Yield Curve? Don’t Worry, Be Happy — at Least for Now!
After scaring the daylilghts out of the average investor yesterday, CNBC today found some economists who did a good job of explaining why indicators do not always indicate. My readers will recognize the same points I was trying to make yesterday.
- You cannot interpret an indicator without some idea of how and why it works. That means a causal model. Multiple commentators said that what really drives recessions is not the shape of the yield curve, but the LEVEL of rates. The current situation contrasts sharply with, for example, 2000. David Malpass, Chief Global Economist at Bear Stearns, points out that when the curve was flat in 2000 it was at a 6.4% level not the 4.3% of today. Malpass has had the best handle on the economy for several years now.
- The indicator is "broken" because of artificial impacts on the long end. The WSJ cited a Fed study suggesting that the impact of Asian bank buying was about 75 bp and CNBC said as much as one percent. Several sources made the point I repeatedly raised yesterday, that this foreign buying is good for the U.S. citizen and our markets.
- Most importantly, other economic indicators are very solid. Yield curve inversion is only one indicator. It is a necessary but not sufficient condition, as Barry Ritholtz pointed out yesterday. Past instances of false positive signals were discussed on theStreet.com and in several CNBC interviews.
Bottom line: Traders and market strategists would do well to give the economists their due respect. As Steve Liesman of CNBC pointed out today, the large group consensus economic predictions, like the Blue Chip group, show no recession forecasts. None! The group calls for a little slowing but growth of 3.4%.
We are in a prolonged sweet spot for investors. GDP growth has been excellent. Inflation has been low. Corporate earnings continue to set records—and the market has not kept up.