This page has been archived and commenting is disabled.
Guest Post: The Yield Spread Is Lying About The Coming Recession
Submitted by Lance Roberts of StreetTalkAdvisors
The Yield Spread Is Lying About The Coming Recession
You are being lied to. There is currently more than sufficient evidence that indicates that we are either in, or about to be in, a recession. The last time I made that statement was in December of 2007. In December of 2008 the National Bureau of Economic Research stated that we were correct. I don't make statements like that lightly and, honestly, I hope I am wrong as this is a horrible time for the economy to relapse.
However, the reason that I bring this up is that there have been numerous analysts and economists stating that the economy cannot be going into recession due to the spread between various sets of interest rates. (For the purpose of this report we will focus on the spread between the 1-year Treasury bond and the 10-year Treasury note.) Historically speaking they would be correct and I will explain why.
The steepness of the yield curve has been an excellent indicator of a possible future recession for several reasons. First, the spread is heavily influenced by current monetary policy which has a significant influence on real activity over the next several quarters. When there is a rise in the shorter rate this tends to flatten the yield curve as well as to slow real growth in the near term. This relationship, however, is only one part of the explanation for the yield curve's usefulness as a forecasting tool. The steepness of the curve also reflects the expectations of future inflation. Because economic growth is affected by the level and trend of both interest rates and inflation it is not surprising that the spread has historically been a good predictor of future recessions.
This time it could be wrong.
The issues with the spread between interest rates today are twofold. First, the U.S., via the Federal Reserve, has embarked upon an unprecedented series of policies to deliberately suppress the yield curve. Through outright purchases of treasuries through Permanent Open Market Operations (POMO) and Quantitative Easing (debt monetization) programs have been implemented to specifically target areas of the interest rate curve. Even the recent announcement of "Operation Twist" is specifically designed to flatten the yield curve to "help promote the demand for credit". Therefore, since abnormal and artificial influences are being applied to the bond market to manipulate interest rates it removes the usefulness of the yield curve as a forward indicator of recessions.
Secondly, and most importantly, the economy is currently not operating under a normal economic environment. As we have discussed in recent missives the U.S., for the first time since the "Great Depression", is undergoing a balance sheet recession. During the "Great Depression" beginning in 1929, the Total Credit Market Debt as a percentage of GDP rose substantially before eventually collapsing. We saw this phenomenon begin again in the 1980's as total debt began to expand dramatically until the Total Credit Market Debt hit 380% of GDP in early 2009. We are now experiencing the deleveraging of those credit excesses which creates economic drag as money is diverted from savings and consumption to the repayment of debt.
Japan has been struggling with the same reality since the bursting of their real-estate/credit bubble and subsequent balance sheet recession. The government of Japan has implemented many of the same policies that Ben Bernanke has been foisting upon the US economy but to no avail. As a result Japan has been mired in a stagnating/declining economic growth environment for the last two decades with frequently recurring recessionary downturns.
The yield spread between Japanese bonds, much like we expect to happen here in the U.S., has remained positive due to government interventions since the beginning of their economic malaise some two decades ago. As far as a recessionary indicator goes - the yield spread has failed miserably.
Japan has been struggling with the same declining employment to population ratio, stagnating wages, an overburdened pension system and weak economic growth enviroment that currently faces the U.S. today. If that is the case then the economic future that has been laid out before us is not a bright one. The coming deleveraging of debt which will result in a needed cleansing of the excesses from the system will result in continued weakness in economic growth as consumers and businesses remain on the defensive. This defensive posture leads to deterioration in the demand for credit, stagnation of wages and lack of productive investment.
If the recent history of Japan is any reflection of the path that we have been set upon then we will likely enter a recession by the beginning of 2012. Of course, it will confound, confuse and surprise the mainstream analysts and media as the yield curve will most likely remain positive. As I stated before, I sincerely hope I am wrong, and that everything turns out for the best. Deep down I am an enternal optomist and believe in the innovation, ingenuity and passion that has made this country great. However, "hope" and "optimism" are not investment strategies by which we can successfully navigate the finanical markets today or in the future.
»
- 15478 reads
- Printer-friendly version
- Send to friend
- advertisements -
Gold - Take Profits Now! - http://evilspeculator.com/?p=24114
Sorry for the big Off Topic here (ZH and readers), but trouble, she's a brewin' in China:
From the Shanghai Daily.
