illegal immigrants over the southern border "is the last straw that makes the battered wife say, 'no mas.' "

"I disagree," Boehner said when asked by reporters Wednesday morning. When a reporter pointed out that some House Republicans also are calling for impeachment, Boehner said again: "I disagree."

Boehner's comments came after Palin said Tuesday night on Fox News that the speaker's planned lawsuit against Obama over his use of executive power is a weak maneuver. "You don't bring a lawsuit to a gunfight," she said. "There's no place for lawyers on the front lines."

NotApplicable's picture

Why the fuck would you bother listening to, let alone write about what any of these criminally-insane idiots say?

As for a "dying republic," that precedent was set by King Lincoln.

The shit you wrote about is nothing more than good ole divide and conquer election year rhetoric, and isn't worth a warm bucket of piss.

Chupacabra-322's picture

"Why the fuck would you bother listening to, let alone write about what any of these criminally-insane idiots say?

As for a "dying republic," that precedent was set by King Lincoln.

The shit you wrote about is nothing more than good ole divide and conquer election year rhetoric, and isn't worth a warm bucket of piss."

Ordo ab Chao. Order out of Chaos. Divide & Comquer with a Sampson Option is the game. Perhaps the obvious point of the Flase Right Left Paradigm you did not comprehend.

The dying Republic was set by The Act of 1871 & Federal Act of 1913. "All done by design, all done by Agenda." My qoute.

p00k1e's picture

 I'm not sure what your message is supposed to be.  No offense.

"illegal immigrants over the southern border". 

Which Republican president did anything about illegals streaming across the boarder?  (We should discount Reagan’s action because he made them go away by legalizing them. And those people are now the aunts and uncles of the children streaming across today.)

gmak's picture

Seriously?  Blame it on Bush? Is that the best you've got?

JustObserving's picture

A very strong case can be made that we are in a recession now:

The third and final estimate (until the annual GDP revisions) of first quarter 2014 real GDP growth released June 25 by the US Bureau of Economic Analysis was a 2.9% contraction in GDP growth, a 5.5 percentage point difference from the January forecast of 2.6% growth. Apparently, the first quarter contraction was dismissed by those speculating in equities as weather related, as stock averages rose with the bad news.

Stock market participants might be in for a second quarter surprise. The result of many years of changes made to the official inflation measures is a substantially understated inflation rate. John Williams ( provides inflation estimates based on previous official methodology when the Consumer Price Index still represented the cost of a constant standard of living. The 1.26% inflation measure used to deflate first quarter nominal GDP is unrealistic, as Americans who make purchases are aware.

A reasonable correction to the understated deflator gives a much higher first quarter contraction. The two main causes of inflation’s understatement are the substitution principle introduced during the Clinton regime and the hedonic adjustments ongoing since the 1980s that redefine price rises as quality improvements. Correcting for excessive hedonic adjustments gives a first quarter real GDP contraction of 5%. Correcting for hedonic and substitution adjustments gives a first quarter real GDP contraction of 8.5%.

oklaboy's picture

well done. I concurr 100%.

knukles's picture

Ya' know, that aphorism about inversions necessary to precede an economic downturn was not invented by nor ever subscribed to by any rational half cogent bond manager.  That's always been another one of those "Oh, listen to me how smart I am, know it all." (BS) equity manager "sayings".
As has been pointed out numerous times by those that have a tidge of historical perspective, the equity market/managers are, compared to the bond market/managers, absolutely dismal at forecasting economic events.
And as a matter of fact, the more CFA oriented types tend to derive their economic forecasts from their desired equity returns, a la, CNBC type commentary.

Inversions, Perversion!

Now for the bond daddy forecast.
We're in a Liquidity Trap.
The global economy is lousy and getting lousier and at best, not improving.
The global strains in economies, geo-politics, social phenomenon and financial markets are increasing, not decreasing.
Rates are headed lower, net, net.
Stawks are floating on a sea of liquidity, and will realize one day (I have no idea of when, liquidity is a powerful beast) that there is no E to support P.

DoChenRollingBearing's picture




I agree, there are many reports that would hint that we are in recession now.  PCR makes a compelling case that the economy is even worse than most of us (non-believers in .gov stats) have been thinking.

disabledvet's picture

This might be my last hundred grand...but at least it's not my first AIG.

"We need 185 BILLION dollars. Now give me some air time bitch!"

I mean...hey, that the New Normal is TRILLIONS...well, simple "ratios" dictate "your next bailout will have to bailout will have to be equal to the new number."

