Originally posted at Kessler Companies [7],
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 [8]. 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.
[9]
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.
