Now, however, the yield curve has been inverted for more than two years. This is generally considered a foolproof indicator of a looming recession. The idea is that you see a somewhat contractionary effect at the short end, perhaps as intended by monetary policy, whereas lower long rates signify lower market expectations of future economic growth. In a way, you hit the brakes and ease off the gas at the same time.
The logic is compelling, but I’m on the record as saying – long before this period of inversion – that it probably has more limited informational value now that both ends of the rate curve have been manipulated by monetary authorities for quite some time. Traditionally, only the short end has been thought of as monetary policy territory.
Either way, there must be a limit as to how long an indicator can flash before the event actually occurs. Sooner or later doesn’t cut it for me. And 26 months would certainly qualify as later.
In my view, an immediate recession is not in the cards for the US economy. This discussion may flare up after the publication of the latest non-farm payroll numbers just after you read this commentary, but please note that up until recently, these numbers have been unusually strong for almost three years. Furthermore, current growth is strong and was just revised upwards, and the August Michigan consumer sentiment index came in slightly above its previous reading. To name a few figures of interest.
I guess a number of indicators can be produced to support either view, but what about the no longer inverted yield curve in the US (I should probably add that it is still inverted in the Euro area)?
Well, there are now comments that the very disinversion is another sure sign of recession; this has often happened just before historical recessions. My take? That may very well be the case. But I’m leery of just using historical patterns as roadmaps without, well, compelling logic.
In the meantime, both bonds and stocks recorded positive performance in August, with the Scandinavian peninsula as a modest exception. Here, though, you could at least have enjoyed positive relative performance in all our mandates. That’s once again a pertinent reminder that you don’t invest in the general markets. You invest in specific financial instruments that are not likely to dovetail with the financial media headlines.
I’m sure my colleagues could find a number of arguments for doing just that.
Finn Øystein Bergh
Chief Economist & Strategist
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