So what's that..."1.85 TRILLION plus legal fees"?

Man...I bet those lawyer fees will have to commensurate with the disbursement as well!

Snoopy the Economist's picture

"A very strong case can be made that we are in a recession now"

Gee, ya think? Sure if you actually believe the bullshit numbers .guv puts out. My bet is we have been in a DEPRESSION for at least 4 years now.


Eyeroller's picture

By hook or by crook, there is no way in hell that second quarter GDP numbers will be allowed to be negative.

Recession is defined as two consecutive quarters of negative growth, and the lame stream can't spin that one on the muppets.  So the number won't be negative.


Handful of Dust's picture

If you want to keep this recovery, you can keep this recovery.

Tjeff1's picture

This is the best its going to get for a while.  All down here from now.

_ConanTheLibertarian_'s picture

There you go mofos. The US is already nosediving.

oklaboy's picture

Happen? we are in a recession, were is this post coming from?

frankTHE COIN's picture

Thanks for the Great Information. The other side was getting sickening trying to argue the opposite of your point. A balance Sheet recession is a whole different animal.

Dr. Engali's picture

We are and have been in a depression damn it! This fact has been hidden in plain sight by financial repression as well as SNAP and various other .gov programs. I feel like I'm beating my head againts the wall every time I read an article that suggests otherwise.

knukles's picture

(pun) as in the only reason we do not see a depression is that the bread lines are electronic (EBT) taking people off the handout meal lines...
there ain't no tent cities (by and large) as there is Section 8, etc....
the whole visual and tactile structure has been disembodied, sent from view...

the Shadow Stats are miserable, terrible, etc...
... if things were measured as they were during the Great Depression, we'd be there if not worse...

Them's facts, folks.

disabledvet's picture

"Housing prices can never fall."

Perhaps one of these policy wonks can explain to me how a debt crisis can be solved by LEVERAGE.

Betting on direction AND price?!!!!

You invested in the wrong horse've invested in a DONKEY.
"And this is the Indianapolis 500."

NotApplicable's picture

A "successful" ZIRP policy allows leverage to go to infinity.

Handful of Dust's picture

Immelt, et al shipped many jobs to Chindia, etc. The housing market is propped up by them coming back buying up the multimillion dollar houses in Cali. Even where I live many Asians are moving in and pay cashola for their $400k-to-$1.2 million house. Realtors and title closing companies are not allowed to ask where they get the cash.

JRobby's picture

This is the modern day depression with the FDIC, TARP, FED backstops, SS and other programs providing income.

That was not the case in the 30's. Banks failed, people and businesses had no savings to live on.

There is no history for the yield curve in an extended ZIRP environment.

Why is this even an argument? This is all new and headed for the end.

disabledvet's picture

We had a diaspora then...we have one now as well (going on thirty years actually.) the difference this time is the true enormity of debt pay for a War in the Holy Lands ironically enough.

Think God is sending a message here? Darn right.

If the militants want their guns and badges "that will be ten BILLION dollars."

knukles's picture

War in teh Holy Lands.
Sure glad it ain't the Unholy Lands, what?


Gog and Megog comin' 'atcha, babe

syntaxterror's picture

Interest Rates are manipulated by the Central Bank Politburo. They mean abso-fucking-lutely nothing.

disabledvet's picture

"Confidence Game." Read it, learn it, love it.

All the banks failed in the 1980's. Why? Because oil prices COLLAPSED.

In the USA "they discovered free energy." And indeed...the USA has discovered it again.

So the question becomes "if we don't need the oil...what do we need the Banks for?" And the only that can possibly be true is "we need a buyer of all our debt."

So a simple 7 dollar tab at the Diner...and an entire Empire State collapses because someone couldn't afford the tip.

lasvegaspersona's picture

Those Q2 GDP numbers should be out soon. Of course they will be re-re-revised but we are just a few lies away from a recession now. In fact the definition is 2 quarters of negative growth but if you average Q4 2013 and Q1 2014 you get a negative number.

Also if you looked at GDP as it was calculated in the 1980s you would see that we have been in  perpetual recession since 2008..which is, of course, why we don't use the old methodology....bad 'optics' as they say.

Anyway things suck and the government lies...nothing ever seems to change.

disabledvet's picture

I invested in the double dip recession thesis last year and am so currently. Because we have had a MASSIVE (higher) price reset here...I am SURMISING (no, I do not sit on any Board. I ought to though!) that a RESTRUCTURING and RATIONALIZATION process is in order.