A Bunch Of Chinese Manufacturing Bosses Just Defaulted And Fled Their Failing BusinessesGong!! (chinese "boom")
Global deleveraging and the hangover effects of trillions in global toxic loans have really only just begun.
According to Shanghai Daily
We're being lied to....again. I am shocked
If a squirrel farts in the woods that doesn't mean the whole country is flatulent. Yes, old Chinese proverb ;-)
And another one - depositors fleeing the big Chinese banks
http://www.macaudailytimes.com.mo/china/29799-Major-banks-losing-deposits-report.html
Is a chinese bank run similar to a chinese fire drill?
Well, that's one remaining set of buyers for physical gold right there.
The 'black bank' - nice turn of phrase!
And watch what happens to the people they have already, and will catch. Public executions.
In the USA, we glorify these types of people, Donald Trump, Mozillo, etc.
Goldman's good ol' Jimbo and the rest of the "China will save us all" -crowd must be shitting in their pants.
Thanks for the link, mate.
:-)
I only heard of the recovery from the mouths of cunts on TV. I sure as hell didn't see any mainstreet, where it matters.
1. too much capacity
2. too much labor available
3. too much debt
4. too much blatant corruption
.....solutions anyone ? bueller ? bueller ?
Government stimulus? Bond yields are ridicu-low, and despite the scramble to ret-con the 2008 crisis as a government debt crisis, it was for different reasons. We're going to have to inflate our way out of this sucker.
The production, as measured by gross domestic product, employment, investment spending, capacity utilization, household incomes, business profits, and inflation all fall, while bankruptcies and the unemployment rate rise. Thanks a lot.
Regards,
resume help
Most mainstream economists believe that recessions are caused by inadequate aggregate demand in the economy, and favor the use of expansionary macroeconomic policy during recessions. Strategies favored for moving an economy out of a recession vary depending on which economic school the policymakers follow. Thanks a lot.
Regards,
baby grand piano prices utah
In an economic cycle, a downturn can be considered a consequence of an expansion reaching an unsustainable state, and is corrected by a brief decline. Thus it is not easy to isolate the causes of specific phases of the cycle. Thanks for sharing.
Regards,
admissions essay
Kickers must be in the kicking box and behind home plate when they make contact with the pitch. The ball is hit either fair or foul. Foul balls are kicks that land the ball anywhere outside the playing field, and are considered strikes. When the kicker gets three strikes, he is out and the next player in line kicks. Thanks for sharing information.
Regards,
Desert Ridge Homes
The interest you pay on credit card debt is typically higher than any interest you can make in a savings account. Make more than the minimum payments on your credit card. Do this by making a household budget to see where you can cut expenses. Eat out less often, for example, and take a list and coupons when you grocery shop. Forgo your vacation to pay off your debt. Once that is done, put the money you were using to pay off your credit cards into your emergency savings account. Thanks a lot.
Regards,
academic writing help
However, if too many individuals focus on saving down debt rather than spending, lower interest rates have less effect on investment and consumption behavior, the lower interest rates are like pushing on a string. Thanks for sharing.
Regards,
Max Burn
In a balance sheet recession, GDP declines by the amount of debt repayment and un borrowed individual savings, leaving government stimulus spending as the primary remedy. Thanks for sharing.
Regards,
used car dealers
There are many indicators of a recession. Businesses sell fewer items because of falling demand. This can happen for several reasons including inflation, deflation and stagflation. These are when prices rise, fall or fail to grow. At times like these, businesses suffer, shareholders don't make money and work forces are downsized. Thanks for sharing.
Regards,
graduate school personal statement
Submit the application with a copy of the dealer training seminar certificate, copy of lease or proof of property ownership, copy of general liability insurance certificate, copy of incorporation, LLC or partnership papers, an original copy of the surety bond and fingerprint card to any regional DMV office. Include a payment of $354.25 for filing and fingerprinting fees. Thanks.
Regards,
graduate school personal statement
Submit the application with a copy of the dealer training seminar certificate, copy of lease or proof of property ownership, copy of general liability insurance certificate, copy of incorporation, LLC or partnership papers, an original copy of the surety bond and fingerprint card to any regional DMV office. Include a payment of $354.25 for filing and fingerprinting fees. Thanks.
