And the beat goes on

Following the events of the recent year or so, it is now safe to say that the yield curve inversion still holds its ground as a leading indicator for a coming recession, and though the last one was merely a baby recession and one may claim that you shouldn't add it to the list as it arose from an extraordinary set of events such as the covid pandemic, that claim would be silly, a recession is a recession and the circumstances that led to it are of no great significance if you lost money. In the grand scheme of things the yield curve is still a reliable indicator and more so now.

Photo by cottonbro from Pexels

This leads me back to some peculiar thing said by Janet Yellen shortly after she ended her role as chair of the federal bank, Yellen said : "the markets may be wrong this time in trusting the yield curve inversion as a recession indicator". Yellen was hardly the only Fed chair to dismiss the yield curve, similar things were said by Ben Bernanke and by Alan Greenspan before him, Yellen was just another link in this ongoing March of folly chain, but the foolishness increased with the piling statistical evidence in favor of the yield curve potency so Yellen's folly is thus far the greatest.

Greenspan, Bernanke & Yellen nailing it each time, Source: federal bank of cleveland

It is a small surprise that Fed chairman and chairwoman are lousy at forecasting recessions, never count on someone charged with the task of preventing something with predicting that same thing, they will always downplay the chances.

The markets are usually great at at eliminating every sort of edge an investor may have over time, one would think that the yield curve would diminish in significance as investors get more and more aware of its merits, thus it is puzzling that this does not happen with the yield curve. To this anomaly I suggest two reasons, one is that paradoxically, the idea that markets are efficient is in itself enough to convince investors each time that this time may be different, the second (and much more important) is that knowing a recession is about to hit does not actually gives you an edge, nothing will testify to that more than recent events. Even if you had full conviction that the inversion is a bad omen for a coming recession, the mere swiftness of what followed meant that the best strategy would have been just to buy the f#$%ing dip or to just stay invested, good luck figuring that out from the yield curve.

For a piece of information to be desirable it has to satisfy two criteria, it has to be important, and it has to be knowable – Warren Buffet (I stole this from Howard Marks latest memo), At the risk of sounding presumptuous I would claim that there is a third condition, it has to be actionable. knowing that a recession is near is quite useless without knowing two more things – how long and how severe, without those pieces of information an investor just can't take much benefit from knowing the time of a coming recession. sure, you could have sold a bunch of your stocks before hand, but good luck timing when to get back in. I'm not claiming the yield curve is worthless, it definitely can serve as a cautionary sign, and an investor planning to put a big lump-sum to work may benefit from being more cautious at time of inversion (And so would every other investor), but trying to maximize gains on this information would probably just prove to be futile at best.

The yield curve will undoubtedly invert again in the future, and as allways it will be wise to pay attention to it, just the necessary amount that is.

2 תגובות בנושא “And the beat goes on

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    1. לא שאלה פשוטה בכלל האמת 🙂
      הפוסט נכתב בכדי להראות שאפילו כאשר השוק שולח לנו איתות ברור שבסבירות גבוהה משהו לא טוב מתקרב, זה עדיין לא באמת נותן לנו שום דבר מהותי לפעול לפיו, נראה לי שזה קצת עונה לך על השאלה.
      עדיין, משקיע אקטיבי חייב תמיד להחליט מה, כמה, ומתי להשקיע כך שמשקיעים אקטיביים בהגדרה הם מתזמני שוק, אבל כמו כל דבר בשוק ההון ההבדל בין אסטרטגיה להימורים יכול להיות דק.
      עם זאת, אפילו משקיע פסיבי לחלוטין יכול להפיק תועלת ממתן תשומת לב להיפוך העקום ולו רק כסימן שמורה לו לבדוק האם הוא חשוף לסיכון מוגזם או מועט מדי *לפני* שפורץ משבר.

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