General Electric might be well nigh worthless...but if I "mash it up into 100 pieces" there might be a small cap or two that might be worth something in that Dinosaur.

Think of it as...."mammalization." Being small and living in a hole is the way to go. "Just don't be General Motors."

DoChenRollingBearing's picture




"...we are just a few lies away from a recession now."

Very well stated.

icm63's picture

Sorry this study is a FAIL, D-

US was on a gold standard before 1973, money supply restricted by gold.

Thus recessions more likely. Different world before 1970s

disabledvet's picture

The only debt worth anything is NEW debt. "What are you going to back it with?"

In the bubble years (1983-2008) that whole pile of bullshit was backed by nothing more than "Accounts Recievable."

AR is a LOT different than "money in the Bank."

Yet again "reckless debt recklessly paid for."

You want a news feed worth following? Just type in "F-35 Fighter Jet." That's your "balance sheet." 350 million a plane and counting..."it's still not enough."

financialrealist's picture

"A repeated theme on financial-TV in recent weeks is that there cannot be a recession without a yield-curve inversion" shows just how ignorant and naive (I will stop short of calling them stupid, many are impressively educated), the media is and most financial journalist only care about trying to sell their latest book.

Given many of the recent articles and posts, it should be clear to everyone interest rates have no bearing anymore. Given the backdrop of where we are and how we got here (just look at Q1 GDP), by no measure can “history” be used as a predictive guide to discern the future path of the economy.  Want to save the economy, save the middle class. 

disabledvet's picture argument you could make also is that "interest rates at 1% is no different than buying stock."

Overlay said "actual rate" (what you see is true) and "simply insert default."

If you're feeling really adventurous ask "and then who pays?" and take it from there. The only certainty is there is no actual cash.

And of course "bitcoin has indeed rallied quite nicely here."

p00k1e's picture

"save the middle class"

What exactly is the 'middle class' but a bunch of people willing to finance stuff and make minimum payments?

Did Henry Ford create the middle class with his finance model?

Did the G.I. Bill create the middle class with their finance model?  American Express?  

The first credit card was invented in 1950.  Marking the first credit card as the beginning of the dilution phase, which decade was the ‘middle class strongest’?  The ‘50’s.  

financialrealist's picture

I’m not certain I exactly understand what you’re saying...I’m suggesting if the economy were to survive as it does today, the powers that be need to understand they need to provide real incomes to the engine that was responsible for growth and prosperity. I am not an advocate of irresponsibility, and do agree with you most live beyond their means, but the basic point of the statement was that the only indicator with predictive power of future growth is the strength of the engine responsible for nearly 60% of our annual consumption, which is the middle class. If it fails, everything fails.      

Late onset ADHD's picture

help knuckles and disabledvet!!!... being held hostage in a "rose-colored glasses factory" in economic-zone china... bonds or oil, oil and bonds...

no matter...

they force me make "rose-colored glasses" in factory...
I don't want wear evil glasses... so...

can smuggle me treasuries to trade some better food?...

I leave "good" tip... ok for you, joe?...


disabledvet's picture

Peace is the word...but War is the answer (the one we are in fact getting.)

So far so calls for a mass mobilization in the USA. "Keepin the kids safe and in the home." Let's hope it stays that way.

Late onset ADHD's picture

your mouth to God's ears, vet


taketheredpill's picture




The Curve used to Lead the economy.


Now the Economy will Lead the Curve.




And in keeping with the Bizarro flip, the slow-growth move will be Bull Flattening, not Bear Flattening.


At least until such time as Yellen farts and markets price in some Fed response, including slamming on the Taper-brakes and going back to QE again.  Or some other monetary experiment.


Late onset ADHD's picture

who's leading?...  the curve?... the economy?... nope sorry...


the invisible soup lines are the leading and lagging indicators...

you know it would just be "common courtesy" for the "ebt card army" to at least line up outside the wallys for an hour or two on "reload" day...

just for show... after all it is showbiz, bitchez...

and on a side note... what forward thinking fucknut in big-gov sold all the giant "soup pots and ladels" from the last time around?...

holding my breath in 3,2,1...



SMC's picture

The mainstream propagandists are pumping any low-IQ factoid their handers can find in a desperate attempt to keep their jobs spewing bullshit to an increasingly angry population.

The spectacle of exponential systemic failure is already well underway.

Those who are already physically, mentally, and emotionally prepared will continue to work hard and produce what they need, overcome challenges, enjoy life and have fun.

Those who have not prepared failed to use the only natural attribute humans have - their mind.

Againstthelie's picture

Brilliant article.