Regards,
graduate school personal statement
Open the Start menu. Type mmc in the Search box. Press Enter to open the Microsoft Management Console. If you are not logged on as an administrator you will be prompted to enter credentials for an administrator account before the console will open. Thanks.
Regards,
Debt Settlement
However, if too many individuals or corporations focus on saving or paying down debt rather than spending, lower interest rates have less effect on investment and consumption behavior. the lower interest rates are like pushing on a string. Thanks a lot.
Regards,
graduate school personal statement
The economic rationale for this is that it allows anonymous trading in the shares of the corporation, by eliminating the corporation's creditors as a stakeholder in such a transaction. Without limited liability, a creditor would probably not allow any share to be sold to a buyer at least as creditworthy as the seller. Thanks.
Regards,
Argan Oil
FIRST
No, you're not - plus you suck for not exhibiting any substance.
You really shouldn't talk to children like that... it wrecks their self-esteem.
Gold/Silver ON SALE!!
Is this character aware we are entering a new paradigm?
Stop the analysis for one second and let "the situation" sink in a little. Maybe later you'll write something worthwhile.
the banksters doing everything in there power to loan money at the lowest interest rates in a lifetime?
sounds like we should be in easy money territory, though we are not. nothing they can do now to encourage
more borrowing when folks have no confidence, no job, and no jingle in there pockets. government spending
and debt have never been more important in the history of this republic and the bastards don't give a wit.
I was listening to an ex-Federal Reserve economist on Bloomberg Radio last night (Bloomberg sucks badly, but it's incrementally better than CNBullSh*t), and he came up with the incredibly amazing analysis (/sarc) that even if rates went to 0%, consumers who have just begun to become serious on paying down debt won't be spurred to borrow, and moreover, banks that have NO IDEA as to how deep and long their balance sheet risks really run won't want to loan, especially in an environment of deleveraging and falling values on securitized assets.
Sometimes Boomberg lets a guest slip in who will be drinking tea vs. koolaid.
In other news, the senate just said screw it, the gov is shutting down!
Should be good for +50 on the DOW.
Progress!
Won't the FED's policies result in an inverted yield curve followed by a steep recession? Isn't an inverted yield curve usually a very bad thing?
miners used to take canaries with them in coal mines for detection. the bird would drop dead from toxic fumes before it would be lethal to humans. the yield curve used to be like a canary. now, it's a statue of a canary based on Bernanke's favorite image of a canary.
the general point of this story is, don't expect the yield curve to tell you anything. don't expect it to invert either, that's not a statue that Ben likes.
how many paragraphs do you need to say the following, "yield curve inversion impossible under ZIRP"?
All those using the yield curve as a recession indicator are about to have a rude surprise...
http://merrillovermatter.blogspot.com/2010/06/is-steep-yield-curve-leading-us-astray.html
"There is currently more than sufficient evidence that indicates that we are either in, or about to be in, a recession. "
-Wow! You mean the first recession ended?
"There is currently more than sufficient evidence that indicates that we are either in, or about to be in, a recession."
Ah, try great depression. Since October 2008.
try greatest depression
2001...
No, it all started when that rabbit attacked Jimmy Carter.
The economy has never recovered from the shock of an innocent creature of nature attacking such a paragon of economic optimism. Even Mother Nature hates our economy.
It is becoming clearer that it's a depression. I wonder what the title for it will be? The Depression Part II? Depression 2010? Depression: The Revenge?
It officially will be called a "soft patch".
Correction: "First, the spread is heavily influenced by current monetary policy which HAD a significant influence on real activity over the next several quarters."
It's deflation folks. All asset classes going lower. Including gold. I'd be selling, in fact going to unload some maples right now.
Income-producing assets will be king.
Well, they will have to go 50% lower to get to where I bought them at. Boy ..then I can run out and buy some unbacked fiat!
Great I am assuming you have that asset, now let me ask you what will you take in return for that service?
The key is not having just one or the other.
That's an interesting comment that people don't seem to get. PMs are likely to deflate with everything else so you need to keep some cash in the portfolio. However, the system is hopelessly leveraged and interlinked, so it is perched on the edge of a cliff. Not having physical risks not be able to get it when you need it. The end can come without warning. Hence:
Inflation/Deflation, it doesn't matter which. GOLD and SILVER will be the first to rise to the surface from the cesspool.
'All asset classes going lower'...really? Where? I see PM's mashed down, but stocks finished green today, and knowing this clown show Monday will probably erase all of Thursdays losses.
Cool let's buy Mall properties for the div yield never mind the coming Celente style flash mob riots and atm machine lock ups from the free shit army. SPG best of breed because I heard you can park your Benz safely without getting car jacked or beat down.
Man I just can't wait 'til my electric bill, gas bill, and grocery bill plunge. That's gonna be so awesome. Can I start holding my breath now?
Yes
Yeah but, how 'bout the Yield Spread vs. STOCKS? QE4 baby! (QE3 is over). Why did Gold & Silver get whacked? "cuz they don't pay no stinkin' dividends, hombre." Figure it out, why S&P hasn't cracked 1101 (Monday?).
http://www.youtube.com/watch?v=UI2FolId6CA
I wonder if "analysts" realize how foolish they sound when they say stuff like "we're about to go back into recession"? When they know in their heart of hearts that we never left it, and indeed that what we have is a depression. Never mind the moving goalposts that 'define' what the terms mean in terms of technical parameters, the truth is we never recovered once the collapse began a few years ago.
'The coming recession'....lol where does this guy live, in a cave? He says he's not lightly saying we may be about to re-enter recession...and it couldnt come at a worse time. Duh?
Yea thats because the many decades of kamikazee banking practices finally imploded and left us with $1.5 quadrillion in bad debt in 2008 which was merely papered over with money printing with the purpose of keeping bankers and politicians quiet about the severity of it.
Not many caves to live in. perhaps from under a rock?
Bingo, thats exactly what happened. In 2008 all they did was paper over the problem but it was under the ocean of paper getting bigger and bigger and now they can't control it.
Ironically, a large chunk of this was deliberately initiated BY a cave dweller.
Osama said quite clearly and publicly in 2004 that he aimed to cause the USA to spend so much fighting ghosts that it collapsed economically.
http://www.corkinthewater.com/blog/wp-content/uploads/2006/12/461-mission_accomplished.jpg
deleveraging sure makes people go crazy
No one has delevered. THEY HAVE ONLY LEVERED UP FROM 2008.
The CB's have dished up more shit liquidity than an enema client.
Corps, or some corpses have diluted shares to raise capital and play accounting games so complicated that it might take years to sort out.
Delevering? I don't care who you are, that's funny.
Now we'll get a weekend of terrible news, and stocks will open up +1% Monday no doubt....as usual.
Here is a thought. The reason the metals especially and other assets got smacked down is because massive amounts of easing is on the way.
The author is correct interest rates are distorted and so aren't a good measure. I think when he is talking about recession he is talking in a technical way. It's not to say that what we have exprienced should feel like a recovery.
Recession... heh. Depression... heh. Try "Permanent Leg-Down."
There is no Golden Age ahead of us... only another Gilded one.
Chickenz bitchez.
i don't think zeroHeads are lying to anybody about a recession, including themselves
neither is the FED
i think the chairsatan has made the correct economic decisions and set the proper economic course, here
it doesn't matter if you're a keynesian or an austrian or an australian kangarooian, if yer mojo ain't working, give it a rest
recessions are painful, but so is insanity, and a recession might even be a wee bit healthier for the "system" at this point
who knows what will happen next? unless the benzelbub is cheating on the printing and going rogue-stealth LSAP, and some, including people of jim willie's integrity, stature, and perception, have now-public doubts: Billboard Signals of Collapse (Paste):
Expect more USFed monetization purchase of USTreasury Bonds, a process that has not stopped. The main emphasis of the USFed and QE discussion is simple. They continue the debt monetization but have decided not to talk about it anymore, in an end to transparency. (end paste)
how enron-esque!
Purchase large quantities of strawberries and baking chocolate. Melt the chocolate and dip the strawberries in the chocolate. To increase the visual aspect of your dessert, dip the chocolate covered strawberry in sprinkles before the chocolate dries. Thanks a lot. Regards, personal statement writers
The last onset of the recession started in November not December of 2007, as was obvious to good observers then. Same is the case now, we are already in the recession, except that this is also a reaffirmation of that earlier recession that never really went away. Soon they will be calling it a Depession.
The only real solution to this fiasco is the old one. Storm the castle and hang the bitches that made all these horrible decisions that led us down this path. They will keep monetizing the debt and digging the hole deeper until they get the moral hazzard they deserve.
Semiconductor sales are slumping.